When RIAs outsource investment management to CIOs, they want professionals who add substantial value to their firms.
We believe that merit is more than their ability to provide superior portfolio management services. In our opinion, the OCIOs must become members of the RIAs’ teams of financial professionals—possibly making the firm more marketable.
These points make selecting the right OCIO of vital importance on multiple levels.
- Credentials and Ethics
- Practice active or passive management
- One-professional show or team-based
How do RIAs select the best OCIOs?
We all know there is subjectivity and objectivity when investors select financial advisors. The same will be true when RIAs select OCIOs to manage assets for their clients.
Let’s get the subjectivity out of the way first, so consider:
- Did you like the personality of the OCIOs?
- Do you think investors will appreciate the OCIOs’ personalities?
- Was the OCIO stiff or aloof, making this professional unrelatable?
- Or, was the OCIO easy to talk to and friendly?
OCIO’s are quantitative by nature. And personalities are influential because RIAs are in the people “and” money business.
Next is the objective part of the outsourced chief investment officer selection process. We think the main focus should be on credentials and ethics. How did the OCIOs become the investment experts they purport to be?
What about the credentials of the OCIO?
We think there are three credentials that matter: experience, education, and certifications. And they say “experience is the best teacher.” So, a few items to look for include:
- How many years of OCIO/CIO experience does each candidate have?
- What did the OCIOs do before they took on the role of OCIO?
We believe that financial advisors should be most interested in the experience that has some relationship to the role of the OCIO. In this case, relevant experience matters the most.
Relevant education also matters. We believe that there should be some connection between education and the role of OCIO.
For example, a degree in Geology normally has nothing to do with investment research and portfolio management. Advanced degrees can also be beneficial as long as they have some relevance.
We believe that financial professionals who represent themselves as OCIOs should hold various certifications indicating the acquisition of specialized, relevant knowledge. We hold that the CFA designation is the most prestigious credential held by an OCIO.
A fourth important credential can be added: memberships in prestigious associations with significant continuing education requirements that keep the OCIOs’ knowledge up-to-date.
What about OCIO ethics?
No due diligence would be complete without checking the OCIOs’ compliance records. At a minimum, RIAs should check their record of compliance at FINRA, the SEC, and state regulatory agencies (securities, insurance, when applicable).
Additional due diligence can include keyword searches on the Internet that include the OCIOs’ names, their firm names, and additional keywords that include foreclosure, bankruptcy, lawsuits, criminal records, and other words that could uncover ethical lapses.
If you are not aware, convicted criminals can hold securities licenses as long as the crime was not securities-related. Watch for gaps if the OCIOs provide their work histories. RIAs should be looking for continuity in their work histories.
Should OCIOs have RIA references?
This can be a sensitive topic for the OCIOs and the RIAs that ask for references.
First of all, no OCIO will provide a bad reference. This definitely limits their usefulness.
Second, you are asking for references that may be competitors in particular if they are located in the same city. This makes it awkward for the RIA and the reference.
RIAs might ask for references in states that are some distance from where they do not have a presence. It is also possible for OCIOs to have testimonials posted on their websites.
They may also have ratings and reviews published on the Internet. Again, testimonials, ratings, and reviews may have limited value.
Should OCIOs practice active or passive management?
This should be determined by the services and business practices of the RIAs. The types of clients the RIAs serve can also be significant factors.
For example, older, more conservative clients may prefer passively managed portfolios of ETFs and lower costs. Younger clients with higher tolerances for risk may prefer actively managed portfolios of securities.
Passively managed portfolios of ETFs are generally considered easier to manage. And passive managers often say it is very difficult to beat the market over long periods. This is why many RIAs manage these types of portfolios themselves.
On the other hand, we do not believe the future will be like the past. Therefore, there may be increased demand for active management as the markets become more volatile: Inflation, Covid, national debt, supply chain disruptions, political instability, etc.
Is the OCIO a one-professional show?
Some of the larger OCIO firms will have teams of professionals that function as analysts, portfolio managers, traders, economists, and other types of investment professionals who help them manage money. This makes perfect sense, in particular for OCIOs, that manage larger sums of assets.
Like the RIAs, the OCIOs also need help when managing hundreds or thousands of investment portfolios.
What other OCIO characteristics should mesh with the clients of the RIAs?
Let’s assume over 50% of an RIA’s clients are retired or are getting close to retirement. At that point, the firm may want to select an OCIO that has a little gray hair.
They say this is a “pay for gray industry,” and gray implies years of experience during a variety of market conditions. On the other hand, if RIA clientele is primarily millennials, then perhaps the OCIOs should be in their 30s or early 40s.
Clients may relate more to professionals in their own age groups even if they give up a little experience to work with someone who understands them.
Ready to build a profitable extension to your firm by bringing an OCIO on board? Reach out to begin.
At the end of the day
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.