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A Demand For Transparency: What RIAs Need From OCIOs

A Demand For Transparency: What RIAs Need From OCIOs

The Chief Investment Officer, or CIO, is at the center of every investment plan’s long-term success. He or She is the one who oversees the fund selection process and works with advisors and planners to create a customized investment strategy. 

The role of an outsourced CIO provider has been gaining popularity in recent years as more and more RIAs recognize the advantages of outsourcing their investment management needs.

This article explores the following:

  • Why is being transparent solely not enough anymore?
  • Could outsourcing your investment management help?
  • How might hiring an OCIO to help you recoup work hours?
  • Are all portfolios entrusted to you managed consistently?
  • Should you play down your fees and expenses?

1. You Need To Prove the Value You Bring to Your Clients’ Table

RIAs are in an interesting position: with raging inflation spooking investors, you have to prove the worth of your services. You also need to be able to justify your fees and explain the process behind choosing investment options. 

Having an outsourced chief investment officer (OCIO) can be a great way for an independent RIA to lower costs, increase the time available for strategic investments and financial planning, and potentially, improve the returns on your client’s portfolios. 

For many RIAs, it can also mean that clients receive better results than they would if they were managing that money themselves. Especially when market volatility has investors anxious, it may put needed weight behind your retention efforts, as well. 

Transparency Is More Than a New Word of the Day

Transparency may be a buzzword in the financial services industry now, but it has a deeper significance. It is also being pushed by regulators who are all-in on putting their money where their mouth is. They have had enough of watching unscrupulous advisors hide behind legal jargon and opaque language to obscure what really goes on behind the scenes.

This puts a greater burden on RIAs to shun even the appearance of impropriety. Now that everyone is looking closer—and encouraged to do so—accountability is essential. The fact that this push for clarity comes at the same time that economic instability may tempt some nervous investors to change advisors means you cannot just be transparent: you need to look extra efficient, as well.

One of the simplest ways to achieve this is simply by lowering the stack of to-do-s in your inbox: outsourcing your investment research, management, and other tasks can potentially free up the work hours you need to relax, craft brilliant financial plans, and cultivate lasting client relationships.

2. You Need Someone Who Holds Up to Scrutiny

If you are an advisor looking for an OCIO, make sure they are able to answer “yes” to these questions:

  • Is the OCIO a fiduciary? As a financial professional, you know the difference this can make (sometimes in multiple respects). 
  • Do they have a track record of success? Anybody can make great-sounding claims. What matters is that they have the history to back them up.
  • How long has the OCIO been in business? Everybody is new to their field at some point—but a newcomer is far less likely to generate the results you need consistently. 
  • Does the OCIO have a clear investment philosophy? There may be room for a variety of approaches. Nevertheless, your odds of optimal results increase with a CIO who shares a similar outlook with regard to how things should be done on a daily basis.
  • Are they willing to share their investment philosophy with you and your clients? An accountability-friendly firm is only as transparent as every metaphorical brick comprising it. Nobody has to share a long-guarded family recipe, but abject refusals to discuss their operational basics are a bad sign. 

3. You Need All Portfolios Managed With Disciplined Consistency

Quality investment management will be consistent across all accounts, including your own. If you manage your client’s accounts by a different set of rules, you are not managing those accounts in a disciplined way. Even if you treat them with the same amount of care and diligence, sooner or later, the difference will show. 

With the eyes of the world, so to speak, on how you operate, optics are everything. You have to be upfront, even about the minutia of fiduciary responsibility. If it appears that you are not managing the client’s account in a disciplined manner, your RIA will not be considered transparent (or, therefore, trustworthy).

A trustworthy fiduciary OCIO will work with you to learn how every portfolio is to be treated—and then standardize your approach throughout their management. This, combined with the value you provide your clients daily, could make your RIA’s more efficient and accountable. They’ll stand out from the competition. 

4. You Need To Be Upfront About Fees and Expenses

business woman using magnifying glass to check contract

The demand for transparency in the financial services industry is especially true when it comes to fees and expenses. People are increasingly looking for firms that are perceived as honest about how they charge for their services. As an RIA or broker-dealer, one of the keys to answering this demand is being able to show your clients exactly how much you charge them.

Better yet, you want to do so in a way that makes sense from a business perspective. In other words, your clients want to know: Can you explain your pricing? And can you also explain why it costs what it does?

For example, imagine a client that has been with you since 2010: he has never made any changes. All he does is put money into his portfolio with no withdrawals or contributions along the way. If his choice is to do next to nothing, charging him an annual fee on top of the underlying fee model itself might eventually be considered excessive (at least with regard to years when nothing happened on his account).

We are not saying you should not be well compensated. Instead, we are pointing out what clients may suddenly start asking today. A strong case could be made that if you have a certified, vetted, experienced, and well-educated OCIO on your team by that point, your firm’s services will be (recognizably) well worth it. 

At Cornerstone Portfolio Research, we believe that a firm’s responsibility to its clients should extend beyond merely providing investment advice: it should include ensuring that the RIAs they work with are themselves fiduciaries who consistently put their clients’ interests first. 

The ability to do this will become increasingly important in the coming years. As a result, we are well prepared to do so today. Contact us to learn more about our asset allocation, risk management, investment decisions, and more. 

 

Don’t Let Rising Interest Rates Scare Off Hard-Won, Potentially Lifelong Clients—We Have Retention Tips

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Cornerstone Portfolio Research (“Cornerstone”) is an SEC-registered investment adviser. Registration as an investment adviser does not imply a certain level of skill or training.  This publication should not be construed by any consumer or prospective client as Cornerstone’s solicitation or attempt to effect transactions in securities or the rendering of personalized investment advice over the Internet. 

The statements in this publication are the opinion of Cornerstone regarding Outsourced Chief Investment Officer (“OCIO”) services. These are not personalized recommendations and you should consider your own criteria when choosing an OCIO. 

A copy of Cornerstone’s current written disclosure statement as set forth on Form ADV, discussing Cornerstone’s business operations, services, and fees is available from Cornerstone upon written request.  You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from Cornerstone or the professional advisors of your choosing.    

More about the author: Thomas Balis

Thomas holds a Bachelor of Science in Business from Ohio State and has since earned the Chartered Financial Analyst® (CFA®) designation as well as the Accredited Portfolio Management Advisor (APMA®) and Chartered Mutual Fund Counselor (CMFC®) certifications.