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How to Vet an Outsourced CIO Before You Sign
Adapted for endowment and foundation boards from Chapter 17 of The Single Family Office by Richard C. Wilson.
The outsourced CIO business is easy to enter. Someone leaves a bigger firm, opens a small practice and starts pitching boards. Some of those people are excellent. Some have never actually served an institution like yours.
Here is the process I recommend to families, adjusted for endowments.
1. Check that they serve your kind of client
A firm that mostly runs money for wealthy individuals is not the same as one that runs perpetual pools with a spending policy, donor restrictions and an audit every year. Ask how many of their clients are endowments or foundations, and what size.
If you are a $200 million college and every reference is a $5 billion university, the firm may not have a team set up for you.
2. Ask for references, then go around them
Every firm will hand you three happy clients. Call them. Then ask your peers who else uses the firm and call those people too. Business officers at similar schools talk to each other. Use that.
Good questions for a reference call:
- What did the firm get wrong in the first year?
- How fast do they answer a question from a trustee?
- Has your lead person changed since you signed?
- Would you hire them again today?
3. Make sure they can handle what you already own
If your endowment has a big gifted real estate position, a concentrated stock gift or a large private equity book, ask the firm how they will manage those exact assets. A firm that is strong in public markets but has never handled a gifted building may not be the right fit.
4. Take your time
The families who chose well got to know their advisers over months, sometimes years, before signing a long contract. That feels slow when a board wants a decision this quarter. But a rushed hire is usually what leads to a rushed firing two years later.
5. Read the exit terms
Before you sign, know what it costs to leave. How long is the notice period? Who owns the manager relationships? Can you keep the funds the firm put you in, and at what fee?
A note from my side of the table
I have sat in a lot of meetings where a polished pitch won the room. The firms that lasted were rarely the most polished. They were the ones whose references said the same thing without being coached.
Frequently asked questions
How many firms should we interview?
Many boards short-list three to five, then do deep diligence on the final two.
Should we use a search consultant to pick an OCIO?
Some boards do. It adds cost but can help a committee without investment staff.
What is a red flag in an OCIO pitch?
Performance shown only for selected clients or selected periods, with no clear way to see the full record.
Sources
- The Single Family Office, Chapter 17, Richard C. Wilson .
