Hiring an OCIO? Beware of Hidden Fees.

Outsourcing investments may not be as cheap as you think.

Illustration by II

Illustration by II

When an institution hires an outsourced chief investment officer to manage its assets, the expectation is that it will save money.

But while pooling assets with an OCIO can help smaller institutions avoid high management fees, those savings may be offset by costs that aren’t revealed at first glance, industry experts say. The problem stems from a lack of transparency and standardization in the burgeoning industry — and it starts at the beginning of the relationship.

Just deciding to outsource investments requires multiple investment committee meetings, which can take a toll on committee members, according to Nikki Kraus, a managing director at OCIO firm Strategic Investment Group.

“By the time they’ve made that decision, they’re extra ‘meeting-ed’ out,” Kraus said. “A lot of them do a request for proposal, meet with an OCIO firm one time, then choose.”

Details on how much the services will actually cost may get lost in the shuffle, Kraus said, noting that OCIO providers may not provide clear information on how they charge fees. For example, an OCIO might share a fee schedule for a portfolio that excludes alternatives or show fees for a passive portfolio when the institution is seeking active management, she said.


To better understand the cost of OCIO services, Kraus suggested that institutions ask specific questions about how they want to allocate, what types of assets they expect to include in their portfolios, and what types of strategies they’d like to implement.

“It’s not dissimilar to making a significant purchase in your life,” Kraus said. “You want to walk into an open house or car dealership and show them that you’ve done some work. You want to indicate that you’ve done your homework.”

According to OCIO consultant Dennis Sugino, there may be room to negotiate upfront.

“If the OCIO says we have a most favored nations clause so all of our fees are the same, then the client might fall for that,” he said. Those clauses require a provider to charge the same fees to all their clients.

Instead of negotiating on the fee schedule itself, an institution may consider asking for a month or two free, then paying full price for the time they work together beyond that, Sugino said. He’s done it for some of his clients before, noting that the larger an institution is, the more leverage it has when it negotiates OCIO fees.

Internal Costs

For OCIO firms that are part of larger companies with custodian, brokerage, or investment management businesses, extra costs may arise when the OCIO division funnels assets through other lines of business.

What’s more is an OCIO could choose to swap an outside manager with one of its in-house products. When the outside investment manager sells off the assets, it may do so through the OCIO firm’s brokerage arm, resulting in yet another revenue source, Kraus said.

Even when a custodian is not owned by an OCIO firm, negotiating those fees is rarely something the provider considers, Sugino said.

“The OCIO may not care what those costs are because it doesn’t reduce their performance and it doesn’t impact them,” he said. “You have to be diligent about the quality of the work of the custodian, as well as whether their fees are market rate or not.”

The Cost of Firing an OCIO

Beyond the expenses of employing an OCIO, institutions should also be aware of the “huge” costs that come with ending an outsourcing relationship, Sugino said.

The reason for these high costs is two-fold.

First, when an institution terminates its OCIO, its capital remains committed to the private equity firms it has invested with through that provider. Most OCIOs charge much higher fees to manage that committed capital for their ex-clients, Sugino and Kraus noted.

There’s also the cost of transitioning assets to consider. An institution must redeem capital from its old fund structure and transfer it over, essentially taking that money out of the market for a brief period, according to Sugino.

“That loss of value is the loss for the client, but nobody else has responsibility for that,” Sugino said. “There are gaps in market exposure that don’t have to happen.”

To alleviate this issue, Sugino suggests setting up futures contracts to cover the time an institution is out of the market, just in case there are huge swings in value.

“There are huge opportunity costs here,” Sugino said, adding that transitioning from one OCIO to another “is maybe the largest hidden cost of all that people don’t even imagine.”