Conflicts of Interest Could Pose a Threat to OCIO Deals

Mergers and acquisitions are on the rise in the outsourced chief investment officer business, with major money managers likeInvescoon the hunt for the perfect acquisition target. As more acquisitions take place, concerns about managing conflicts of interest are growing among industry professionals, however.

“I think you can kind of do the math and go gee, they’re not building any more pension funds and they’re not building any more foundations and endowments,” said Tim Barron, chief investment officer at Segal Marco Advisors, explaining why mergers and acquisitions are becoming more common in the sector. “If you want to grow your business, organic growth is going to be more difficult than an acquisition.”

But pursuing the latter route may create conflicts, market participants say. Major money managers that acquire OCIO businesses, for instance, may use the business to promote their own investment product lines, according to Jim Dunn, chief executive officer and chief investment officer at Verger Capital, by phone. In the end, he added, these firms could be trying to self-service.

“It’s rampant,” Dunn said. “It’s really challenging to get past those conflicts.”

According to Dunn’s colleague, Patrick Decker, other conflicts can arise at major investment managers that own OCIO businesses.

“If you have a firm that has multiple lines of business, there’s naturally going to be a conflict of resources in the firm,” said Decker, managing director for client development at Verger. “How much attention gets paid to OCIO, retirement, and money management? Then on top of that, there’s the discussion of equitable allocation of resources.”

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Concerns over conflict of interest can also pop up when consultants and OCIOs merge, as investors may worry that the consultant may prefer to recommend their OCIO business over others.

One recent merger shows how those conflicts are being managed. OCIO consultants DiMeo Schneider & Associates and Fiduciary Investment Advisorsannounced in Januarythat they plan to merge. The deal is set to close on April 1, according to Mark Wetzel, FIA’s president.

FIA had historically acted as an outsourced chief investment officer and did work as a search consultant, according to Michael Chase, a partner and senior consultant at FIA. He said by phone that when the investment size had been lower than $200 million, the firm acted as an OCIO. Any larger pools of capital would be placed by the firm’s search consultants.

“That was a good business and we developed some good relationships,” Chase said, adding that the firm’s focus going forward following the merger will be on offering discretionary consulting services.

Wetzel added that discretionary consulting – when a firm offers not only search consulting, but investment policy review and development, fee analysis, and benchmarking advice, among other services – has become more important for clients than simple searches.