Should You Outsource Your Investment?

In our 2023 Global Family Office Compensation Benchmark report, we found that 60% of the surveyed family offices identify risk-adjusted growth as the main purpose of the entity. This means that investment management is the core function for a lot of family offices.

Family offices face a critical decision: should they outsource investment management or manage it themselves? Outsourcing can bring benefits, like access to specialized expertise and potential cost savings, it is important to consider the downsides, such as having less control and potential misalignment of interests.

Outsource vs. In House

Most family offices operate on a very small scale, with an average of less than 5 employees, according to our compensation report. Family offices should carefully consider which core functions to internalize and which to outsource. A recent research report by Ocorian showed that 91% of the surveyed family office professionals believe that outsourcing will grow over the next three years.

Outsourcing investment functions can give access to specialized knowledge and investment strategies not easily found in-house, especially for smaller family offices. It can also potentially reduce costs, particularly for those who may not require a full-time in-house investment team. Additionally, outsourced firms may offer a wider range of resources, including advanced research capabilities, technology platforms and access to extensive networks. Diversifying investment management across multiple providers can help mitigate risk and reduce reliance on in-house staff.

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In an RSM survey, it was revealed that although many family offices outsource some functions, these are typically non-core activities such as IT (81%) and bills (64%). Only a small proportion of family offices choose to outsource investment accounting (28%) and wealth management (5%). This caution may stem from concerns about losing control over investment decisions, which could compromise the family office’s ability to execute its specific investment strategy effectively.

When investment tasks are outsourced, there is a risk that external managers might prioritize their interests or those of other clients, potentially misaligning with the family office’s long-term goals. Moreover, outsourcing can lead to reduced transparency in investment decisions and reporting, complicating the family office’s ability to track performance and assess risks. Finally, external managers serving multiple clients might face conflicts of interest, adversely affecting the family office’s investments.

In contrast, in-house investment teams offer greater control over investment decisions, allowing for strategies that are customized to fit with the family office’s values, risk appetite and long-term goals. These teams, dedicated solely to the family office, focus on aligning their interests with the family. They typically prioritize long-term wealth preservation and growth over short-term performance metrics. Additionally, keeping investment management in-house ensures greater confidentiality, which is vital for most family offices. It also allows for direct and efficient communication between family members and investment professionals, leading to better decision-making and understanding.

The OCIO Model

In recent years, we have seen family offices increasingly turn to Outsourced Chief Investment Officers (OCIOs) to handle their investment portfolios. OCIOs provide a comprehensive suite of investment services, including asset allocation, manager selection, due diligence and performance monitoring. This can be particularly beneficial for family offices that lack the in-house expertise or resources to manage their investments effectively. By partnering with an OCIO, family offices can lower operational costs and gain access to specialized knowledge, economies of scale and a broader investment perspective at the same time. Several leading financial institutions and specialised firms offer OCIO services. Some of the notable players in the OCIO market include Mercer, Cambridge Associate and BlackRock.

Needless to say, careful consideration should be given when using an OCIO. While it allows family offices to manage investment externally without a full-fledged investment team, it comes with potential risks including the loss of total control over investment decisions, misalignment of interests between the family office and the OCIO, and the potential for increased costs.

Ultimately, the success of an OCIO relationship hinges on a strong partnership between the family office and the OCIO provider. To mitigate risks, family offices must select a suitable provider carefully. Family offices should conduct thorough due diligence to ensure that the chosen OCIO aligns with their specific needs, risk tolerance and investment philosophy.

In the case where families do decide to outsource, it is important to note that you would still require an internal resource that can help you navigate through the arduous tasks of OCIO and manager selection, asset allocation strategy, deployment of capital, reporting and consolidating the entire initiative.

When weighing the options of outsourcing versus in-house management, several important factors must be considered. These include the size of assets managed by the family office and the structural complexity, its investment philosophy and objectives, the related costs and available resources, as well as the accessibility to skilled investment professionals in the marketplace. It is very important to recognise that the choice to outsource or to manage investments internally does not have a universal solution. Each family office must carefully evaluate their unique needs, goals and resources to determine the best approach.