The use of an external ‘CIO’ offers significant benefits to foundations, endowments and institutions.

The concept of outsourcing holds a well-established position in today’s global business environment. In the asset management world, we’re increasingly seeing entities like foundations, endowments and institutions with retirement plans look out-of-house for help in managing numerous aspects of their investments—responsibilities that typically fall under the purview of the chief investment officer. The benefits of outsourcing can be substantial, enabling companies to leverage the core competencies of their provider, including asset allocation and manager selection expertise, a robust investment platform, deep industry knowledge and resources and, potentially, mitigate fiduciary liability.

A Look at the Job of CIO

CIOs are responsible for designing and managing investment plans of companies, retirement pools, endowments, foundations or other organizations with financial assets and obligations. The job requires a deep understanding of the organization and requirements of the plan, significant investment and risk management expertise, and the ability to stay up-to-date on regulatory developments. CIOs often serve as fiduciaries and thus have a responsibility to manage assets prudently.

Within this larger mandate, a CIO is tasked with understanding current and future needs and goals of the organization, and setting a risk tolerance that balances the organization’s investment needs and culture. This often requires setting outflow and inflow expectations (which may require actuarial analysis of defined benefit plans) and establishing an optimized asset allocation framework that can help the organization meet its obligations within the confines of its risk tolerance. CIOs must also select managers or strategies to implement the investment plan, then monitor the portfolio and its managers, rebalancing or making tactical moves according to the market environment, and terminate managers or strategies as necessary.

Different Levels of CIO Outsourcing

For entities with a CIO or an investment team in place, an “outsourced CIO” can represent an additional source of input for decision-making. In this situation, outsourced CIO services can include input on capital market assumptions and tactical market opportunities. They may also provide a comprehensive view of risk analysis, or simply a connection to the financial community and the networks of social information they provide.

It’s increasingly common for organizations to seek a more complete set of services from an “outsourced CIO,” in which case the role may include fiduciary responsibility across asset allocation, implementation and rebalancing processes. Within this scope, entities hold onto review and oversight responsibilities and have the ability to retain or terminate the outsourced CIO, but are generally able to delegate significant responsibilities in overseeing and implementing the investment plan to the outsourced partner.

Potential Benefits of Outsourcing

Businesses may choose to outsource a task when the cost/ benefit of outsourcing is a more attractive balance than the cost/benefit of doing a task in-house. The same way that this can apply to manufacturing curtain rods, it can apply to designing and managing an investment plan.

Extensive Investment Infrastructure at a Potentially Lower Cost

CIO outsourcing can allow entities to access a substantial investment infrastructure for potentially less than it would cost to build it in-house. Hiring a CIO or an investment team can represent a significant financial commitment—especially for a company, a foundation or an endowment with a small to mid-size asset pool. Additionally, smaller organizations may be able to hire only one professional who, however knowledgeable, may lack the time or expertise to do every task related to the job well.

CIO outsourcing provides immediate, turnkey access to asset allocation, manager research and selection expertise, ongoing monitoring and risk management. Outsourced CIOs can take responsibility for navigating the array of available investment options—active, passive and flexible strategies, products that use derivatives and leverage, and those with lockups and alternate fee structures.

An outsourced CIO may also have connections to industry information via proprietary and third-party research and relationships with other industry professionals that can also be extremely valuable to an organization. Thanks to their position within the industry, for example, an outsourced partner can have insight into working with a particular portfolio manager or strategy that an in-house CIO or investment team might not have.

Potentially Mitigate Personal Liability for Board Members and Business Owners

Board members of endowments and foundations, and business owners—particularly those with responsibility for ERISA plans—are often fiduciaries and thus held to the associated fiduciary standard and the potential for liability if those standards aren’t fulfilled. While in-house CIOs or investment committees may approach their fiduciary role with best efforts and intentions, they may not have the capacity or resources to perform extensive asset allocation, due diligence, implementation and monitoring, and risk management. Partnering with an outside fiduciary can provide the dual benefit of delegating to a firm with strengths in these areas, as well as potentially mitigating some of the associated fiduciary responsibilities and risks.

Choosing a Partner

An ideal “outsourced CIO” has deep asset allocation and manager selection expertise and access to a robust investment platform of traditional and alternative portfolio managers and strategies. The provider should also be able provide access to environmental, social and governance (ESG) oriented solutions. It’s important to seek out partners with deep industry resources and knowledge. Additionally, it’s critical to find a partner with an open and adaptable communication style, who can clearly explain the asset allocation process and rationale for hiring and firing managers, and answer questions about performance.

Although looking outside an organization for such expertise may involve a conceptual leap and a departure from past practices, it can serve as a cost-effective and prudent alternative to shouldering the investment and fiduciary burdens in-house. For more information on outsourced CIO services, please contact your Neuberger Berman representative.

Questions to Ask an Outsourced CIO Candidate

  • What is your process for choosing an asset allocation?
  • How do you decide to change managers?
  • Can you implement tactical market solutions? How frequently do you make changes and recommendations?
  • Do you have ESG investment options? How do managers incorporate ESG factors into their investment process?
  • Do you work with clients like us (by size, by industry, by investment goals) today? What solutions have you designed for them?

Outsourced CIO: 7 Key Tasks and Traits

  • Act as investment fiduciary
  • Oversee initial evaluation of risk profile and investment goals
  • Design customized asset allocation and manager implementation
  • Address customized income needs, growth objectives and risk tolerance
  • Offer access to a robust investment platform across equities, fixed income and alternatives
  • Provide access to ESG-oriented solutions
  • Provide ongoing oversight and risk management