The outsourced CIO business model is maturing in the US. Clients are becoming more demanding and new entrants are squeezing fees.

US-based assets under management held in outsourced chief investment officer firms rose by 7.8 per cent last year, decelerating from previous years after the business model has taken big strides, a report said.

Outsourced CIOs have become part of the wealth management, family offices and wider fund management landscape, with cost considerations, traditional needs for a division of labor and benefits of specialist skills all playing into the story. Outsourced CIO firms operating in the family office space include businesses such as Hirtle Callaghan and Silvercrest Asset Management. This news service interviewed Hirtle Callaghan about its business model and views here.

The report, by Cerulli Associates, said that the total AuM of global OCIOs stood at almost $2.0 trillion at the end of 2018. "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," Cerulli, which is based in Boston, said.

In the past, outsourced CIO providers have been able to collect fees because clients have not been widely aware of this model and because of a relative lack of market entrants. But as more organizations got into the act and clients woke up to their options, fees have been compressed - as one would expect in a free market economy.

Competition and fee comparison relative to peers are ranked as the top challenges OCIO providers face (57 per cent and 43 per cent, respectively), according to Cerulli’s report.

Competitive landscape changes are causing a trickle-down effect on pricing, Laura Levesque, senior analyst at Cerulli, said.

“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,” Levesque said.

The report finds that nearly three-quarters (72 per cent) of OCIO providers have cut 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 outsourced CIO provider.

Two-thirds (66 per cent) of the providers who 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 outsourced CIO offerings.

Inside and outside
The outsourced CIO sector is also growing outside the US.

"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 UK market being of addressable size," the firm said.

Cerulli said it "does not expect that any of the regulatory efforts abroad will put significant pressure on the US OCIO market over the next five years".