Investment Advisers often work with sub-advisers or Third-Party Asset Managers (“TPAMs”) to provide clients with a various investment management strategies.
Primary client-facing advisers generally select these managers because of their expertise. However, which manager type is selected – sub-adviser versus TPAM – can have various impacts to the adviser. In a sub-advisory relationship, the contractual servicing relationship is with the adviser; however, with a TPAM arrangement, the TPAM contracts directly with the end-client. This means that typically only a client can terminate the relationship with the TPAM.
Moreover, which manager relationship is selected impacts whether the adviser can count the client’s assets as regulatory assets under management, as further discussed below.
Key Considerations and Due Diligence
In a sub-advisory arrangement, the client grants the adviser discretionary authority to hire, monitor, and terminate the sub-adviser. The adviser remains the client’s primary point of contact, and bears full ongoing supervisory responsibility, including liability for any of the sub-adviser’s violations.
With a TPAM, the client typically enters into a direct contractual relationship with the asset manager, who assumes their own independent fiduciary duty to the client. The primary adviser’s role is limited and focused on the initial recommendation and ongoing client servicing rather than direct supervision of investment decisions.
Servicing and AUM Considerations
What many advisers may not realize is how the type of engagement selected may impact them.
In a sub-advisory relationship, the adviser hires and can terminate the manager. Thus, the adviser is responsible for ongoing supervision, monitoring, due diligence and delivery of disclosures to clients and client paperwork to the sub-adviser. Here, the adviser counts investor assets delegated for management to the sub-adviser as RAUM because the adviser retains the supervisory responsibility and discretion over the selection of the sub-adviser.
By contrast, in a TPAM relationship, generally, the client hires and terminates the manager relationship pursuant to a contract entered into directly by the client with the TPAM. Thus, the TPAM can (but often chooses not to) communicate directly with the client. While the adviser must still conduct due diligence, monitor, and make recommendations to the client regarding the TPAM, the adviser generally cannot count investor assets managed by the TPAM as RAUM because the TPAM, not the adviser, is managing the client’s assets directly.
Both arrangements require disclosure in Form ADV, covering services provided, conflicts of interest, and any additional fees charged by the outside manager.
Conclusion
Sub-Advisers and TPAMs can add significant value to managing clients’ portfolios but strong due diligence is vital to ensure the adviser or manager continues to deliver on their services, and the adviser understands the impact of manager selection to their business.
For more information on due diligence with third-party advisers, please contact us at 619.298.2880 or email info@jackolg.com.
