2024 could be a very volatile year for the financial markets. A lot of uncertainty could impact the U.S. economy: continued inflation, volatile interest rates, risk of recession, out-of-control borders, wars, a $32 trillion national debt, and a presidential election year. So, what does this all mean for individual investors and their families? And what about the advisors who serve them?
It could be an exceptionally busy year for you, filled with frequent discussions about the future performance of your clients’ portfolios. It will pay to be prepared for this – perhaps an alternative would work better for you and your clients.
One strategic solution is to consider an engagement with an Outsourced Chief Investment Officer (OCIO) to handle your investment research and portfolio management duties. An OCIO may be worth your consideration if the principals at your firm are already wearing too many hats with too little time. An OCIO can assist your team with investment research, portfolio management, and servicing. Plus, firms like ours can seamlessly integrate into your existing strategies, processes, and operations.
In this blog, we’ll explore how an outsourced CIO can be a valuable asset in preparing your clients for inevitable securities market volatility.
Preparing for Market Volatility with an Outsourced CIO
Outsourced Chief Investment Officers (OCIOs) can be crucial for independent RIAs and IARs that provide portfolio management services to individual investors and their families. The services of an OCIO can be even more valuable for advisors and their clients during periods of excessive market volatility. The knowledge of the right OCIO can be invaluable for navigating the day-to-day volatility of the securities markets
OCIOs typically diversify investments across multiple asset classes, economic sectors, and geographies to reduce the risk of large losses for your client’s portfolios. This risk management strategy using diversification helps reduce potential losses associated with concentrated portfolios. Following are three real-world examples of how an OCIO might handle diversification:
- Asset allocation adjustments are primarily used to balance risk and reward based on current and future market conditions. This could include modifying allocations between stocks, bonds, and alternatives to make portfolios more resilient when markets are experiencing significant volatility.
- Another tactic that an OCIO may deploy on behalf of your client is recommending investments in various parts of the world. This can be another way to assist in reducing the impact of volatility in particular geographies. This approach requires increased analysis of countries, companies, and currencies. A global approach may provide more stability than a limited domestic strategy, particularly when you want your clients’ assets invested in the best companies.
- OCIOs can also diversify investments across various sectors of the economy and industries. For example, some industries are more negatively impacted by inflation than others. These industries need help passing their cost increases through to their customers. An example of this is the automobile industry. It is easy for consumers to defer their purchase of new cars.
Regular risk assessments ensure clients’ portfolio management strategies align with their current risk tolerances and investment goals. This involves updating the client’s financial situation and adjusting the portfolio.
An OCIO starts by identifying potential market risks that could impact portfolio performance. This includes analyzing economic indicators, market trends, and geopolitical events.
From there, an OCIO can assess each client’s exposure to risk to their investment objectives. This personalized approach ensures client portfolios align with the client’s financial goals and capacity for taking risks.
The OCIO may also conduct a stress test and analyze the results to determine how client portfolios will perform in different market conditions.
Once any changes have been implemented, an OCIO will conduct regular reviews to track results and produce reports. This utilizes sophisticated analytical tools to predict, manage, and avoid unnecessary risks.
Ongoing client communications should also be the responsibility of an OCIO. Keeping your clients informed about the possible impacts of market volatility on their wealth should be a high priority so they can make informed decisions.
Another component of ongoing communications is helping clients realize that their portfolios are built based on long-term financial assumptions and that short-term market volatility is an unfortunate part of this process.
Frequent, transparent communications should be a minimum requirement for you and your clients. The accessibility of the OCIO and high-quality communications are two ways to keep clients informed about market conditions and possible outcomes. This is a great way to build trust and confidence in your firm.
Implementing the OCIO Model in Your Firm
Once you’ve concluded that partnering with an OCIO firm is the right move for your firm, selecting the right OCIO that aligns with your firm’s investment philosophy and client needs will be an important part of your success.
Here is a checklist you can use when vetting OCIO providers:
- Understand their experience in the industry, performance history, degrees, certifications, and designations, along with case studies they may have to describe how they helped other firms accelerate their growth.
- Understand their investment approach and philosophy, including risk management strategies and asset allocation methodologies. Have them provide you with a detailed list of services that they provide, such as investment research, portfolio management, and compliance assistance.
- Ask about the types of clients they typically serve and if they specialize in certain areas relevant to your needs.
- What is an ideal size client based on asset amounts? Also, how do they handle smaller accounts that may be part of a bigger relationship?
- Determine how they plan to keep you informed about investment decisions and performance.
- Understand how they charge their fees and what is covered by those fees. Ensuring the OCIO expense fits in with your operating budget is important.
- Verify that they have not had disclosure or regulatory events on their compliance records.
- If applicable, discuss what technology platforms and tools they use for investment research, portfolio management, and client reporting.
- Clarify which custodian(s) they utilize and whether or not this impact your current client accounts.
- While references and testimonials should be taken with a grain of salt, it’s still worthwhile to have conversations with others who have used the OCIO’s services.
About Cornerstone Portfolio Research
At Cornerstone Portfolio Research, we understand the value of having access to experienced CIO and CFA® Charterholder services without the usual hassles or disruptions that can be associated with outsourcing.
Our focus is providing research, portfolio management, and back-office services so you can dedicate more time to marketing, planning, and other client services.
As an independent firm specializing in investment research and portfolio management, we offer outsourced CIO services based on the needs of various types of advisors. Our goals are straightforward: provide a better experience for your clients and free up your time for activities that impact the growth rate of your firm.
Our services are ideal for financial advisors who want to:
- Grow their firms
- Increase their minimum asset requirements
- Start their own firms
- Focus on other services
- Reduce the number of hats they wear
If you’re ready to talk seriously about transitioning to an OCIO model, we invite you to connect with us for an introductory call.