Risk Management Strategies: The Role of an OCIO

Risk Management Strategies: The Role of an OCIO

When market downturns occur, your clients may feel uneasy or concerned about their assets.  It’s normal. The trickle-down effect on your RIA/IAR is added pressure to meet client expectations and calm their fears.  

So, the question is, do you have the bandwidth and resources to handle the day-to-day operations of your practice while also handling client concerns?  

While market fluctuations are inevitable, an OCIO can be a strategic partner for independent RIAs and IARS to rely on through turbulent times.

OCIOs, such as Cornerstone Portfolio Research, offer RIAs/IARs the insight and flexibility required to navigate any market condition and associated risks with volatility. They can also assist in reducing or alleviating pressure and stress that you may experience when trying to manage your day-to-day operations.   

Our blog will consider how an OCIO can help your firm identify, assess, and manage investment risks. We’ll also discuss why partnering with one can benefit your firm and clients.

How an OCIO Identifies Investment Risk

An OCIO, like Cornerstone, can give your RIA/IAR a deeper understanding of the potential threats lurking within client portfolios and the financial markets. This proactive identification of risks lays the foundation for practical risk assessment and mitigation strategies.

Here are several ways that an OCIO identifies investment risk:

  • OCIOs analyze factors like interest rates, inflation, and global growth forecasts to assess potential risks like recessions or currency fluctuations.
  • They monitor geopolitical events, policy changes, and potential trade wars that could disrupt specific markets or asset classes.
  • An OCIO identifies potential risks like sector-specific downturns, earnings disappointments, and market bubbles in certain industries.
  • They assess interest rate sensitivity, bond issuers’ credit quality, and potential bond market defaults.
  • They evaluate risks associated with illiquidity, complex valuation methodologies, and unforeseen changes in market dynamics for these assets.
  • OCIOs analyze a company’s financial statements, debt levels, and profitability to identify potential financial instability.
  • They assess the competence and track record of the company’s management team.
  • An OCIO evaluates the industry’s competitiveness, potential disruptions, and the company’s position within the market.
  • They run simulations to assess portfolio performance under various economic scenarios, including market corrections and recessions.
  • OCIOs identify how different asset classes are interconnected and how a downturn in one might affect others.
  • They study historical trends and market cycles to understand how specific asset classes have behaved in similar situations.
  • They keep track of industry trends, economic data releases, and potential regulatory changes that could impact your clients’ investments.
  • OCIOs can consult with other professionals to gain insights into emerging risks and potential blind spots.

Assessing Risk With an OCIO: Beyond Identification

While identifying potential investment risks is crucial, an effective OCIO goes further by assessing the level of risks that may impact your clients. Not all identified risks are created equal. Prioritization helps focus on critical threats.

For example, how probable is each risk to occur—high, medium, or low? How significantly could each risk affect the portfolio’s severe, moderate, or minor value?

Various quantitative tools are used to provide a more objective assessment of risk. Here are some examples:

  • Standard deviation: This metric measures the historical volatility of an investment’s returns. A higher standard deviation indicates greater potential fluctuation and risk.
  • Value at risk (VaR): This statistical measure estimates the potential loss within a specific confidence level (e.g., 95%) over a given time horizon.
  • Scenario planning: An OCIO creates hypothetical scenarios simulating potential market downturns, interest rate hikes, or other disruptive events. This helps assess how the portfolio might react under stress and identify possible weaknesses.
  • Backtesting: Historical data tests the portfolio’s performance against past market events. This helps evaluate how the portfolio behaved during similar periods of stress and identify areas for improvement.

By assessing risk, the OCIO works with you and your client to make informed investment decisions to navigate the ups and downs of the markets with greater confidence.

The OCIO: A Steadfast Partner in Risk Management

An OCIO goes beyond simply identifying and assessing risks. Their true value lies in turning this knowledge into actionable client strategies.

Understanding your client’s risk tolerance is the foundation of an OCIO’s approach. Through open communication with you and your clients, they can assess their comfort level with potential losses. 

This understanding directly influences how OCIOs select assets that align with your client’s risk profile. This may involve favoring lower-volatility investments or established companies with a history of weathering economic storms.

Diversification is another key component to addressing risk. OCIOs strategically allocate assets across various asset classes (equities, fixed income, alternatives) to reduce dependence on any single asset that could experience a downturn.

Beyond Static Allocation: Dynamic Strategies

An OCIO goes beyond simply setting an initial asset allocation. Depending upon your firm’s investment philosophy, they may use more of a strategic asset allocation model or a tactical asset allocation model.  

Because market conditions constantly evolve, an effective OCIO should be proactive vs. reactive.  Using real-time analysis, the OCIO can recommend adjustments to clients’ portfolio allocations, rebalancing, or suggest additional risk mitigation strategies to address unforeseen market movements.

They should also be aware that your client’s needs and goals may change over time, so their investment solutions should accommodate this, especially if major life events occur for your clients that require some repositioning. 

Partner With Cornerstone Portfolio Research

Cornerstone Portfolio Research is an independent investment research and portfolio management firm with 70+ years of combined experience in the financial services industry. 

We help RIAs and IARs like you outsource the investment research and management process.  We can also help you identify, assess, and elevate your risk management in client portfolios.

Consider teaming up with Cornerstone Portfolio Research for enhanced risk management capabilities. 

So don’t hesitate to reach out and start the conversation today!  

An OCIO Can Help Your RIA

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.