If you own a single-family office in Asia managing less than $1 billion, chances are you have already outsourced functions such as compliance, IT and internal auditing. But would you go all the way and outsource your chief investment office? Probably not.
The outsourced CIO model has its roots in institutional investors such as endowments and pension funds, and it is gaining traction in the US and Europe among smaller family offices. Although the model varies depending on the contract, clients are typically supported by a CIO who leads a full investment team and operations support staff who manage portfolios in the B2B set-up, according to Cambridge Associates. The client is in charge of investment strategy, portfolio construction, risk management and manager hiring, firing and rebalancing.
A hard sell
In Asia, with the impending wealth transfer and rising regulations, many ultra high net worth families are looking to institutionalise the administration and investment management of their assets. Some investment professionals are hoping to capture the need for investment expertise through an outsourced CIO (OCIO) model, but it has proved an uphill task.
‘There is a lot of emotion that tends to get invested, in that “we must have an in-house investment professional”. My answer to that is why? What is the difference between that and outsourcing your compliance or internal audit? Surely the ambition should be to provide the best investment advice,’ said Justin Kendrick, co-founder and head of investment solutions at Ingenia Consultants, a consultancy firm aiming to be a one-stop shop for a range of financial services.
Kendrick believes he is among the first to discuss formally outsourcing the CIO role for family offices – single and multi – as well as external asset managers.
Currently, single- and multi-family offices have CIOs and portfolio managers in-house and tend to seek external advice when necessary from consultancy firms or external asset managers.
But Kendrick believes a CIO requires multi-asset expertise, fund selection exposure and a macro perspective, all developed over a number of years, which comes with a hefty price tag.
Closing the knowledge gap
‘Most family offices in the region are probably under-resourced at this stage,’ he said. The same applies to smaller wealth managers like external asset managers, which manage around 5% of the region’s wealth currently.
‘Above $2 billion, your revenues are probably at a level that you can manage money completely in-house. A vast bulk of people in the external asset manager (EAM) space are below that level in Asia,’ he said. His team of six investment professionals at Ingenia ‘would cost in the region of $1.5 million or more if we were in-house. But in the OCIO model, we are probably four or five times cheaper than an in-house solution.’
The reason the conversation around the OCIO model hasn’t taken place until now is because the wealth management space in Asia is dominated by larger financial institutions, Kendrick said.
His proposition is a bit of a hard sell in the EAM industry and Steve Knabl, president of the Association of Independent Asset Managers Singapore, believes this has to do with the clientele the EAMs service.
‘The OCIO model – for saving costs – will be much more adequate for retail, rather than high net worth investors, who are paying top dollars for investment advice,’ Knabl said. ‘Otherwise, what is my business proposition as an EAM?’
However, he is starting to hear murmurs of the OCIO model in the high net worth community in Asia. ‘One of the clients of our managers here is asking him to be an OCIO without using the term. The client has different accounts with different banks and is getting different advice from each RM,’ Knabl said.
‘What he needs from the wealth manager is to give him advice on the advice he’s getting and to structure his portfolio holistically and look at everything comprehensively. It’s a pretty new notion.’
A proposition in need of refinement
Arjun Raghavan, Asia head at Partners Capital, currently works with endowments, foundations and single family offices under the ‘manager of managers’ model, managing their investable assets by investing in a range of asset classes globally.
‘Whether it’s a Malaysian family, an Indonesian family or [someone] in Hong Kong, they have a lot of their assets still in businesses they own and understand. They may then choose us to diversify a portion of their wealth globally,’ he said.
His firm has never worked with multi-family offices globally because he ‘can’t see what the proposition would be’. However, Raghavan said that he could consider the OCIO model if he meets like-minded clients. ‘They [multi-family offices] could manage client relationships and potentially do overall asset allocation. But when it comes to investing the capital, we could partner with them where they are white labelling our relationship, effectively. As long as they are long-term oriented clients and are crystal clear about the arrangement, it might work,’ he said.
This article appeared in the September issue of the Citywire Asia magazine.