From One CFO to Another: An Insider View on OCIO Decision Making

What do CFOs worry about when it comes to OCIO?

We’ve all heard the standard reasons why organizations consider outsourcing their investment program: Outsourcing may provide better investment outcomes, retirement-plan management is not core to the organization’s focus, outsourcing may free up internal resources or it may create economies of scale. Most of that is true, most of the time.

But for a Chief Financial Officer, there are many other factors that need to be considered—factors that may not rise to the surface during a typical pitch meeting. That’s why we tapped the expertise and experience of our own Steve Belgrad. In this interview, we get his take on both key and peripheral issues that he and his fellow CFOs worry about when considering a major outsourcing relationship. When is it time to change strategic partnerships? And once it’s time, what are the key considerations?

As CFO, how do you decide what to outsource and what to keep in-house?

Steve: There’s not a right or wrong answer to this. I think it really depends on the organization—what their capabilities are, their scale and their key strategic priorities. If you’re a massive company with deep pockets, it may be cheaper to build the capabilities in-house. But certainly sometimes organizations are better off outsourcing specific functions. If the function is not central to your business, if managing it yourself creates unnecessary risk, or if it’s more cost effective to outsource, then it’s worth exploring the idea.

There’s that famous Warren Buffet quote: “Price is what you pay. Value is what you get.” How do you weigh the difference between cost and value?

Steve: The funny thing about buying an investment management service is that you don’t know exactly what you’re buying at the time that you buy it. Because no matter what kind of service vendor you’re talking about, you’re always buying some form of their future performance. You’re buying the future outcome. At the end of the day, the basis points that you’re paying are not what determines your final cost.

When a CFO is purchasing investment advice, the cost can sometimes be hidden. The final cost is also about writing or not writing future checks. The cost of the decision is not just the basis points paid for the advice, but the underperformance of assets if you make the wrong decision. If you choose the right relationship, you end up writing smaller checks in the future. If you chose poorly, you end up writing bigger future checks to offset the underperformance.

This is where due diligence comes in—looking at the potential partner’s reputation, ratings from their clients, how long clients retain them, that sort of thing. And the more that you can anticipate what they’re actually going to deliver, the better. I’m drawn to firms that provide greater transparency and make it as easy as possible to make a well-informed decision. Because while these may be business decisions and transactions, there’s always a significant amount of trust involved. Transparency builds trust.

What’s the difference between a good strategic partner and a bad one?

Steve: You want to choose a partner that is a subject-matter expert, but also one that is willing to invest the time to understand your firm and its unique needs and objectives. You want a trusted advisor—that’s what’s really important to me. If you don’t have the expertise in-house, you want someone that’s not just going to sell you a product, but is really going to be a great consultant, too.

How do you manage your personal career and reputation risk that comes with choosing a strategic partner?

Steve: You want a strategic partner who will validate the trust you have placed in them and validate the decision to hire them. Hiring a strategic partner carries asymmetric risk. If you get it right, no is going to pat you on the back or congratulate you for a vendor doing their job. But if you get it wrong, there’s a lot of potential downside.

And the CFO is just one of a number of stakeholders. When it comes to choosing an OCIO provider, companies may involve HR, treasury, other fiduciaries like the investment committee or trustees, the CEO at some point, and the board as well. Knowing that, the providers who pitch to a firm, or who respond to an RFP, very much need to have their ducks in a row. And they need to be prepared to answer the toughest questions. I think good CFOs take a bit of joy in asking tough questions. Good providers should take joy in answering them.

When it comes to analyzing existing vendor relationships, how do you know when it’s time to make a change? What has to happen to make your feelings about a provider go from they’re good enough to we need to end this?

Steve: For me, the greatest factor that makes me want to end a relationship is when I feel like they’re putting their own interests ahead of my firm’s. As a CFO, I want a strategic partner that is going to put my firm’s interests ahead of theirs.

A CFO’s job is stressful enough. What skills can a strategic partner bring to the table to reduce some of your worries and improve your peace of mind?

Steve: When I feel like I’m in the hands of a good advisor, I have more comfort. I want a partner that knows both what they’re talking about and also understands our business goals to a pretty significant level. Of course, I want someone that I trust. But I also want someone that clarifies things instead of confuses things. I want someone who will tell me when I am wrong and educate me on the best decisions for my business, in their area of expertise.


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