“What are your fees?” is a simple question, yet it carries more weight and nuance than it would imply. Institutions and organizations often claim that fees are not a major consideration when vetting OCIO service providers. In reality, however, committees’ final selections will frequently list cost as a deciding factor.
Most organizations understand that fees associated with OCIOs can vary widely depending on the amount invested, asset allocation strategies, additional services such as reporting on external manager performance, and other factors. What is less widely understood—and more frustrating—is the frequent obfuscation and opaqueness surrounding the specifics of fee structures.
Formal presentations and RFPs can often conceal OCIO fees. For this reason, partnering with a provider that maintains transparent structures is critical to maximizing portfolio success. This article outlines potential pitfalls when evaluating and comparing fees across OCIO providers.
Potential Hidden OCIO Fees
OCIO providers can offer a variety of fee structures. To understand fee structures, it is critical to look beyond the surface to uncover hidden fees. The most frequent and simplest fee presented by OCIOs is the management fee, which is often calculated as a percentage of total assets under management (AUM).
While advisory fees can be straightforward, other fees are often misreported or not mentioned at all. These can include transaction fees for trading, servicing fees for administrative costs, underlying investment management fees, and more. These may be bundled as a single fee, further complicating things. An OCIO that values transparency (as all should) will be able to parse these for you.
Veiled fees pose a specific threat to your investment, as their exclusion in reporting can artificially inflate performance metrics and misrepresent true returns. Uncovering and identifying these fees is the only way to successfully create a one-to-one comparison and choose the OCIO provider that best fits your portfolio’s needs.
Translating Fees to Value
After uncovering and gaining a comprehensive view of potential providers’ fees, you must then consider the value those fees represent. Comparing only costs from one OCIO provider to another is simple; understanding the value represented by those fees is more complex.
An OCIO provider can add value to an organization in several ways. For example, OCIOs may provide special reporting on outside assets or create customized fund reports. Some may offer back-office services that consultants or more limited providers do not. Specific services, such as reconciliation of books, may even allow your organization to reduce internal staffing. While these features can inflate total cost, their added benefits to the organization may tip the scales in your overall value equation.
Additionally, some fees can encourage value creation. Underlying investment managers, particularly in alternative strategies, often charge incentive fees in addition to fixed management fees. Manager incentive fees can be viewed as an indicator of strong performance and a metric that aligns managers with the goals of the portfolio.
Understanding OCIO Transparency
When comparisons begin, cost may seem like a simple, straightforward factor to consider. However, much like when evaluating OCIO performance metrics, a deeper assessment is required to understand the entire picture. The investment committee participating in the RFP and selection process must ensure they fully understand not only the costs associated with each OCIO provider but also the value that each may provide. Given that fee structures can vary dramatically between different OCIO firms, understanding a firm’s value in addition to its performance, investment approach, and client base can be extremely beneficial during final selection.
All investments involve risk, including possible loss of principal. Not all strategies are appropriate for all investors. There is no guarantee that any particular asset allocation or mix of strategies will meet your investment objectives. Diversification does not ensure a profit or protect against a loss. One cannot invest directly in an index, and unmanaged indices do not incur fees and expenses.
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