Flexibility can be found in outsourcing

The concept of outsourcing, also often referred to as outsourced CIO, is gaining significant traction, but we’ve found that many institutional investors are confused by exactly what the terms mean.

Further confusion has been created by the variety of different solutions being offered in the marketplace. In a nutshell, the terms “Discretionary Consulting”, “Implemented Consulting”, and “Outsourced CIO” all refer to delegating decision-making authority to a third party. The reasons many organizations are looking to delegate authority are sound. Some investment committees are realizing they do not or cannot meet often enough to (i) provide the oversight necessary to appropriately position their portfolios in a high-volatility environment and (ii) to take advantage of market opportunities. In addition, staff members are facing increasing demands on their time and budgets to manage operations.

In a nutshell, the terms “Discretionary Consulting”, “Implemented Consulting”, and “Outsourced CIO” all refer to delegating decision-making authority to a third party.

As organizations evaluate whether they wish to delegate decision-making authority to their consultants or other providers, they also need to think about how much authority they wish to hand off. The question of “how much” is an important one. When one hears the term “outsourced CIO”, it may appear to suggest a 100 per cent shift in decision-making authority to an external party. This is common in private wealth management, but typically institutional investors either have hired an investment consultant to advise a Committee or Board on how to invest and work with staff to implement, or they have built in-house teams of investment professionals to manage their investment portfolios.

Some investment committees are realizing they do not or cannot meet often enough to (i) provide the oversight necessary to appropriately position their portfolios in a high-volatility environment and (ii) to take advantage of market opportunities.

At Pavilion, we view implemented consulting as a strategy that “brings to life” the advice we provide to clients. Our discretionary model leverages the non-discretionary services we have practiced for 30 years. In this model, we act as an extension of staff providing additional resources to meet today’s challenges and leading to a governance structure with clear procedures that identify management responsibility, accountability and deliverables.

As organizations evaluate whether they wish to delegate decision-making authority to their consultants or other providers, they also need to think about how much authority they wish to hand off. Pension plans, endowments and foundations can delegate to us such responsibilities as the authority to retain and terminate managers, implement changes in asset allocation strategy based on the client’s defined parameters or actively manage certain assets in the portfolio. The amount of discretion is determined by the client based on available resources, governance requirements, etc. The benefits of having a single, focused decision-maker handling these responsibilities include timely investment implementation, more effective use of Investment Committee time, and increased staff efficiency.

This is not an all or nothing approach; there is a great deal of flexibility in what can be outsourced. It’s important to choose the right model for your organization.


GENERAL DISCLOSURE: This paper is intended for sophisticated and/or accredited investors and is for illustrative use only. While the assumptions, data and models used to develop the information contained herein are from sources deemed to be reliable, there can be no certainty or guarantee regarding the likelihood of the outcomes as presented. This document is not and should not be construed as legal, taxation or investment advice. Any investment advice would be delivered pursuant to a written agreement and legal and taxation advice should be obtained from appropriate and qualified professionals. No part of this publication may be reproduced in any manner without our prior written permission. © 2015 Pavilion Advisory Group Inc.