Over the past decade, fee compression has been a steady trend in the asset management industry, as competing firms seek to win market share and increase scale.1 Outsourced CIO services are no exception. When evaluating a potential OCIO provider, fees are important. At the same time, it’s crucial to consider fees within a broader context when engaging an OCIO provider. An OCIO relationship is not a commodity. While some providers may offer only strategic advice for a base-level fee, OCIO relationships can deliver a significant premium through a wider and deeper range of services with varying levels of discretion. Here are five questions to ask your outsourced investment provider to help ensure that you get the outcomes you need and expect for the fees you pay.
1. What level of fiduciary responsibility is being offloaded and what is being retained?
Many providers can take on as much ─ or as little ─ discretion as a client wishes to delegate. The level of discretion that the OCIO assumes, and plan-related services provided, are reflected in the advisory fee. When determining the decision-making authority that will be assumed by the OCIO, it is also important to consider the scope of plan services the sponsor is able to offload in addition to delegated decision making. Advisory fees are an explicit contractual arrangement and often increase for greater level of delegated services.
When comparing similar delegated models it is also important to consider potential opportunity cost factors caused by inefficient trading and rebalancing services that can erode portfolio values. These include transactional drag, being out of the market, and ineffective rebalancing processes. Each of these factors could supersede a 10 basis point advisory fee, for example, in any one week, let alone for a year.
2. What trading infrastructure and risk systems are used to manage and monitor client portfolios?
OCIO providers often use sophisticated tools to handle portfolio management (including trading and rebalancing) and to effectively analyze, manage and report on risk. The most effective trading infrastructure and risk systems are very expensive platforms on a standalone, per client basis. Providers that offer these tools tend to fall in the higher range for advisory fees. As a plan sponsor, you can benefit not just from the skillful practitioners that some OCIO teams offer, but also benefit from their access to these platforms far more cheaply than building or buying them yourself.
Pension risk management often requires different systems for the various lens for which to view risk. The systems are best when used together. Some are stronger on the asset side, while others offer more robust liability reporting. An OCIO harmonizes and interprets these beyond the input assumptions. Grounded, experiential learning to interpret what those assumptions might look like in terms of correlation and outcomes is key to using these tools to gain focus on the most impactful risk factors for your assets. Most institutional clients don’t have access to these information sources, so the cost to benefit ratio must be considered.
An OCIO with a centralized trading and implementation function that is responsible for managing cash flows, portfolio rebalancing and tactical positioning, executing hedges and overlays, and ensuring timely movements of capital using a consistent approach not only reduces potential transaction cost, but also improves governance related to portfolio actions for approved investment decisions. Providers that offer these enhanced service levels are likely to be on the higher end of the fee range, and rightfully so. It’s critical to keep in mind that adverse trading costs or operational errors can more than offset fee differentials among OCIO providers.
3. Does the OCIO have the negotiating power to lower overall portfolio fees?
One of the key benefits of partnering with an OCIO – especially an OCIO with exceptional scale – is the potential to gain cost savings by leveraging the buying power of the provider and the know-how of its manager research function to negotiate reduced management fees for best-in-class investment strategies and vehicles.
The cost savings passed along to defined benefit plans, operating funds, endowment and foundations can be significant and should be considered when comparing OCIOs (see Figure); however, the cost savings passed along to defined contribution (DC) plan participants may actually benefit plan sponsors most. As ERISA law matures and plaintiff-side attorneys gain access to new tools and databases, class action lawsuits claiming excessive 401k plan fees experienced a fivefold increase2 between 2019 and 2020. The cost savings that an OCIO with a manager research function can generate for DC plan participants can help to reduce the rising risk of litigation.
Leverage Scale and Institutional Buying Power
Average fees for a typical portfolio as negotiated by a representative OCIO provider, compared with standard fees for the asset class.
4. What type of reporting can I expect?
Standard reports providing baseline information from the custodian, such as portfolio values, performance, and attribution, are sufficient for some OCIO clients. Custom reporting typically involves additional costs for OCIO mandates. Some situations – multiple accounts, unique benchmarks, liability and funded status monitoring for pension plans, and/or portfolios with private market investments -- require custom reporting. In other cases, clients seek custom reporting because it can yield markedly improved outcomes. Custom reporting on risk assessment through an appropriate risk dashboard can be particularly helpful, because it enhances overall governance and fiduciary oversight.
Not all custom reporting is created equal. Quality custom reporting should not be mistaken for overcomplicated risk reports with a range of outcomes, simulations and back tests. These can ultimately overwhelm and distract clients from what matters most. Custom reporting worth paying for yields insight, allowing you to quickly and easily understand the possible outcomes and what may require some adjustment. Risk assessments should summarize this range of outcomes, highlight where the most significant risks are coming from, and make clear whether any segment of the portfolio may not perform in line with expectations in an abnormal market event. Providing the right amount of data to a client and reducing the risk of surprising the investment committee and senior management is key to a successful OCIO relationship.
5. Am I overpaying for OCIO services?
For plan sponsors already engaged in an OCIO relationship, regular review and consideration of fee arrangements can be helpful. Some client segments haven’t benefited from the fee compression trends that have prevailed among OCIO providers in recent years. Institutions such as endowments and foundations are more asset focused and total-return oriented, and have less complex requirements than, for example, a corporate pension plan, which need liability valuations, glide path development, and funded status monitoring. Institutions with more straightforward needs may find they are paying higher fees versus the value they’re receiving, when compared to corporate pension plan sponsors. These client types should carefully review the outsourced investment fees they are charged against the services required for their specific mandate.
The fees associated with retaining an OCIO to oversee your total investment management program are just one consideration when searching for a new provider or conducting a due diligence assessment of your current one. An OCIO relationship can offer governance and investment expertise, operational efficiency, and improved risk management. These benefits can lead to fortified standards for not-for-profit boards and retirement plan fiduciaries, and ultimately benefit your plan’s participants as well as your organization’s mission. To unlock these benefits, it’s important to place fees in context with the quality services that will contribute to your desired outcomes.
1 Source: Casey Quirk, a business of Deloitte Consulting LLP 2 Sources: Ignites, January 2021; Bloomberg Law, “Lawsuits Over 401(k) Fees Taking Aim at Smaller Employers” (September 17, 2019).
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information.
The views expressed are the views of the Global Fiduciary Solutions team only through April 30, 2021 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that SSGA’s role as a fiduciary does not begin until SSGA has been retained to act in a fiduciary capacity pursuant to a written agreement and receipt of a fee. Prior to such time, SSGA is not undertaking to provide impartial investment advice or to give advice in a fiduciary capacity in connection with the sale or distribution of SSGA products or services. SSGA has a financial interest in the sale of our investment products and services.
Investing involves risk including the risk of loss of principal.
The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent
Before investing, consider the funds' investment objectives, risks, charges and expenses. To obtain a prospectus or summary prospectus which contains this and other information, call 1-800-997-7327, download a prospectus or summary prospectus now, or talk to your financial advisor. Read it carefully before investing.
Distributor: State Street Global Advisors Funds Distributors, LLC, member FINRA, SIPC, an indirect wholly owned subsidiary of State Street Corporation. References to State Street may include State Street Corporation and its affiliates. Certain State Street affiliates provide services and receive fees from the SSGA Funds.
THIS SITE IS INTENDED FOR U.S. INVESTORS ONLY.
No Offer/Local Restrictions
Nothing contained in or on the Site should be construed as a solicitation of an offer to buy or offer, or recommendation, to acquire or dispose of any security, commodity, investment or to engage in any other transaction. SSGA Intermediary Business offers a number of products and services designed specifically for various categories of investors. Not all products will be available to all investors. The information provided on the Site is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.
All persons and entities accessing the Site do so on their own initiative and are responsible for compliance with applicable local laws and regulations. The Site is not directed to any person in any jurisdiction where the publication or availability of the Site is prohibited, by reason of that person's nationality, residence or otherwise. Persons under these restrictions must not access the Site.
Information for Non-U.S. Investors:
The products and services described on this web site are intended to be made available only to persons in the United States, and the information on this web site is only for such persons. Nothing on this web site shall be considered a solicitation to buy or an offer to sell a security to any person in any jurisdiction where such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction.