FundFire: Why the Numbers in an OCIO RFP Rarely Compare

FundFire's Richard J. Chang published a detailed look this week at how investment consultants calculate assets under advisement (AUA). The article focuses on RVK, whose reported AUA, according to FundFire's reporting, included large clients the firm was on retainer with but had not worked for in years. Anna Dunn Tabke, CFA, CAIA, founder and president of Leita Advisory, contributed to the piece. A news story only has room for a line or two of comment, so the point deserves more space here.

Any number clients care about will be shown in its best light

AUA is not regulated, but committees rely on it during a search. It is often how they judge whether a firm has served institutions of their size. Whenever a number matters this much to buyers, firms have an incentive to present it in the most favorable light. The same dynamic applies to client lists.

As Anna explained to FundFire, large firms are collections of parent companies, business lines, divisions, and teams. When pitching to a large institution, a firm may report a whole business line, such as all asset and wealth management, or count every nonprofit dollar, whether the client bought a single fund or full OCIO services. For a smaller institution, a firm may highlight a team that better matches that client's profile. Each of these numbers may be defensible, but they are rarely straightforward, and the methodology behind them is seldom disclosed.

Project work is a good example. As noted in the article, there are genuine cases where counting project assets makes sense, such as ongoing work for a client's internal investment office. The problem is scale. When a quarter of a firm's reported assets come from clients it hadn't worked for in years, the figure no longer describes the firm's business in a way that helps prospective clients understand their capabilities.

Why it takes a full-time search consultant

Catching these differences requires ongoing, detailed work. It means reading Form ADVs, digging into each firm's methodology, and repeating this process every year, for every firm. A committee running its own search usually sees each firm's numbers once, in isolation. By contrast, a full-time search consultant reviews these numbers year after year, across all competitors, and knows what questions to ask. That is what separates the best OCIO search consultants: they follow the market between searches, not just during them. (Link)

Leita Advisory has built web scraping tools that compare what firms report in proposals and questionnaires with what they file on Form ADV. As Anna told FundFire, "They very rarely match."

Leita's annual OCIO due diligence questionnaire, completed by 70 firms in the most recent cycle, tracks these figures over time. Numbers may change for many legitimate reasons, but the key is to understand why, so clients can compare candidates on consistent terms. Learn more about Leita's DDQ. (Link)

Four Numbers in an OCIO RFP That Rarely Compare

Here are some of the worst offenders.

1. AUA and AUM: Which entity, which clients, and which methodology? The answer is rarely the same from one firm to the next.

2. Client retention: Firms often report 99% client retention. In Anna's experience, many calculate this from net client counts. For example, a firm that had 100 clients ten years ago and has 99 today may report 99% ten-year retention, even if many of the original clients left and were replaced by new ones. Real retention asks how many of those original 100 are still clients. Otherwise, new wins can offset losses and inflate the number.

3. Client lists: Many nonprofits have both a long-term endowment or foundation pool and a retirement plan, and often use different OCIOs or investment consultants for each type of portfolio. Any of those OCIOs may list the organization as a client. However, a committee hiring for its endowment only cares about the endowment relationship. When requesting representative clients, always ask how representative the list truly is.

4. All-in fee estimates. Any request for an easy-to-graph estimate with no contractual obligation behind it invites trouble. We suspect that all-in fee estimates for total portfolios bear little resemblance to the cost of the portfolio as executed. There are defensible choices behind them, but Leita has also seen proposals that:

• recommend a fully invested portfolio and then price 5 to 10 percent in cash at no cost

• recommend 20 to 30 percent in alternatives and then price a traditional portfolio with no alternatives- price public equity at 70 percent passive when the firm typically runs closer to 30 percent

And of course, Leita has never seen an all-in estimate include carried interest on private markets, which can be a hefty bill. This is fair: to estimate carry, you must project both the returns and the hurdle rates that firms need to clear to earn the incentive compensation (both of which are far more complicated than pulling a management fee out of a database). That said, it is not really an all-in fee then, is it?

Read the full FundFire article.

If writing an apples-to-apples RFP feels daunting, Leita Advisory is here to help. Schedule a consultation to gain clarity and confidence in your OCIO selection process.