Q. So today we’re talking about a big trend in the family office world, right?
First, what exactly is an “outsourced CIO”?
A. It is what it sounds like. Many family offices lack the resources and human talent to manage their overall portfolios well– they can’t do all the work to figure out the right allocations, do the diligence to select managers, rebalance all the time, etc. So they farm that activity out to manager who are not just advisors– they actually have the power to do the investing for the family or institution. An outsourced Chief Investment Officer.
Q. And this is a new sort of thing?
A. Well, its been ever more popular since the crash. It started a long time ago as just professional advisory business, to the really big endowments and foundations. Then smaller institutions also started hiring the same advisors– but they didn’t have the same staffs as the big guys, so had a lot more trouble implementing changes and suggestions. That really became apparent in the crash, and the landscape really changed then.
Q. So how prevalent is this?
A. Maybe something like 40% of all family offices, but the majority of smaller ones– ones that have under $500mm to manage– use outside discretionary managers.
And its growing rapidly for two big reasons. One reason is that more realize they can’t be just in stocks and bonds; they need the help to build robust alternatives portfolios, do the diligence on managers, etc. And the other is that a lot of family offices face the same problem as other organizations do: if you do wind up with a top tier manager inside, its hard to keep him– the top talent wants to manage more money and get paid for it.
Q. And what should family offices look for when they go shopping for an outsourced CIO?
A. Aside from the obvious — quality, track record, etc.– its probably about customization. Just like individuals, there are liquidity, risk and volatility issues that are peculiar to each family office. You also want to make sure you’re getting frequent reports, and that all the guidelines, restrictions are clearly stated in writing.