What is the difference between OCIO and fiduciary management?

OCIO (Outsourced Chief Investment Officer) and fiduciary management are both delegation approaches used by institutional investors around the world to manage their investments, but they differ in key ways. At times, the terms are used interchangeably as if they are the same thing and this note seeks to provide clarity on the subtle but important differences.

OCIO is an investment management model where an organisation outsources its investment management function to a third-party provider, often an investment management firm. The provider acts as the organisation's Chief Investment Officer, taking on responsibility for investment policy and asset allocation proposals, manager selection, and other aspects of investment implementation. The organisation retains oversight and control of the investment program, but the provider executes the investment strategy.

Fiduciary management, on the other hand, is an investment management model where an investment function usually does not already exist and the organisation delegates investment management responsibilities to a third-party provider. The provider has full or partial discretion over investment policy and asset allocation decisions as well as executing investment strategy.

The key difference between OCIO and fiduciary management is the level of control the organisation retains over the investment policy and asset allocation decisions. With OCIO, the organisation retains more control and oversight, while with fiduciary management, the provider has significantly greater discretion.

Why would an institutional investor choose OCIO vs. fiduciary management?

Institutional investors may choose OCIO or fiduciary management for various reasons, depending on their investment objectives, governance structure, and resources. Here are potential factors that may influence the decision:

1. Control: An organisation that wants to retain some level of control over its investment program such as strategic asset allocation may prefer the OCIO model. The provider can act as an extension to the organisation under a variety of models that are tailored to them. The organisation can still set investment policy and asset allocation, review investment performance, and set implementation preferences, while benefiting from the provider's expertise and resources.
2. Cost: An organisation that wants to control investment costs may prefer the OCIO model, as the provider's fees are typically lower than those of a fiduciary manager. This is because the provider is not assuming full fiduciary responsibility, and the institution is retaining some investment decision-making authority. That said, both delegation models offer enhanced scale and therefore can drive value through established processes and cost efficiencies.
3. Delegation: An organisation that wants to fully delegate investment decision making responsibility may prefer the fiduciary management model, where the provider assumes full fiduciary responsibility and can act more efficiently and quickly than an OCIO provider who works in partnership with the organisation, requiring approval where applicable
4. Governance: An organisation that wants a clear separation of duties between investment management and oversight may prefer the fiduciary management model, where the provider assumes full fiduciary responsibility and the institution can focus on governance and oversight.
5. Portfolio complexity: An organisation with a simpler, and possibly low returning portfolio, may favour fiduciary management as the key investment decisions come with less materiality; emotionally, that may feel like a lower hurdle for delegating decisions.

The choice between OCIO and fiduciary management depends on the organisation’s goals, preferences, and circumstances. In practice there is a spectrum between fully delegated fiduciary management, moving into more flexible fiduciary management and then to OCIO, with a correlation to the size and resources of the organisation. It is important for the organisation to carefully evaluate both models and their providers before deciding.

What size institutional investors typically uses OCIO vs. fiduciary management?

The decision to use an outsourced chief investment officer (OCIO) versus fiduciary management is typically based on the specific needs and resources of an institutional investor, rather than investor size alone, and should be carefully evaluated on a case-by-case basis.

However, generally speaking, larger institutional investors with significant assets under management and complex investment needs are more likely to use OCIO services.

On the other hand, institutional investors with fewer assets and less complex investment needs may be more likely to use fiduciary management services. Fiduciary managers can provide a more customised and scalable solution for investors that may not have the resources or expertise to manage their investments in-house.

In conclusion, while OCIO and fiduciary management share similarities as delegation approaches for institutional investors, they differ in key aspects. OCIO allows the institution to retain control and oversight while outsourcing investment management functions, whereas fiduciary management involves delegating investment decisions to a third-party provider with full or partial discretion. The choice between the two depends on factors such as the institution's need for control, expertise, cost considerations, delegation preferences, governance structure, and portfolio complexity. Although investor size can play a role, the decision should be evaluated on a case-by-case basis.