Full Transparency Is Key to OCIO Success

ARLINGTON, Va.--()--The material outsourcing of investment decision making to a third party means high levels of trust are required for the relationship to be successful, according to global professional services company Towers Watson (NYSE, NASDAQ: TW). In its annual Global Investment Matters publication, the company says fiduciary managers can help create and maintain this trust by providing a high degree of transparency.

“While a full understanding of the client context is an essential starting point for designing the right portfolio, to be successful, this needs to be married with operational expertise”

“Regardless of the extent of delegation, whether it is full fund or partial, building and retaining trust is essential for an effective partnership, and in our experience with some long-standing clients, providing full transparency is the most influential factor in achieving this,” said Debra Woida, head of North American Delegated Investment Services, Towers Watson.

Towers Watson suggests investors should require full transparency from fiduciary managers in a number of areas including costs, clear information on performance and risk against objectives, and details on those areas that have added and detracted value. In addition, there should be transparency in the investment process to allow the trustees or board to understand what changes have been made to the portfolio, the rationale for these changes and what value has been added. Further, the company highlights the need to show how conflicts of interest are managed, particularly with regard to asset allocation decisions and revenue implications for the fiduciary manager.

“While full transparency is vital for building trust, outsourced chief investment officer (OCIO) providers must fully understand the client context if the partnership is to work. One size does not fit all, so an OCIO approach needs to reflect the client context,” said Woida.

Towers Watson also contrasts the contexts of defined contribution (DC) plans and maturing defined benefit plans, and their need for different outsourced management approaches. For the latter, it says risk tolerance will generally decrease, and illiquid investments will be less appropriate, as risk management relative to the liability becomes more important. By contrast, for a DC plan that has experienced substantial asset growth, the ability to implement multimanager pools for participants may have expanded, thus presenting opportunities to increase the efficiency of investment options and lower costs, and therefore calls for a need to revisit the plan’s structure and implementation with the plan sponsor.

“While a full understanding of the client context is an essential starting point for designing the right portfolio, to be successful, this needs to be married with operational expertise,” said Woida. “Clients require confidence that implementation processes are robust and all risks are carefully managed. This entails an appropriately resourced, specialized team with well-defined processes and supporting systems. The fiduciary manager’s overall risk management culture is similarly critical in this regard.”

Towers Watson also points out that regardless of the extent of delegation, the plan fiduciaries remain in control of the high-level strategy, which includes determining long-term objectives, return requirements and risk tolerance. The OCIO provides strategic advice and takes on the day-to-day implementation functions including asset allocation, hiring and firing of investment managers, negotiating investment manager fees, reviewing legal documentation, executing documentation, managing cash flow, monitoring investments and coordinating with the custodian.

“The OCIO and fiduciary management market, and demand for these services around the world, continue to grow at a rapid pace, and it is not surprising given its ability — if done well — to provide exceptional clarity of investment performance while explicitly increasing accountability,” said Woida. “We expect this growth to continue as funds realize this form of outsourcing may be the best way to compete against the world’s best investors for returns in this ever-changing market environment.”

Global Investment Matters covers topical investment issues and this year includes articles on:

  • Defined contribution: Competing for an investment edge
  • Practical investing: How to exploit long-term themes
  • First among equals: Investment is a competition
  • The grit in the oyster: Who is the investment industry set up to benefit?

Towers Watson Investment

Towers Watson’s Investment business is focused on creating financial value for institutional investors through its expertise in risk assessment, strategic asset allocation, fiduciary management and investment manager selection. It has over 800 associates worldwide, assets under advisory of over US$2.2 trillion and over US$75 billion of assets under management.

About Towers Watson

Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. With 15,000 associates around the world, the company offers consulting, technology and solutions in the areas of benefits, talent management, rewards, and risk and capital management. Learn more at towerswatson.com.

Contacts

Towers Watson
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eemerman@eaglepr.com
or
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josh.wozman@towerswatson.com

Towers Watson