CPD: What is Outsourced CIO?


In today’s topsy-turvy pandemic world, financial services firms are beset by a multitude of challenges. Investing shouldn’t be one of them.

Outsourced CIO stands for outsourced chief investment officer, or, more broadly, outsourced investment management. The term refers to the full or partial outsourcing of a financial planner’s investment function to a third party. In most cases, the third party is an asset management firm or investment consultant. In delegating investment tasks to a third party, the planning practice typically retains some level of fiduciary responsibility—such as the licensee’s or financial planning firm’s governance oversight.

Who uses Outsourced CIO and why?

Financial advice businesses partner with Outsourced CIO providers to satisfy a range of objectives, including portfolio customisation, fiduciary requirements, enhanced governance structure, decreased volatility, risk reductions and lower costs.

A range of uniquely tailored solutions

It’s worth emphasising that, above all else, there is no cookie-cutter approach to Outsourced CIO. The goals and objectives of the financial planning firm that have made the decision to outsource vary widely across the spectrum, and so too do the range of potential solutions. Leading Outsourced CIO providers will be able to draw on their flexibilities and utilise the proper set of tools to align their investment outsourcing services with the precise needs of each business. The emphasis placed on customisation is one of the key calling cards in a trusted Outsourced CIO partner.

Some advice businesses may choose to only outsource the strategic asset allocation

management—while others may opt to take a full, holistic investment management approach. The lack of a one-size-fits-all solution means that each firm receives its own uniquely tailored solution based upon its goals, circumstances, values and beliefs. Ultimately, this aims to improve the likelihood of the advice business achieving its goals, without compromising its values or beliefs.

Help to establish a robust governance structure

One key reason a financial advice business may shift the management of its investment program to an Outsourced CIO provider is to improve its governance structure. The traditional governance model used by the firm to make investment decisions is rife with several shortcomings, many of which have been exacerbated by today’s increasingly complex regulatory and investing environment.

Many companies, for instance, establish and review their investment policies and asset allocation during quarterly meetings run by an investment board or committee. This means that on an annual basis, a shockingly small amount of time—as little as 16 hours—is spent making high-impact investment decisions. This isn’t even remotely close to the ballpark range of time that is necessary to review and refine an investment strategy.

An Outsourced CIO provider, by contrast, works to establish an improved, robust governance process for the advice business, with the provider assuming daily oversight of all investments. A skilled Outsourced CIO provider will have the superior resources, expertise and implementation capabilities that this day-to-day attention demands, with clear visibility into a portfolio’s holdings at any given time. This is crucial due to the volatile nature of markets, where yesterday’s winners can become tomorrow’s laggards in the blink of an eye, as the events of last spring demonstrated all too clearly. Just as significant, market volatility can sway investors from their long-term goals, tempting them to make hasty decisions at odds with their overall strategic objectives. A strong, well-defined governance process helps prevent this from happening, ensuring that the practice does not stray from its previously established investing mandates.

Help with strained resources?

More and more licensees and financial advice businesses are facing resource constraints, tighter budgets and the need to keep on top of ongoing regulatory requirements. There’s increasingly less time to spend on activities that aren’t core to the business. A financial advice practice, for instance, is better served focusing its time on a client’s holistic financial goals and overall business objectives than on day-to-day investment portfolio management. Yet both demand stringent, around-the-clock attention. That’s where an Outsourced CIO provider can step in.

Access to best-in-class money managers

The right provider will not only have a dedicated team of in-house specialists to provide daily oversight and strategic advice, but also offer improved access to best-in-class investment managers on a global scale. A leading Outsourced CIO provider will be able to extensively research and rate thousands of investment managers and opportunities to find those ideally suited to a licensee’s or financial planning firm’s portfolio. In addition, skilled providers will possess a comprehensive risk management system—a necessity for effective portfolio management today. These systems typically show aggregated portfolio exposures across multiple managers, with a view of how exposures are likely to affect both risks and rewards—all with the click of a mouse.

Can Outsourced CIO also help with back-office functions?

Investment outsourcing also means that the Outsourced CIO provider takes charge of the associated daily administrative tasks, reducing the strain on a firms resources. This, in turn, frees up more time for the advice business to spend on core business activities and programs—while simultaneously ensuring that its fiduciary duties are still being carried out.

Provide cost savings

Many financial planning firms can also save significant amounts of money by outsourcing some or all of their investment function. How? There is a well-documented inverse relationship between asset management costs and portfolio size. In other words, large Outsourced CIO providers—with billions of dollars in assets under management—can use their scale to negotiate more competitive rates with sub-managers. They can also accomplish this by pooling the assets of multiple firms together. In aggregating this buying power, Outsourced CIO providers can pass along these efficiencies, which are, quite frankly, unachievable when a firm negotiates independently.

Help to reduce volatility

Another key reason many cite when switching to Outsourced CIO is a desire to reduce volatility. This is especially important for clients who may be closer to retirement due to sequencing risk (i.e. if drawdowns occur closer to retirement). Volatility is a key component of long-term asset allocation through diversification. A simple multi-asset fund with 70% equities and 30% bonds is no longer sufficient as bond yields have fallen to historic lows. A more diversified approach may enhance returns and reduce volatility. Dynamic asset allocation also factors in the management of volatility, especially when the market cycle becomes more extended and valuations become more expensive.

Best-in-class OCIO providers also offer the potential for improvements in a client’s overall financial wellbeing—an objective which is likely to increase in scope due to the dramatic drop in discount rates since the onset of the pandemic.

Case Study

Jonathan and Jodie are business partners in Osprey Financial Planning a self-licensed financial planning practice on the South Coast of NSW. They have seven Financial Advisers in the practice, including themselves and have over $600m in funds under advice. Over the past 12 – 24 months, with the regulatory change impacting their business, Jonathan and Jodie have agreed to focus more on their client experience. They have decided to outsource their investment management processes to a global fund manager who has a strong local presence and solid processes that are not solely people dependant.

Jonathan, Jodie and their investment committee interviewed a number of fund managers and ultimately, they selected an outsourced CIO who:

  1. Understands what is important to Jonathan, Jodie and their clients: Over a period of a many weeks the outsourced chief investment officer, which included, the asset consultant, portfolio manager and platform provider sat down together with the team at Osprey to understand their needs.  The workshops conducted took into account the investment policy statements and guidelines set out by their licensee and also the needs of Osprey’s varied client base.   The outcome of these workshops over an initial period of a few weeks saw Osprey, the outsourced chief investment officer and their team along with the platform have a clear understanding and articulation of their client strategy, objectives, return expectations and risk tolerances and ranges. The outsourced manager was then able to design, construct and manage a range of managed accounts for their clients for review.   Investing a little time with the outsourced CIO and their team early in the process will ensure the outsourced CIO is able to design a range of solutions that meet the needs and return expectations for clients and stakeholders.
  2. Achieves a fee budget: Outsourcing your CIO can deliver a range of efficiencies to your business.  In the case of Osprey Financial they were able to save on employment costs within their business which included analysts and trainee investment professionals.  In addition to this by outsourcing their investment management processes and product design they gave their outsourced provider a fee budget to work towards for each managed account solution, for Osprey the fee for the portfolios and investments management services ranged between 60 and 80 basis points.
  3. Manages risk: One of the key elements Osprey wanted as part of their Outsourced CIO Services was a manager who had established and embedded governance and risk management processes at a local and global level, this was to ensure that as a business they weren’t single person dependant but more reliant on the processes and procedures a global outsourced CIO can bring with a local presence along with global best practices.
  4. Sources best in class managers: With the proliferation of retail financial services at a global and local level the number of investment managers offering single sector and diversified client solutions can be overwhelming based on their fee structure, benchmark and risk tolerance. The team at Osprey were very aware of not knowing what they didn’t know when it came to manager selection and were therefore more comfortable to utilise the services of a local and global team of investment professionals who are able to research, identify and implement a range of investment managers that meet their needs and can achieve benchmark, fee budget  and risk tolerances within the managed account structure they designed.
  5. Can manage volatility. In the design of the managed accounts solution, the Osprey team applied a Dynamic Asset Allocation approach within the managed accounts models, which was beneficial for their clients during the prolonged periods of volatility during the pandemic. This structure whereby up to 35% of the underlying assets within their managed accounts were a range of investment managers that the portfolio manager was able to sell down, switch or bring on a new manager within their fee budget, risk tolerance and investment benchmark without the advisers within Osprey needing to complete a statement of advice.

The bottom line

In today’s topsy-turvy pandemic world, financial services firms are beset by a multitude of challenges. Investing shouldn’t be one of them. Consider partnering with a skilled Outsourced CIO provider to improve your firm’s client goals, alleviate resource strain and reduce your overall costs.


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