The Role of Outsourcing in Family Offices

By Richard Joynt, Head of Family Office and Bharat Basra, Chief Investment Officer and Partner at Hassium Asset Management LLP

THE ROLE OF OUTSOURCING IN FAMILY OFFICES

The landscape of wealth management is constantly evolving, presenting families and trustees with both challenges and opportunities. We see an increasing trend towards outsourcing within family offices including utilising an Outsourced Chief Investment Officer (OCIO) role. This is a solution with its own nuances that families, family offices and trustees must learn to grapple with.

Whether you’re a client handling investment directly, part of a family office arrangement, or dealing with assets held in trusts, understanding the available options is key.

Why is OCIO becoming more important?

Over the last couple of decades, several challenges facing high-net-worth clients have become apparent. The development of alternative assets brought with it theoretical complexity. As portfolios increase in size, a greater allocation towards those assets has become normalised, bringing with it the need for greater technical expertise that generalist teams often lack. With the number of external allocations to fund managers also increasing, increased complexity and breadth of portfolios often requires centralized decision making to clear this up.

Who is/should be making these decisions is not clear, and there are not easy ways to solve these problems. You can educate, you can involve a consultant, you can hire more managers, or you can have an OCIO. Below we explore four broad investment approaches that a family office or trustee may consider when allocating assets;

Exploring investment management options

External Investment Managers:

In this approach the family office principal or trustee would allocate to multiple external investment managers which operate independently. They would then be responsible for monitoring these managers to ensure their performance, fees, strategy and suitability remains suitable to achieve their clients’ objectives. Trustees are likely familiar with this model as it is what the industry has known traditionally.

External Investment Managers + Independent Consultant:

The decision maker continues to allocate to external investment managers and would also hire an independent consultant to assist with the monitoring of these managers. The consultant would typically provide performance analysis, a traffic-light style review and a high-level recommendation for each manager. The independent consultant service may also support the discovery, selection and replacement of external managers.

Outsourced Chief Investment Officer (OCIO):

An OCIO relationship provides family offices and trustees with immediate access to institutional-grade investment expertise. The OCIO will have investment specialists across asset classes, and would take a hands-on approach to portfolio monitoring, manager selection, asset allocation, risk management and investment policy development. This model delivers stronger governance, broader investment access, improved execution, and proactive oversight which enables the family office or trustees to focus on non-investment matters.

In-House Investment Team:

The fourth option would be to build-out an in-house investment team. Whether focused on a specific asset class or spanning the entire portfolio, you can either take on the role of CIO yourself by hiring a dedicated team or leveraging internal investment capabilities to manage investments within the business.

Each approach has advantages and considerations based on uniqueness of the client needs. Alignment with the family office’s unique goals and circumstances is key. With a large complex portfolio, the opportunity cost of having the wrong strategic approach can often exceed £100k+ a year in missed returns.

In-house Investment Team (IHIT) vs the Outsourced CIO (OCIO).

For a principal seeking a high degree of control and ability to change the strategic direction of resources as they navigate their family through different challenges, building an In-house Investment Team can be appealing. However, such an approach isn’t universally ideal. In a family environment with multiple key decision makers, flexibility and agility may contradict the ability to achieve long-term objectives and needs of the group. Balancing active participation of a principal, versus utilising a committee-based approach requires considering family office dynamics and enforcing governance processes. Building an in-house team is also likely to be resource and capital intensive and is typically not appropriate for families with less than £300m of investible assets.

Instead, larger families with complex governance requirements may benefit from engaging with an OCIO. The OCIO approach brings flexibility in both engagement and investment capabilities. The principal/key decision makers maintain complete control over the scope of engagement and can terminate an OCIO agreement at their discretion. An outsourced investment team would bring institutional-grade expertise and a breadth of experience across asset classes to respond to changes in market conditions. They often bring hands-on investment experience (often acting as CIOs or Portfolio Managers for other clients) which typically independent consultants do not have. This enables the incumbent family members to focus on non-investment matters such as succession planning and transformation. Next generation often resist adopting the same structures as the principal and may push back against inheriting an in-house team. They often seek fresh perspectives and advisors who are responsive to their evolving needs and viewpoints. The breadth of an OCIO team can make efforts to understand these dynamics and evolve their strategies over time to meet these changing needs.

Moreover, as the OCIO acts on behalf of the Family Office, typically on a fixed fee basis, they are focused on choosing the products and strategies that best suit the mandate. In an increasingly complex universe, it is common that an independent consultant may advise the adoption of additional managers as a solution to diversify risk. Such advice can be self-fulfilling, as it can unnecessarily increases investment complexity and monitoring requirements, which in turn requires more consultant advice, which in turn propels fees. Such diversification can offset risk but can simultaneously offset returns. The OCIO is more aligned and, and through expertise, could achieve the same level of diversification without the proliferation of managers and resulting fee structure, choosing investments that better suit long-term portfolio goals.

Navigating potential risks

Often, the investment houses which perform OCIO services also offer discretionary asset management services and sometimes also have private capital and structured product lines of business. Family offices and Trustees need to be aware of the potential conflict of interest that this could create, as one of the principle benefits of the OCIO model are that interests should be totally aligned. If the OCIO is also recommending its own solutions, for which it earns additional revenues, this is a potential conflict.

Thought also needs to be given as to how the OCIO is monitored. In a traditional discretionary investment scenario, Family Offices and Trustees can appoint an external independent investment review firm who can report periodically on performance and adherence to mandate. In such a bespoke scenario as an OCIO arrangement, oversight might need to be exercised in a different manner (e.g. a council of family members, trustees and expert external advisers).

Tailored solutions for long-term success

In conclusion, the need for tailored solutions in wealth management cannot be overstated. Whether opting for traditional models or embracing innovative approaches, families and trustees must carefully evaluate their objectives and choose solutions that align with their long-term goals. By navigating the complexities of outsourcing with foresight and strategic planning, families can position themselves for financial success in an ever-changing environment.

Email: Bharat.Basra@hassium.co.uk
Contact Number: +44 204 558 0400
LinkedIn: Bharat Basra | LinkedIn