What's the right size for an OCIO provider?

Executive summary:

  • We believe that organizations searching for an OCIO provider should not focus on the size of the provider. Rather, we contend that the provider's capabilities, culture and commitment to client service are the main factors that lead to successful client outcomes.
  • There are many good qualities embedded in both boutiques and larger providers that can be delivered independent of size. We believe that multi-boutique firms are best structured to provide these qualities.
  • Multi-boutique firms are firms that employ a boutique-style approach to engagement within market segments, and requisite customization to their clients. These types of firms provide boutique levels of client service while leaning on their significant underlying shared infrastructure and scale to provide cost advantages to all of their clients.

It's a frequent question asked by organizations looking for an outsourced investment solutions provider: What's the right size for an OCIO provider?

Our answer may surprise you.

That's because we staunchly believe that when it comes to choosing an OCIO provider, it's not just about the size of the provider. When institutions ask this question, they are often using size as a proxy for the qualities they seek in an OCIO provider. We contend the provider's capabilities, culture, and commitment to client service are the main factors that can lead to successful client outcomes, and that size is not a reliable proxy for strength of those qualities. To put it bluntly, if you're simply asking about size, you're asking the wrong question.

Let's dig in and explain why.

Boutiques vs. larger providers

When it comes to selecting an OCIO provider, organizations tend to focus on size due to the perceived advantages of working with one over the other—a boutique or a larger provider. But can these advantages exist independent of the size of the provider? Let's take a look, starting with boutiques.

What are the perceived advantages of a boutique firm?

1. Superior client service

Perhaps the biggest advantage that jumps to mind when thinking of partnering with a boutique firm is their reputation for superior client service. And this perception is not without reason, as many boutiques are well-renowned for their high-touch individualized service, which goes beyond personally answering the phone when clients call and entails a highly proactive approach to communication and putting significant time and effort into developing meaningful relationships.

We strongly believe, however, that superior client service isn't defined by the size of a provider—but by the people and the culture of a provider. If an organization stresses a client-centric approach above all else, then every single task—whether it's as simple as responding promptly to an email or as complicated as repositioning a portfolio—will be executed in exemplary fashion. When a firm's culture is built and shaped around the needs and priorities of its clients, stellar service will naturally follow suit—regardless of whether the organization is large or small.

2. Customized, bespoke investment solutions

Another perceived advantage to a boutique firm is the ability to provide customized portfolio solutions, tailored to meet each client's unique circumstances. The conventional thinking goes that only boutique firms offer these types of individually crafted solutions, due to the deeper relationships they build with a much smaller client base—and that all larger firms, because their book of business is too big, can only provide off-the-shelf, cookie-cutter approaches.

But this too is a fallacy. Any best-in-class OCIO provider will—regardless of their size—take the time to sit down and fully flesh out their clients' goals, circumstances and preferences, and then leverage their resources to design an appropriate solution. Obtaining a deep level of client insight allows the provider to develop truly personalized solutions to their clients' problems. For instance, two clients with similar goals may wind up with distinct portfolios due to fundamental differences in beliefs or risk tolerance. Not only is having this level of client insight the foundation for developing a bespoke investment strategy, but it also makes for a more efficient and aligned decision-management process.

Furthermore, in many instances, the organization's size is an enhancement, rather than a limitation, when it comes to building customized solutions. This is because a larger organization will naturally have more resources at its disposal, including a greater array of capabilities and specialization to meet client needs.

3. Insight into specific market segments and peer intelligence

A third perceived advantage to smaller providers is that because many tend to focus on a particular segment of the market, they'll naturally have greater knowledge of that segment. For instance, an organization searching for an OCIO provider may presume that a boutique focused solely on pensions will have greater insight into the needs of defined-benefit (DB) plan sponsors than a larger firm that services a broader client base. With this presumption also comes the implication that boutiques have superior peer intelligence—or deeper knowledge of the inner-workings of a market segment—and therefore will be a more effective and efficient partner.

The point here isn't to say that boutiques don't provide this level of insight and peer intelligence—as many do—but to stress that these capabilities, just like the ones listed above, exist independent of the size of the provider. We believe that the ability to offer capabilities and peer insights that resonate is dependent on the culture and philosophy of the organization. From our vantage point, the focus of all OCIO providers should be on the client—for the simple reason that when the ultimate focus is on the client, providers need to go the extra mile to integrate the required specialization and understanding of the client's ecosystem.

4. Access to niche managers

It goes without saying that in order to help an organization achieve its investment goals, the ability to identify and access best-in-class investment managers is mission-critical. Some may think boutiques, because of their smaller size, will have better access to robust niche managers. This stands in opposition to large firms, which often are not able to land these same opportunities. In recent years, this has especially been the case in the alternatives space, where large private credit asset providers have become too big to consider smaller opportunities.

But importantly, a provider's asset base size, whether small or large, doesn't define the types of managers it researches—or at least, it shouldn't, in our view. We believe successful OCIO providers will evaluate all managers—big and small, mainstream or niche—regardless of size, and leverage their resources to hire the most appropriate managers for client portfolios.

Here's an example. At Russell Investments, we believe we're one of the most innovative when it comes to identifying and combining multiple managers, having done the research for decades. This has led to the ability to work with investment manager partners to create bespoke strategies that are designed to work together, as part of the whole, for our client solutions. And we contend that not all providers can do this, because a firm has to be the right size to be flexible for its clients, and with real credibility to influence money manager strategies for the benefit of the ultimate client.

What are the perceived advantages of a larger provider?

1. Scale and negotiating power

Right off the bat, most organizations looking for an investment-solutions partner will list scale as a significant advantage to hiring a larger provider—and we would argue that in many cases, they're not wrong. With more scale comes broader capabilities, as well as greater buying power across these capabilities to drive lower manager fees for its client base. In a world where every dollar spent is scrutinized, and every basis point counts, the savings that result from this can be large. Bear in mind, too, that it's not just about greater buying power for investment managers, but also for trust, custody and other third-party services. Simply put, when you're the 800-pound gorilla in the room, you hold lots of sway with service providers, particularly when your scale is focused on third-party managers rather than proprietary products.

2. Cheap beta

Another perceived advantage is that larger organizations have the ability to hire truly active investment managers because they can disentangle and separately manufacture or source more plain vanilla portfolio exposures on a cost-effective basis. We find this to generally be the case, as these organizations can reduce investment management costs by leveraging internal capabilities where appropriate, particularly to ensure an overarching risk management lens is placed on the aggregate client solution.

3. Technology

Broadly speaking, because they are usually more resourced, most organizations think of larger OCIO providers as having more robust technology capabilities. Just like in the examples above, we would argue that the technological aptitude of a firm is driven less by its size and more by the emphasis it places on providing a truly holistic OCIO solution. This is because in today's world, a total portfolio approach to risk management equates to providers making significant investments in technology, particularly where such technology is developed on a fit-for-purpose basis for the OCIO solution, rather than being repurposed from other proprietary products or business lines. 

4. Ancillary services

Last but not least, it's also perceived that larger organizations will be able to provide a wider range of ancillary services to clients, due to their breadth and scope. We generally agree, although it's important to stress that smaller organizations with a laser-like client focus can also offer this, depending on specialization. Common services provided here include retiree services for pensions, risk management, trading capabilities, and legal, audit and compliance services.

The Goldilocks approach: Work with a firm that combines the best of both worlds, such as a provider that operates like a multi-boutique, buttressed by significant aggregated scale across a broad capability set

The overarching message here is that there are many good qualities embedded in both boutiques and larger providers that can be delivered independent of size. In other words, an organization shouldn't use size to proxy what it's looking for in an OCIO provider. For example, use references, not size, to test a provider's commitment to client service. Investigate the flexibility of the investment platform to test a provider's ability to deliver a truly customized investment solution. No client should feel like it has to sacrifice one perceived attribute of a provider for another—as we believe there are firms that can provide the qualities of both.

So, what might a firm that offers this look like? We believe the answer is what we call a multi-boutique firm—a firm that employs a boutique-style approach to engagement within market segments, and requisite customization to its clients. This is combined with open architecture buying power across investment managers, as well as an efficient and flexible implementation platform. These types of firms provide boutique levels of client service while leaning on their significant underlying shared infrastructure and scale to provide cost advantages to all of their clients.

Multi-boutique firms put the client in a client-centric approach

Look, we know we've beaten the drum loudly on the importance of a client-centric approach, but it's because we truly believe that only providers guided by this mentality will succeed.

To be clear, a client-centric approach is much more than just client service. It's about having a clear focus and investment platform that allows you to think about and deliver what each client really needs—rather than taking a solution you already have and trying to make it work for all.

Select multi-boutique firms are best positioned to offer the attributes of both a boutique firm and a larger provider. With a multi-boutique firm, there's no pre-packaging of total solutions—and no product-centric mentality—but there is customized scale, individually crafted for the needs of each client and powered by robust technology platforms and efficient implementation to help drive down costs. Sound like the best of both worlds? We think so.

The bottom line

Ultimately, in our opinion, it's not about the size of the OCIO provider—it's about an understanding of individual requirements and delivering associated customized solutions and service with appropriate scale. We believe organizations looking for an OCIO provider should keep this top-of-mind, avoid screening on size and consider evaluating if a multi-boutique firm, like Russell Investments, is right for them.