Family offices face unique investment challenges. Generally, early-stage family offices often need help establishing governance and diligence practices. In contrast, late-stage family offices often struggle to stay on top of all their investments and optimise portfolio performance.
Regardless of the stage, family offices are increasingly turning to OCIOs to manage their investments. This insight discusses the role of OCIO, their benefit, and how family offices can choose the right OCIO for their investment needs.
What is a Chief Investment Officer?
A Chief Investment Officer (CIO) is a high-level executive professional responsible for managing organisations’ investment strategies and portfolios. They determine how much of a firm’s operational finances may be used for investment while maintaining a low level of risk to the organisation.
Usually, this entails drafting investment policies (IPs), adjusting asset allocations, and striking a favourable balance between risk and return. Other responsibilities may include sourcing deals, managing, and monitoring clients’ investments. Whether they set up investment programs or work with external portfolio managers, their ultimate goal is to help clients meet their investment objectives.
What is an outsourced Chief Investment Officer, and how do they function within a family office?
OCIO stands for Outsourced Chief Investment Officer. As the name implies – it is when a family office ‘outsources’ the investment decision-making to a third party. The third party could be an advisor, consultant or an investment firm. In the context of a family office, the OCIO takes on the fiduciary responsibility to manage investments on behalf of the family.
They are responsible for creating a suitable investment strategy that aligns with the family’s goals. They establish a governance structure, execute investment decisions, and deploy risk management strategies.
Why do family offices outsource Chief Investment Officers?
Family offices use OCIOs for a variety of reasons. Below are three of the most prominent reasons:
Lack of internal expertise
The lack of internal resources is one of the main reasons for outsourcing their investments. Family offices often have to perform various activities to ensure the family’s well-being. While they may have accountants and access to expert legal and tax consultants – none of those roles deal directly with investments. Getting the most out of assets requires time, commitment and dedication.
Specialised investment knowledge
The second reason family offices outsource their investment decisions is to seek specialised insights from seasoned professionals. They understand that portfolio optimisation requires more than getting the right asset allocation mix or investment managers.
Professional OCIOs bring a wealth of experience and access to industry best practices. They may have access to exclusive funds, products and top-line tech solutions.
Reducing costs
The third reason why family offices outsource investment decisions is to reduce costs. While this may sound counterintuitive, consolidating all investment design-making can reduce overall costs. Also, working with an experienced OCIO can help family offices avoid costly short- and long-term mistakes.
Benefits of outsourcing
By enlisting the services of an OCIO, family offices can benefit in numerous ways, mainly:
Access to specialised expertise
Working closely with an experienced OCIO can provide access to specialised expertise and resources. OCIOs not only bring their knowledge and skill but also bring their network in their various areas of expertise.
Given their experience and track record, OCIOs are more likely to make the right investment decision for family offices. As outsiders, they bring an objective perspective and can tailor unique investment strategies that align with the family’s investment goals.
Efficient investment processes
OCIOs have hands-on experience constructing and customising portfolios to suit individual client needs. By drafting an effective investment policy, they can significantly streamline investment activities and enhance the overall effectiveness of the family office’s investment processes. They also apply a professional approach to risk management and exercise discipline when executing investment decisions.
Better investment performance
As market cycles rotate, family offices may need help keeping up with the changes and making suitable adjustments in time. OCIOs, on the other hand, specialise in dynamic market conditions.
They stay abreast of the latest investment disciplines. That includes fields like sustainability and environmental, social and governance (ESG), and alternative assets such as private equity and hedge funds. Enlisting the services of an OCIO can significantly improve a family office’s investment performance.
How to choose an outsourced CIO
When choosing to hire an OCIO for your family office, you should consider the following:
Mission and values
When considering hiring an OCIO, family offices must find the right fit. Thinking about the family’s vision and mission is an excellent place to start. The right OCIO needs to share the same mission and values. Shared values go a long way in building long-lasting and beneficial relationships.
Experience
Family offices require specialised support and must find an OCIO that matches their investment needs. The chosen OCIO must demonstrate relevant experience and in-depth knowledge in the areas where the family is most invested. They should understand your investment philosophy to help add value and efficiency to your investment processes.
Proven track record
Not only should the right candidate demonstrate relevant experience, but they must also show a proven track record in wealth management. In other words, you shouldn’t be their first family office client. The ideal OCIO should show to have outperformed in investments and dealing with the family office industry.
In conclusion, outsourced CIOs are becoming increasingly prevalent in family offices as they face unique investment challenges. OCIOs can streamline investment activities, enhance risk management, and tailor investment strategies to align with family goals. By selecting the right OCIO, family offices can optimise their investment management and achieve their investment objectives effectively.