While the outsourced chief investment officer market is on a trajectory for continued growth, firms aiming to win new business and differentiate themselves from competitors must offer comprehensive advice with a focus on client service, according to Ryan Marshall, a managing director and global head of client portfolio solutions at BlackRock Inc.
"The organizations that are going to be successful will offer a full range of investment capabilities, have the technology to harness those capabilities and deliver them to the clients, and really invest in this (client) service dimension," Mr. Marshall said.
U.S. assets in the OCIO space are predicted to grow from $1.1 trillion, as of the end of 2018, to $1.7 trillion by 2023, according to a March white paper by Cerulli Associates, Boston, which was sponsored by BlackRock.
But expected gains could be tempered by a shift in financial markets, the paper said, noting that institutional growth has, so far, occurred in an extended bull market.
"As markets move into a more challenging stage, institutions are increasingly likely to seek OCIO services, providers will face a new series of tests, and existing OCIO clients will continue to conduct replacement searches," the paper said.
After surveying 45 institutional investors with OCIOs, which were mostly non-profits (21) and corporate DB plans (19), Cerulli found that 57% of organizations had initiated, or planned to initiate, a replacement search for their OCIO provider. Reasons for replacement searches varied — from a desire for greater flexibility, to a search for better performance, stronger investment capabilities or more proactive client service, the paper said.
Overall, institutions "have higher expectations about investment performance, about the clarity, transparency and quality of service, (as well as) reporting," despite having outsourced investment duties, said Mr. Marshall.
"They still have to manage all of (their) stakeholders," he said of investment offices or staff for institutions.
"When people outsource there is a lot of anxiety about how (they) will answer the questions (they) get from stakeholders," Mr. Marshall said.
Of note, 56% of institutions in the Cerulli survey said there had been no change in the level of board or committee engagement since an OCIO was hired.
As the OCIO market grows, the industry can also expect increased competition to drive advisory fees down, according to the white paper. Advisory fees, in this context, generally covered the costs of OCIO investment portfolio oversight and management, such as investment policy development, asset allocation, manager hiring and termination, performance monitoring and attribution, meetings with staff and board, oversight and management of custodians, and regulatory filing support.
In the survey, 38% of respondents reported that they had negotiated lower fees during the bidding process for an OCIO.