Rich Nuzum, investments business leader-North America at Mercer LLC, New York,said advice-only fees aren't necessarily down “but value-add is definitely up” for traditional clients “as a result of our work as an OCIO.” He said Mercer leverages the knowledge gleaned from its OCIO service. As an example, an OCIO sees manager trades daily and in real time, as opposed to looking at investments after the fact with traditional consulting. “That benefits advice-only clients because we leverage our knowledge of the managers we get through our OCIO business.”
At Wilshire Consulting, advice-only clients pay a retainer while OCIO client fees are based on the asset size of the client, and are generally higher than for advice-only, said Julia Bonafede, president of the Santa Monica, Calif.-based consultant. While the research for advice and OCIO is the same, the higher cost for OCIO covers the fiduciary duties as well as higher costs for legal services, compliance and operations. “OCIO requires a significant investment in governance. It's a far more involved service, and thus has higher fees.”
Fees for OCIO can still depend on what each client wants, from the kind of advice they want to how much discretion the client wants to keep or delegate, Russell's Mr. Turner said. “There is no black line; rather, there's a spectrum of discretion among clients. It's not all or nothing with OCIO. There are levels of serving. The bottom line is clients often don't know exactly what they're asking for, whether that's help in selecting a manager or going to the all-inclusive model. Each client's needs are different, and the fees reflect that.”
“It really depends client by client,” added Paul Berriman, CEO at Towers Watson Investment Management, London. “Every time you do a business pitch, sometimes you know what a prospective client wants; sometimes that changes. We don't go in with any predetermined idea as to what we will charge. It always depends on the client. But we will charge for the amount of work we think we will do.”
Ultimately, the fees agreed upon by the client can depend on what rivals are offering, Mr. Berriman added. “It's always a market-based decision,” he said. “There aren't more than six or seven firms that are our rivals for what we offer. All of us are aware of what the market is. We might try something different from the market.” He said such fee competition isn't exclusive to OCIO, “it's been the same over the past 25 years in regards to competition.”
Flat fees, despite the dispersion in value in OCIO, are fairer for the client than a more performance-based regime, Mr. Berriman said. “We forensically dissect what the (underlying) fund managers charge. You need to do the work, all the things that good consultants do. What we care about are the proposals; we do the same with ourselves that we do with the managers. We know what managers do, and we let clients know, and we tell them there are various ways they can compensate us. These agreements have a tendency to get devilishly complicated, but most of the time we tend toward simplicity. If fees were purely performance-based, sometimes that can seem right in theory, but you have to be very careful that everyone understands what is being measured. Performance relative to what? An index? Inflation? There are so many things you can peg it to, so many unintended consequences. You have to be really careful in dealing with managers and then fairly explain that to the client.”
Casey Quirk's Mr. Stakel said that despite the fee dispersion, there are two general pricing methods for OCIO: Cost-plus, in which clients pay fees for underlying managers chosen for the OCIO program plus a flat fee to the OCIO provider; and bundled, where an overall flat fee is assessed and the OCIO firm is responsible for paying the fees of the underlying managers. He said both kinds might have additional performance fees, but “there's no strong trend toward that now.”
Also, there might not be much difference ultimately between one pricing method and another. “Either way you'll have to pay the underlying managers,” Mr. Stakel said.
Added Gerry Cosgrove, managing director and head of consultant relations, RBC Global Asset Management (U.S.), Boston. “The fee sizes depend on how the consultant uses a manager, but it's not very different between advice-only and OCIO,” Mr. Cosgrove said. “For example, emerging markets, because of the due diligence required, is more expensive (than less research-intensive strategies), but that's whether a consultant uses it in an OCIO package or an asset owner hires a manager directly.”
