Sub-advisory services: Overview, definition, and example
What are sub-advisory services?
Sub-advisory services refer to the outsourced management and advisory services provided by a third-party firm (the sub-advisor) to another advisor or financial institution, typically in the context of investment management. In this arrangement, the primary advisor (often called the "lead advisor" or "primary advisor") hires the sub-advisor to manage specific aspects of a portfolio, fund, or investment strategy. The sub-advisor is generally an expert in a particular asset class, market, or investment strategy, and they provide specialized advice, research, and management services under the terms of an agreement with the primary advisor.
Sub-advisory services are commonly used in investment funds, where a lead advisor may hire one or more sub-advisors to handle different investment segments or asset classes, such as equities, fixed income, or international markets.
Why are sub-advisory services important?
Sub-advisory services are important because they allow firms to access specialized expertise and resources that may not be available internally. By outsourcing specific areas of investment management to experts, the primary advisor can offer more diversified and effective investment strategies to clients, without needing to develop expertise in every asset class or market.
For investors, sub-advisory services can result in better-managed funds, higher returns, and improved risk management, as sub-advisors bring specialized knowledge and experience. For financial institutions, using sub-advisory services enables them to enhance their offerings and serve a broader range of client needs without having to expand their internal resources or capabilities.
Understanding sub-advisory services through an example
Imagine a large investment management firm that offers a mutual fund focusing on global equities. While the firm has strong expertise in U.S. stocks, it may hire a sub-advisor who specializes in European and Asian markets to manage the fund's international investments. The sub-advisor is responsible for selecting and managing investments in Europe and Asia, while the lead advisor oversees the overall portfolio, including U.S. investments, and ensures that the fund remains aligned with the client’s overall strategy.
In another example, a financial planning firm that offers retirement planning services may partner with a sub-advisor who specializes in fixed income investments, while the primary advisor handles the stock market portion of the portfolio. The sub-advisor’s role is to manage the bond portion of the portfolio, ensuring diversification and risk management for the clients' fixed income investments.
An example of sub-advisory services clause
Here’s how a sub-advisory services clause might appear in a contract or agreement between the primary advisor and the sub-advisor:
"The Primary Advisor hereby engages the Sub-Advisor to provide investment management services for the portion of the portfolio allocated to international equities. The Sub-Advisor shall manage the international equity investments in accordance with the guidelines set by the Primary Advisor and will report on performance and strategies on a quarterly basis. The Sub-Advisor shall act in the best interests of the clients and shall be compensated as outlined in this Agreement."
Conclusion
Sub-advisory services play a key role in the financial services industry by enabling primary advisors or financial institutions to offer specialized expertise in managing specific aspects of portfolios or investment strategies. These services allow for better risk management, diversification, and access to specialized knowledge without expanding internal resources. Whether managing international investments, fixed income, or niche asset classes, sub-advisory services enhance the overall quality of financial products and help meet the varied needs of investors.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.