Will Outsourcing CIO Services Accelerate Your Financial Advisor Firm’s Growth?

Outsourcing can revolutionize your business ten-fold. There are two types of commonly referred CIOs: Chief Information Officers and Chief Investment Officers. 

When comparing professionals offering their services, be sure that “CIO” represents the latter if those are the services you are looking for. 

Why We Believe More RIAs Outsource to a Chief Investment Officer in 2022

Check the boxes as you consider this decision-making process on hiring an outsourced Chief Investment Officer for your firm:

  • What is an OCIO/alternatives
  • Impact on RIA representation
  • Cost-effective solution
  • Investment services provided
  • Interviewing and affordability
  • Improving client results
  • Marketing benefits
  • Impact on profitability
  • Managing the transition
  • Competitive advantage
Chapter 1

What is an OCIO?

Outsourced Chief Investment Officer: you can outsource an OCIO as an independent contractor responsible for managing your client’s assets. 

Unlike some other alternatives, the OCIO is part of your team of professionals. 

OCIOs Can Make Independent RIAs More Marketable

How to Spot a Fake Financial Advisor

Chapter 2

Who can serve as Chief Investment Officer alternatives?

The vast majority of financial advisors are using one of the following choices:

  • A current principal at the firm acts as the CIO
  • The firm hires an employee for this role
  • This role is outsourced to an external TAMP or SAM
  • The position is outsourced to an independent contractor (OCIO firms)

A principal might want to focus on asset management. This professional might wear multiple hats: investment solutions, estate planning, trading, and administration. 

It takes a unique skill set to do this job properly, so you can see why it may not be ideal.

A more prominent firm with a more generous staffing budget may hire an experienced Chief Investment Officer professional. This internal solution is great if it happens to be affordable.

The role of the CIO is outsourced to a third party (TAMP, SAM). These OCIO firms are an external solution. 

The financial advisor is acting as an asset gatherer. Investment management is done by a third party that is also an RIA. 

The internal solution that we recommend is to outsource the work to an independent contractor who acts as your part-time Chief Investment Officer

Read: Outsourcing Investment Research is Another Golden Opportunity

Chapter 3

How does the OCIO impact the way Financial Advisors represent themselves?

Who is making the investment decisions for your client’s assets? Is it someone inside or outside of the firm? 

This is a major strategic decision for every RIA, notably smaller RIAs that do not have the budget to hire a full-time CIO. 

Financial advisors will most often represent themselves as teams composed of specialized professionals. For example, the person who produces the financial plans does not manage client assets.

What’s in it for you? OCIO firms make it possible to market an expanded team of professionals, and one member of the team is OCIO.

Chapter 4

Why an OCIO can be your most cost-effective solution?

The OCIO alternative can be your most cost-effective alternative compared to employees and third parties. Consider this comparison:

  • The employee is paid a salary, bonus, and benefits, plus taxes and the potential for stock options and other incentives
  • Third particles services (TAMPs, SAMs) can charge significant basis points
  • The OCIO may not have the overhead of the aforementioned
Chapter 5

What are investment services provided by an OCIO?

You might say the OCIO provides all of the most critical investment programs that include investment strategies, investment research, market analysis, asset allocation, buy/sell decisions, and market environment reports.

We believe that you should make the entire investment process the responsibility of the OCIO so you can focus on activities that support the growth of your firm. 

Investment portfolio: the outsourced CIO may be responsible for managing model portfolios or individual portfolios tailored to your client’s unique needs.

Chapter 6

What to look for when you interview Outsourced Chief Investment Officers?

We recommend that you select an OCIO who has all or most of the following characteristics:

  • Education: an advanced degree is preferred
  • Years of experience in a variety of market conditions
  • High-quality certifications: in particular a CFA Charterholder
  • Association memberships with continuing education requirements
  • Clean compliance and criminal records
  • No negative public information

The personality of the outsourced CIO should match your firm’s culture and the way you prefer to represent your firm. They should also use a flexible investment process, so it is not one-size-fits-all.

Chapter 7

Will an OCIO improve your clients’ results?

Possibly. The fact that OCIO firms are focused on results may increase the likelihood of yours producing improved returns for your clients.

Chapter 8

What are the top four marketing benefits when outsourcing to a CIO?

  1. Team of experts: the most critical benefit is adding an essential professional to your firm’s team of financial experts. 
  2. Competitive edge: your firm will have similar characteristics to the more prominent firms – teams of professionals working together for the benefit of your clients.
  3. Marketable and credible: It may make your firm more marketable when you have a professional dedicated to managing your client’s assets.
  4. Accessible: ideally, the outsourced CIO is available to interact with your firm’s prospects and clients. For example, this professional is available for Zoom meetings.
Chapter 9

What about OCIO information in the public domain?

It is prudent to check the OCIO’s compliance record and conduct an in-depth Google name search at least ten pages deep. 

You are seeking any information that would cause you to exclude a particular professional or outsourced CIO firm.

Look at any public information that investors can see. Your compliance officer should be able to assist in this review

Chapter 10

Are the services of an OCIO affordable for your firm?

It stands to reason that different OCIOs have different compensation arrangements. Plus, the arrangement may vary for current clients and future clients.

There may be minimum fixed fees for both types of clients. The minimums may also vary for equity, balanced, and fixed-income clients. Some OCIOs may also charge more for global portfolios.

The fees may be expressed in basis points, so clients with more assets pay higher prices than clients with smaller portfolios.

Types of investments may also impact the fees of an outsourced CIO. For example, a portfolio of stocks and bonds may be more expensive to research and manage than a portfolio of ETFs

Chapter 11

How will the OCIO impact the profitability of your RIA?

The OCIO would represent an incremental expense if you manage client assets yourself. In this case, you could be making less money unless you spent more time adding new clients to your firm. 

You may want to modify your fee schedule for new clients so that you can maintain your profit margins.

Chapter 12

How do you manage the transition to an OCIO?

This is one of the more critical questions for a potential OCIO. How exactly would an outsourced CIO transition current portfolios to fit the OCIO’s version of your outlook and strategy? 

Will the OCIO make significant changes to the portfolio in a short period, or will the transition occur over a more extended time?

Perhaps better questions are how long the transition will take and how radical the shift will be in the short run. Will the change be a series of small steps that minimize trading costs and taxes (if applicable)?

Chapter 13

What about the accessibility of an OCIO?

We believe the right outsourced CIO should be accessible to prospective clients and current clients. In particular, a virtual world includes Zoom calls and other technologies that make remote communications more feasible.

However, just because the technology is there, that does not mean communicating with current and future clients is part of the job description. This is a service that may vary by OCIO.

Chapter 14

How will the OCIO impact your communications?

Will the OCIO talk to prospective clients about your firm’s investment services? We think ideally, the answer is yes, particularly when the prospects have significant assets available for investment.

Your firm may want to establish a higher minimum asset requirement for current clients who wish to interact with the OCIO. This is a higher-level service that clients should be willing to purchase.

You should be asking the outsourced CIO whether the current revenue-sharing arrangement covers this level of involvement.

Chapter 15

Does the OCIO provide the same advice and services to other RIAs in your market?

This may be a touchy subject. Let’s say you go with an outsourced CIO, and this professional is profiled on your website. Will the OCIO appear on any other advisor websites in your primary market?

Some OCIOs may be willing to limit their exposure in particular markets – particularly smaller markets with fewer RIAs.

Chapter 16

Why we believe an OCIO will be more important in 2022 and beyond?

Many RIAs manage their clients’ assets using passive investment management and ETFs. This worked for more than ten years with a few short-term blips.

We Believe More RIAs Will Outsource to a Chief Investment Officer in 2022.

Our expectation is that there will be more volatility during the early and mid-2020s due to:

  • National debt approaching $30 trillion 
  • 40-year-high for inflation
  • Political instability
  • Global tensions (Russia, Ukraine, China, Iran)
  • Supply chain problems
  • Stock market bubble (historical high)
  • Artificially low-interest rates
  • Rising interest rates

More attention will be needed for crucial investment decisions that impact asset allocation, security selection, risk exposure, and performance.

Chapter 17

How do you market the OCIO on your website?

The outsourced CIO has a bio just like every other member of your team of professionals. There are no material differences in the bio.

Your compliance department may require some type of disclosure that the OCIO is an independent contractor and not an employee of your firm. 

This may be no different than financial planners and advisors who are independent contractors.

Chapter 18

How does an OCIO make your firm more competitive against bigger RIAs?

It makes sense that bigger RIAs employ more professionals than smaller firms because they have bigger budgets. 

One of the primary marketing messages we’ve seen from bigger RIAs is that their clients get the best thinking of a team of professionals versus the best thinking of an individual. The implication is a team of professionals will produce better results than an individual.

When an OCIO is on your team, you can counter some of that messaging from bigger RIAs by showing a deeper bench of professionals.

Your firm may be more competitive with larger firms and may have a significant competitive advantage compared to smaller firms.

Chapter 19

What about quality of life when you bring on an OCIO?

There can be two huge benefits when you bring on the right OCIO. 

Reduced Stress

Take off the many hats of market research, security selection, buy-sell decisions, and performance. Or at least set them aside for now. 

There is substantial day-to-day stress when you manage your clients’ assets. 

Quality of Life

Additional time will be granted back to you: spend with family, friends, pets, and enjoy personal activities. You are not constantly pressured to monitor your clients’ current investments and manage changes that impact future performance. 

If the benefits listed above don’t check all of your boxes, please find out what else is in it for you. Contact us at Cornerstone Portfolio Research today.

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.

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.