Considering total fees when evaluating OCIOs

As fiduciaries for your investment program, thank you for taking the initiative to conduct additional due diligence on the evaluation of OCIO providers.  Today we will discuss the importance of fee transparency and the total cost of partnering with an OCIO.

Decades ago, when the delegated investment management model was first introduced, OCIO advisory fees and underlying manager fees were often bundled together. Over time, a competitive OCIO market and the need for fee transparency has led to a separation of those fees.

The shift to greater transparency was and is a very good thing. However, this had led some investors to over-rely on the standalone OCIO fee, oftentimes ignoring arguably the largest portion of total cost: investment manager fees. 

Let’s compare sample fees for two discretionary investment providers.  

• In this example, we have an institutional investor with a $200 million portfolio, only investing in public markets, that already has determined the value of investment manager fee-savings within the OCIO model
• OCIO firm A has a 20 basis point advisory fee and OCIO firm B is proposing a 25 basis point advisory fee
• Next let’s take a look at the investment management fees across a diversified public market portfolio; we will allocate the assets the same for both OCIO firms in order to maintain consistency
• The total weighted average investment manager fees for OCIO A are 48 basis points while OCIO B weighted investment manager fees are only 21 basis points
• OCIO A has a total fee of 68 basis points, while OCIO B has a total fee of 46 basis points
• So, while OCIO A has a lower advisory fee, the total fee is significantly higher than OCIO B.  This should be important criteria when evaluating providers.
• So, what makes the OCIO fee higher for one provider versus another? Our next blog and video will address the different type of services offered by OCIO firms to better explain the differences in advisory fees. 

As a fiduciary for an institutional investment pool, your job can be challenging.  
We believe that fee transparency and the importance of accurately comparing all fees are critical decisions to help you achieve your goals and objectives.