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Discretionary vs Non-Discretionary OCIO for Endowments
Adapted for endowment and foundation boards from Chapter 17 of The Single Family Office by Richard C. Wilson.
Before an endowment signs with an outsourced CIO, it has to answer one question. Who pulls the trigger?
In a non-discretionary setup the firm advises. It recommends managers, allocation changes and rebalancing, and the investment committee or staff approves each move. In a discretionary setup the firm acts inside limits the board sets, without asking first.
What I see most often
Among the families I wrote about, non-discretionary was the more common choice. The adviser looked at the assets but did not hold custody, make trades or commit capital on the family's behalf. Both models exist, though, and plenty of institutions run discretionary mandates.
Four things that decide it
- Staff depth. If your finance office is two people who also run payroll, approving every manager change will slow you down. Discretion may be the honest answer.
- Committee time. A committee that meets four times a year can't approve a redemption that has to happen in three weeks.
- Trust and track record. Discretion is easier to give a firm you have watched for years.
- Custody. Assets should sit with an independent custodian either way. The outsourced CIO directing trades is not the same as the firm holding the money.
Write the limits down
A discretionary mandate only works with clear guardrails. The investment policy statement should spell out:
- Target weights and ranges for each asset class
- Liquidity floors, such as the share that must be available within 90 days
- Any banned investments the board has adopted
- What needs committee sign-off no matter what, such as a new illiquid commitment over a set dollar amount
The hybrid many boards land on
Some boards give discretion on public markets and rebalancing, then keep approval rights on every private fund commitment. That keeps the slow, sticky decisions in front of the committee and lets the firm handle the fast ones.
Frequently asked questions
Does discretion mean the board gives up control?
No. The board sets the policy, the limits and the benchmark, and it can end the contract. Discretion covers execution inside those lines.
Who should hold custody of endowment assets?
An independent custodian bank in most cases. Talk to your auditors and counsel about your own setup.
Can we start non-discretionary and switch later?
Yes. Some institutions begin with advice only, then grant discretion once they trust the firm's process.
Sources
- The Single Family Office, Chapter 17, Richard C. Wilson .
