In a recent interview with FundFire, Managing Partner Jim Scheinberg spoke with author Alana Pipe on OCIO fees, and the competitive pressure fees bring to the industry as a whole.
In Pipe’s article, she outlines data from Investment Metrics that shows that compared to the traditional consultant model, median OCIO fees did not vary by more than a few basis points last year. That being said, OCIOs are not immune to the consistent fee pressure the industry sees overall. Other consultants interviewed make the case that fees receive too much attention, and that compared to larger firms, boutique OCIOs can charge more due to the closer relationships they can establish with clients.
However, smaller isn’t always better. As search experts, we at North Pier know that the client’s needs, culture, and objectives are far more important determinants in OCIO selection. For example, clients with more global views and use of alternatives, or interest in SRI/ESG investing, would benefit from the significantly larger and more sophisticated approaches and research that larger firms can provide – which is why they often have higher fees.
In the article, Scheinberg notes that ancillary services offered by OCIOs is one way to drive more value and negotiate higher fees.
The bargaining leverage of these services differ by client type, he says. For instance, pension funds may need Employee Retirement Income Security Act of 1974 (ERISA) compliance consulting, asset/liability studies, or liability-driven investing and interest rate hedging strategies and implementation, which an OCIO could charge more for, says Scheinberg. When it comes to endowments and foundations, an OCIO can provide complex administration and reporting for different types of planned giving, like donor advised funds and charitable gift annuities as well as donor-relations support, which will be seen as highly valuable says Scheinberg.
Fee transparency is also an important factor to consider. It’s critical to ensure asset owners are receiving the best value for their money, and that incentives are aligned. For example, bundled fee arrangements can create incentives for consultants and OCIOs to lower manager and other service provider fees (potentially risking suboptimal performance) and not necessarily pass the savings on to clients. Additionally, firms who offer in-house investment products or funds are incentivized to use these products in client portfolios. While these products may be a reasonable product for a client, understanding the total fees earned is an important aspect of assessing the true cost and value of a consulting or OCIO relationship.
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