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A maturing market puts pressure on OCIO providers to spend more time justifying fees, engaging search consultants, and considering expansion opportunities
November 2019, BOSTON—The outsourced chief investment officer (OCIO) market is seeing signs of maturity. Global OCIO assets under management (AUM) reached nearly $2 trillion by the end of 2018, with U.S. AUM growing 7.8%. Cerulli’s latest report indicates that growth will remain strong but is far more modest than it has been in the past. In order to continue to grow AUM, many OCIO providers will need to adopt new practices around performance reporting, leverage relationships with search consultants, and potentially look abroad for expansion opportunities.
OCIO providers’ fees have benefitted from a historical lack of awareness of the OCIO model by clients and few providers in the market. As the number of OCIO providers grew, and clients became aware they have many options, so is downward pressure on the fees that OCIO providers are able to charge for their services. Competition and fee comparison relative to peers are ranked as the top challenges OCIO providers face (57% and 43%, respectively), according to Cerulli’s report. Competitive landscape changes are causing a trickle-down effect on pricing, according to Laura Levesque, senior analyst at Cerulli. “The resulting economies of scale for the larger players make it easier for them to lower fees, as a result, smaller players need to come to the table with a competitive value proposition,” says Levesque. The report finds that nearly three-quarters (72%) of OCIO providers have reduced published fees schedules over the last three years.
As awareness of the OCIO model and the options available have grown, asset owners acknowledge that the selection process must include comparison, evaluation, and due diligence. Search consultants have stepped into this role, helping organizations select a provider and determine what they need from an OCIO provider. Two-thirds (66%) of providers Cerulli surveyed have won at least one mandate from a consultant-intermediated search, according to Cerulli’s report. While the demand for search consultants has increased as a result of asset owners wanting to learn about as many options as possible, Cerulli believes that future search consultant demand will be driven by organizations concerned about the quality of the OCIO offerings. “The customized nature of the industry and the lack of regulations can make comparisons between firms difficult. Search consultants are driving methodology and standardization. Providers should expect even greater future interaction,” comments Levesque.
Interest from OCIO providers and asset managers in the United States about how the OCIO industry exists outside the United States has grown in recent years. These firms are interested in ways to address the markets in their own business plans and how any rules or regulations that exist in these regions might affect OCIO business in the United States. While many countries in Europe and Asia are beginning to adopt fiduciary management, they are relatively new and small markets, with only the Dutch and U.K. market being of addressable size. Cerulli does not expect that any of the regulatory efforts abroad will put significant pressure on the U.S. OCIO market over the next five years. However, Levesque notes the possibility of influence in the future. “There is appetite for some standardization around fees, performance, and the handling of conflicts of interest,” she concludes.
NOTES TO EDITORS:
These findings and more are from The Cerulli Report―U.S. Outsourced Chief Investment Officer Function 2019: Emerging Trends in a Maturing Industry.
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