Compensation to the sub-adviser: Overview, definition, and example
What is compensation to the sub-adviser?
Compensation to the sub-adviser refers to the fees or payments made to a sub-adviser for providing investment management or advisory services under a primary advisory agreement. A sub-adviser is typically hired by a fund manager or investment firm to handle specific asset management responsibilities, such as overseeing a portion of an investment portfolio or implementing specialized strategies.
For example, a mutual fund may engage a sub-adviser to manage its international equity investments and agree to compensate them based on a percentage of assets under management (AUM) or performance-based fees.
Why is compensation to the sub-adviser important?
Clearly defining how and when a sub-adviser is compensated ensures transparency, aligns incentives, and helps avoid disputes between the fund manager and sub-adviser. Compensation structures may include:
- Flat fees – A fixed amount paid periodically.
- AUM-based fees – A percentage of assets managed by the sub-adviser.
- Performance-based fees – Compensation tied to the portfolio’s returns relative to a benchmark.
For businesses, having a well-defined compensation structure in agreements ensures that sub-advisers are fairly compensated for their expertise while protecting the interests of investors and fund managers.
Understanding compensation to the sub-adviser through an example
Imagine an investment firm managing a $1 billion mutual fund hires a sub-adviser to oversee its emerging markets portfolio. The agreement states that the sub-adviser will receive 0.30% of the assets under management (AUM) annually for their services. If the sub-adviser manages $200 million of the fund’s assets, they would receive $600,000 per year in compensation.
In another scenario, a hedge fund hires a specialized sub-adviser for its options trading strategy. The contract includes a performance-based fee, where the sub-adviser earns 20% of profits above a set benchmark return. If the portfolio generates $5 million in excess returns, the sub-adviser would receive a $1 million performance fee.
An example of a compensation to the sub-adviser clause
Here’s how a compensation to the sub-adviser clause might appear in an investment agreement:
“The Sub-Adviser shall receive a management fee equal to [X]% per annum of the average daily net assets under its management, payable on a [quarterly/annual] basis. Additionally, the Sub-Adviser may receive a performance-based fee of [X]% of any returns exceeding the benchmark index as specified in this Agreement.”
Conclusion
Compensation to the sub-adviser is a critical aspect of investment management agreements, ensuring fair and transparent payment for advisory services. Compensation structures may be fixed, AUM-based, or performance-based, depending on the sub-adviser’s role and the fund’s objectives.
By clearly defining fee structures, payment terms, and performance metrics in contracts, fund managers and sub-advisers can align incentives, ensure smooth collaboration, and protect investor interests.
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.