Forbes Family Trust Wins 'Best Outsourced CIO Solution'
I recently spoke with Forbes Family Trust's Partner and Director of Research, James McGrath regarding the firm's recognition as the "Best Outsourced CIO Solution" at the 2018 Private Asset Management Awards. We discussed the recent award, current investment trends, why it is smart to outsource the CIO function, and how Forbes readers should select a CIO. Here was our interview:
Forbes: You recently won an award for best outsourced CIO please tell us about this?
McGrath: Forbes Family Trust (FFT) was honored at the 2018 Private Asset Management Awards as the “Best Outsourced CIO Solution”. The PAM Awards recognize the top investment professionals and wealth management organizations operating within the private asset management industry. We were extremely pleased to be recognized by our peers and the broader industry in receiving this prestigious award.
An outsourced CIO is an arrangement in which leading families or institutions engage a third party to manage all or a portion of their investment portfolio. This relationship can include functions such as establishing the strategic asset allocation, selecting independent managers, implementing tactical decisions, providing oversight, monitoring, and risk management, and reporting results.
This has been a key aspect of FFT’s value proposition since the founding of our firm.
Forbes: What are you seeing in the marketplace right now in terms of investment trends?
McGrath: The most sophisticated families are seeking custom solutions and access to differentiated investment opportunities. No longer content to be an LP in another $10BN buyout fund, families look to investments which are not widely syndicated, which are not publicized, and have limited capacity. Fund structures are still viable, but funds of one, and other bespoke offerings, which encourage alignment of interests as well pursuing a specific mandate, are increasingly attractive to discerning investors.
Retail investors are beset by an ever-growing wave of buzzwords and fads. Some investors think smart beta is smart; risk parity guards against losses; or that factor-based investing will outperform. Leading families are not distracted by Wall Street’s product du jour, but look to smartly deploy their capital where it can work most effectively.
“Open architecture” is a given. Allocators demand the ability to invest in global opportunities, unconstrained by structures or “platforms.” Years ago, many wealthy investors had to content themselves with a pre-approved set of strategies at a bank or brokerage. Today, a go-anywhere mindset is a necessity. Private real estate transactions, disruptive new technologies, non-traditional securitizations, frontier markets, and highly data and analytic-dependent strategies are just a few areas we are seeing opportunities.
Sourcing, evaluating, and implementing investments off the beaten path requires smarts, a lot of hard work, great connectivity, and intuition backed by hard-edged research. That’s why the vast majority of investors who are more comfortable on the road of least resistance (or can’t chart a different course) don’t achieve the results of the top global families and select institutions. They either don’t see superior opportunities or don’t have the ability to separate the wheat from the chaff.
Forbes: Why is outsourcing CIO function a smart move and what type of investor is best suited for this?
McGrath: An outsourced CIO allows a family to focus on strategic decisions, while accessing truly world-class investment capabilities that would be prohibitive or impossible to build in-house.
Today, with an increasingly challenging investment landscape, with more “noise”, more pitfalls, and more elusive alpha, the investment function for top families and institutions has become even more critical. It requires specialized (and expensive) expertise, institutional-strength infrastructure, and commitment. Years ago, an informed amateur—perhaps a family member with an investment bent—might run a family’s assets. Today’s investment world is simply too competitive for this approach to be effective.
An outsourced CIO like FFT is a firm built around a singular focus—to pursue excellence in investments. It involves supporting investment talent with client support, compliance, legal, reporting, risk management, and performance analysis. The infrastructure is robust, with deep redundancies. Professionals are available 7 days a week, 365 days a year and are ceaselessly working to manage investments and pursue efficiencies.
These efficiencies economize on the cost of running the infrastructure, but also on the cost of placing investments: increased buying power can drive lower fees when employing third party managers, in turn enhancing results.
That said, it is not necessarily the case that an outsourced CIO replaces a family’s investment staff. In fact, FFT has had very successful relationships where we work alongside large single-family offices with very robust capabilities in their own right. In such an arrangement, the outsourced CIO serves a complementary role: it may focus on specialized sourcing and diligence, and can provide another source of market and investment intelligence.
Forbes: How should a Forbes reader go about selecting a CIO?
McGrath: There are a number of criteria, but reputation is at the top of the list. Does the firm have a brand that represents a family’s ethics? Do the principals share your values and sensibilities? Is this a firm that has a foundation as solid as its family clients? Is it built to last generations? The CIO is your foremost trusted advisor. He or she should have the utmost integrity.
Independence and freedom from conflicts is critical. This is a key value proposition of this structure, but just because a firm sells an outsourced CIO solution doesn’t mean it is conflict-free. Some firms may offer internal products in certain asset classes while equivalent or superior solutions exist elsewhere.
Sophistication and thought leadership are essential, offering the ability to access and integrate a wide variety of research and investments alongside cutting edge, proprietary investment thinking. A CIO should be an investor first and foremost, with true bona fides: top-notch educational backgrounds, experience from the most demanding and prestigious firms, and an incisive intellect that allows them to challenge conventional thinking.
Personal qualities are important, too. A CIO should be comfortable representing the family’s interests in challenging circumstances, with self-assuredness, and place the client’s interests front and center.
Ultimately, this is a relationship that should be expected to last forever. It is truly a strategic decision for the family or institution, which will drive outcomes decades hence. There is nothing more important.