By Brian A. Schroeder, the founder of OCIO Monitor, a specialty consulting firm that provides due diligence of investment consultants and outsourced chief investment officers.
Recently, I had a conversation with an OCIO representative wanting to learn more about my firm, talk about the industry and just make a new connection. I love these conversations, and they always end with "how can we help each other?"
My consistent response is, "If you have a client that wants to independently review your performance, I will provide an unbiased, objective and quantitative review. Since I do not perform searches or act as a competitor, I have no conflicts to upset the apple cart and create a search to earn more revenue for myself."
He questioned back asking, "Why wouldn't I recommend a firm that might put me into a future OCIO search?"
Bingo!
This exchanging of referrals helps both firms. However, if you perform OCIO searches as a fiduciary, you have a duty to put the interests of your client first.
But if you hire an OCIO search consultant and they use the opportunity to "payback" OCIOs that previously helped them get hired, does this one hand washing the other affect objectivity?
The answer is an obvious yes!
And not just for OCIO searches, but also reviews. If you give a bad review, a potential source of future referrals dries up. Unless of course, you then put them into a new search to "even things out." What if you give a good review in exchange for future referrals?
The horse-trading potential is limitless.
How are clients ever to know if this is impacting their consultant's objectivity?
What's worse, if an OCIO search consultant does not "spread it around," it disadvantages them for the following 3 reasons:
1) They diversify their reputational risk. If they do not spread it around, and instead know a "best in class" OCIO that subsequently falters due to performance, fraud or criminal activity, that search consultant's reputation is shot. 2) If they don't spread it around, they fall out of favor with other OCIOs which are a source of referrals. 3) Spreading it around ensures perks from OCIO firms: golf, dinners, sporting event tickets, sponsorships, attendance at conferences, advertising, etc.
Clients that hire an OCIO search consultant that also performs OCIO reviews can never truly be sure whose interests are being served.
All posts are the opinion of the contributing author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CAIA Association or the author’s employer.
About the Author:
Brian A. Schroeder is the founder of OCIO Monitor, a specialty consulting firm that provides due diligence of investment consultants and outsourced chief investment officers. He has over 30 years of investment experience, as both an institutional manager and consultant.
He is the leading objective and unbiased due diligence provider on behalf of institutional plan sponsors. He has worked for pensions, foundations and endowments with assets up to $15 billion. Besides quantitatively determining their value-add and discovering behavioral finance heuristics, he is likely the leading expert in benchmarking and performance reporting transparency. He has been consulted by academics and recently presented to the Securities Exchange Commission’s Division of Exams’ investigators on how to spot performance reporting fraud when conducting routine firm inspections.
Schroeder has spoken at the International Foundation’s Trustee Master's Program, the Investments Institute, and the ISCEBS Symposium. In July 2014, Benefits Magazine published his article “Multi-balanced Model: The Missing Link in Investment Approaches?” and, in May 2019, “3 Simple Strategies for Adopting a Passive Investment Consulting Approach” and, in July 2020, “Investing in Response to the Covid-19 Response.”
His analysis is novel by quantitatively scoring the value-add of investment consultants and OCIOs in their five main duties- strategic asset allocation, tactical asset allocation, rebalancing, active manager hiring, and active manager firing.
Schroeder has a Bachelor of Arts degree in economics and a Master of Science degree in financial analysis. He served for 3 years on the Riverton, Utah Committee for Economic Development and is a volunteer at the Salt Lake City YWCA.