We talk to the Oaks, Pennsylvania-headquartered firm about its outsourced CIO business and the dynamics shaping it.

With consolidation taking place in the outsourced chief investment officer (OCIO) sector, those providers that have decades of experience on the clock should be in a strong position to compete. 

SEI made the case for its longevity in the OCIO sector to this publication recently. 

“Our OCIO business has been through several market cycles and we have the technology to identify new opportunities that allow us to bring a custom experience to investors,” Michael Cagnina, senior vice president and managing director of SEI’s Institutional business, told FWR in a call. Cagnina spoke alongside Erich Holland, executive managing director of client experience for SEI's Advisor business.

The business was started in the early 1990’s, long before the 2008 sub-prime mortgage crash, Cagnina said. “We were very transparent about our approach and did not panic.”

This sector continues to grow. “Every firm that is an institutional investor wants to have some kind of OCIO offering,” he said. 

Holland, meanwhile, noted that with so many RIAs being formed by breakaways from large banks, wirehouses and other institutions, this also fuels demand for OCIOs. “What they [breakaway advisors] are giving up is all of the infrastructure that has handcuffed some of their capabilities, such as how they can build client solutions,” he said.

The OCIO space made headlines late in 2023 when Mercer bought Vanguard’s outsourced chief investment officer business, which comprised about 120 people. According to Cerulli Associates, the Boston-headquartered research and analytics firm, in August last year, OCIO assets, which stood at $2.4 trillion at the end of 2021, are expected to grow to more than $3.0 trillion by the end of 2026, an overall growth rate of 5.6 per cent, driven by both new adoption and expected capital markets movements. Some 14 per cent of asset owners say that over the next 24 months they are likely to start using an OCIO for the first time. An additional 11 per cent expect to expand their overall use of OCIO (either from a partial portfolio mandate to a full portfolio mandate or to fully cede final portfolio investment decisions to the OCIO provider), it said. 

“From a fee perspective, scale matters up to a certain point. I believe that once a firm reaches a critical mass in assets under management, investment fees tend to level off. Although we are a top OCIO provider in terms of AuM, we believe an OCIO doesn’t need to have the largest AuM to deliver maximum value to its clients,” Cagnina said.

SEI has always worked with third-party managers; over time, it developed internal capabilities and gained access to customized alternative investment programs, he continued.

According to the August 7, 2023 report on OCIOs from Charles Skorina & Company, the institutional group at SEI had $203.8 billion in AuM at end-2022. In first place is Mercer ($344.9 billion); BlackRock (307 billion); Russell Investments (236.8 billion); and Goldman Sachs (207.6 billion) in first, second, third, and fourth place, respectively. Willis Towers Watson is behind SEI, at $163 billion; AON Hewitt is at $148.7 billion, and SSGA rounds out the top eight, at $146.2 billion.

Pressures
As financial regulations around the world become more stringent, wealth firms are under more pressure to outsource some of their operations.

There are more than 9,000 non-profits in the US alone and committee members change through time, for example. “People know they need a process in place that is consistent that can continue after they are done with their term as a committee member,” Cagnina, who has been at SEI for 32 years, said.

Holland said the OCIO phenomenon shows how firms across the wealth value chain are looking to decouple. “People can continue to use SEI for different parts of their wealth needs. This is how the OCIO sector comes into focus with our Advisor practice – clients have more choice with SEI than in the marketplace,” he said. 

In general, Holland said that advisors have a lot more choices than they used to have in the number of OCIO firms out there.

In terms of investment sophistication, “institutional investors are about a decade ahead of private clients in terms of looking at alternatives in private markets,” Holland added.