CUMMINGS: In a defined benefit program, investment
decisions are fairly isolated from the beneficiary’s experience.
In the participant-directed space, participants select how their
money is invested, or have transparency into how somebody is
advising them on that. Defined contribution plans want to work
with an OCIO who understands they’re not making investment
decisions in isolation—that those decisions must be appropriate,
understandable and desirable from the participant perspective.
A focus on behavioral risks and participant outcomes requires a
more robust set of capabilities.
CIO: What about endowments and foundations?
CUMMINGS: In this space you often have unpredictable or no
additional sources of funds and a requirement to grow in perpetuity
while spending a certain amount each year, so the financial dynamics
of how to structure an investment program are different if you want
to be sustainable over as many years as possible. Many boards face
the challenge of wanting to make certain strategic decisions around
their funds, but lack the access to investment leadership in order
to deliver. Engaging an OCIO provides an extension of the staff to
implement decisions based on strategic objectives. Also, there is
often a desire among boards to incorporate responsible investing
sensibilities into the investment program. These add layers of
nuance to how you evaluate an OCIO solution.
CIO: How have OCIO providers—Aon Hewitt
Investment Consulting included—had to bolster
their capabilities to serve this broadening market
CUMMINGS: Those of us who entered the business from the
investment consulting world have had to build out our money
management capabilities, and that has required quite an
investment. Even if you’re not buying individual securities, you still
have to have much of the same infrastructure and regulatory rigor
that a traditional investment management organization has always
had. In our own case, we’ve made a big investment in our middle
and back office functions.
CIO: What distinguishes your OCIO offering from
the product offered by your competitors?
CUMMINGS: We think there is a clear advantage to using an
OCIO provider from the consulting space, because consulting
organizations don’t have their own investment products to sell.
We have no financial incentive to include or exclude any particular
investment manager. Scale is important, too. To be successful
in this space, you need a broad and deep infrastructure. Our
distinctive differentiator is our independent business model. Most
large OCIO providers from the investment consulting space charge
a bundled fee to clients, whereby they compensate the underlying
investment managers and retain the remainder of the fee. In some
cases, the fee arrangement between the provider and manager is
obfuscated. We have always charged a separate, standalone fee
that is not comingled with the fee paid to the underlying investment
manager. As our OCIO solution has grown in popularity, those
underlying investment management fees have gone down as
various breakpoints have been hit, and that savings has passed
100 percent through to our clients. At Aon, we are also focused
on appropriately managing the risks our clients face. We view risk
management as the intentional assumption of compensated risks
for outsized rewards, while avoiding uncompensated risks. We
believe strongly in meeting our clients where they are and providing
custom solutions to address their unique goals and objectives.
CIO: How distinct are your traditional investment
consulting practice and your OCIO business?
CUMMINGS: They are separate businesses, but we find them
incredibly complementary. How we think about manager research
and capital markets on the advisory side is fundamental to the way
we think about our OCIO solution. Our advisory clients are some of
the largest, most sophisticated institutional investors on the planet,
always challenging us and allowing us to explore new ideas. We’re
able to take the thinking we develop in that business and apply it to
our OCIO solution. The two businesses are just different ways for
clients to access what we believe is our best thinking.
CIO: For any asset owner new to outsourcing the CIO
function, what are some keys to a successful OCIO
CUMMINGS: Remember that outsourcing is not the same as
abdicating. Hiring us doesn’t mean you disappear and don’t
know what’s going on with the investment program. Get periodic
reports on how things are going and what changes have been
made, and inspect the results of your decision to use an OCIO.
Also, maintain frequent reporting relationships and touch points,
and share news—good, bad or indifferent—in a very open and
collaborative way. n
Aon Hewitt Investment Consulting, Inc. (“AHIC”) is a federally registered
investment advisor with the U.S. Securities and Exchange Commission.
AHIC is also registered with the Commodity Futures Trading Commission
as a commodity pool operator and a commodity trading advisor, and is
a member of the National Futures Association. AHIC provides investment advisory services to clients located in the U.S. Investment advisory
services to clients outside of the U.S. are provided by Aon Hewitt affiliates.
The opinions referenced are as of the date of publication and are subject to
change due to changes in the market or economic conditions and may not
necessarily come to pass. Information contained herein is for informational
purposes only and should not be considered investment advice.
4/14/17 11:31 AM