Under TPA, an investor's job is no longer to fill asset class buckets. Instead, it's to generate knowledge on how any potential investment—be it a manager, ETF, or direct deal—adds value to the overall portfolio's objectives, forcing an apples-to-apples comparison of all opportunities.

To ensure genuine collaboration across funds, Centerbridge structures compensation so a "substantial minority" of an individual's pay comes from other areas of the firm. This economic incentive forces a firm-wide perspective and makes being "part of one team" a financial reality, not just a cultural slogan.

By decoupling bonuses from AUM, the firm removes the incentive for managers to hoard assets for personal gain. This allows leadership to allocate capital optimally across managers based on style and portfolio needs, promoting a culture focused purely on performance.

In a TPA model, diversification is a total-portfolio responsibility. This frees individual teams from needing to diversify within their silo. They can build more concentrated, high-conviction portfolios, as their contribution is assessed at the whole-fund level, where diversification is achieved across different strategies.

Unlike traditional asset allocation where portfolio decisions are jointly owned, TPA clarifies governance. The board sets a risk appetite via a reference portfolio, but management is solely accountable for constructing and managing the actual investment portfolio, making their performance directly and transparently measurable.

Stephen Gilmore's first step in moving CalPERS to TPA was demonstrating to the board that a simple stock/bond portfolio closely tracked the fund's actual performance. This revealed the fund's primary risk drivers were simple betas, making the case for a reference portfolio and a more holistic management approach more intuitive.

By removing the annual bonus cycle, Eagle Capital eliminates short-term performance pressure on analysts. This encourages them to focus on investment theses that play out over 3-7 years, aligning compensation with the firm's long-duration investment strategy.

Moving from Strategic Asset Allocation (SAA) isn't about taking on more risk. CalPERS calculated that their existing SAA policy ranges already allowed for a ~450bps active risk budget. TPA maintained this budget but granted flexibility to deploy it across the entire portfolio, unconstrained by rigid asset class silos.

Structuring compensation around a single, firm-wide P&L, rather than individual deal performance, eliminates internal competition. It forces a culture of true collaboration, as everyone's success is tied together. The system is maintained as a meritocracy by removing underperformers from the 'boat.'