The widespread adoption of outsourced chief investment officers by family offices and foundations has left a gap for those who want to maintain control over their investments but need advanced analytics and insights to guide decision-making. Many institutions prefer to retain control over their portfolio but lack the in-house resources and know-how for complex data analysis.
The need for decision-support, not decision-replacement, is particularly critical for family offices and foundations whose investment strategies often require personalization. By retaining control and using sophisticated tools to interpret data, manage risk,and assess performance, these institutions can remain actively involved while still benefiting from expert insights.
The crux of the issue is that OCIOs, while providing convenience, often force institutions into a “hands-off” position, which doesn’t align with the needs of many family offices and foundations that value the flexibility and personalization of self-managed portfolios. OCIOs may bring expertise, but they often bring misaligned incentives as well, placing institutions at risk of losing control over critical strategic decisions.
In contrast, a consulting model that offers sophisticated analytics and clear insights fills a crucial need in the market. It is becoming more critical to provide investors with the tools to interpret their data,understand their risk exposure, and drive performance. OCIOs may offer to simplify management, but the trade-off is often a loss of flexibility, and most importantly, control.
According to recent studies, small and mid-sized university endowments are turning to OCIOs at a higher rate, stemming from their inability to build robust internal investment teams due to limited budgets. These institutions have fallen to the pressure of closing internal investment offices and outsourcing to OCIOs for access to resources and relationships they can’t develop on their own.
One of the driving factors behind this shift is the high cost of maintaining in-house investment offices. Staffing alone accounts for 75-85% of an investment office’s total costs - for smaller endowments, these costs are disproportionately higher compared to larger institutions, creating anon-negligible financial burden. For instance, a $500 million portfolio would typically require $1.85 million annually for staffing, compared to much lower costs for OCIO services, which may range around 12 basis points for larger portfolios.
Additionally, small and mid-sized institutions often lack the expertise needed to navigate the growing complexity of alternative investments, which are becoming increasingly prominent in institutional portfolios. With large endowments leading the charge into alternative assets, smaller institutions are following suit but struggle to conduct the due diligence and operational oversight necessary for these investments. This further incentivizes outsourcing to OCIOs, as providers can offer access to specialist managers and research capabilities that small institutions cannot afford internally.
Yet, while OCIOs can provide access to these resources, the transition comes with challenges. For the relationship to be successful, there must be clear communication and alignment between the OCIO, the institution’s board of trustees, and its investment committee. OCIOs must understand the unique liquidity and spending needs of each institution, and misalignment can lead to difficulties—especially when performance doesn’t meet expectations. Moreover, OCIOs often need to take on broader roles, such as educating new board members or supporting fundraising efforts.
Institutions that want to remain actively involved in the management of their portfolios need access to robust analytics and performance data, but without the need to completely hand over the decision-making process.This balance allows institutions to adjust strategies in real-time, manage risk, and measure performance against their specific benchmarks, all while keeping control over their investments.
A smart model that offers support both through expert advisory and tooling, without taking control, can fill the gap left by the OCIO approach, aligning interests with quantifiable outcomes and allowing institutions to remain flexible and responsive to market changes. This approach enables institutions to make smarter, more informed decisions without sacrificing the autonomy that is often critical to their long-term investment strategy.
In short, while OCIOs may serve as a solution for some, there’s a growing need for a hybrid model that empowers investors with the insight they need to succeed—without giving up control. This hybrid approach doesn’t replace the role of the allocator but strengthens it by providing the tools and data needed to ensure that every decision is well-informed and goal-aligned.
