Liability of subadviser: Overview, definition, and example
What is liability of subadviser?
Liability of subadviser refers to the legal responsibility that a subadviser holds in managing assets or providing services on behalf of a primary adviser or investment manager. A subadviser is typically a third-party entity hired by the primary adviser to manage specific aspects of an investment portfolio or offer specialized expertise. The subadviser is liable for any errors, omissions, or failures in the services they provide, including failing to meet the agreed-upon performance objectives or not adhering to regulatory and legal requirements.
For example, if a subadviser fails to properly execute trades or makes poor investment decisions that result in financial loss, they may be held liable for those actions.
Why is liability of subadviser important?
The liability of a subadviser is important because it outlines the extent to which the subadviser can be held responsible for their actions and the impact on the primary adviser's client. If a subadviser fails to perform their duties correctly or breaches the terms of the agreement, the primary adviser and their client may seek compensation or other remedies. For businesses, understanding the scope of subadviser liability helps to establish clear expectations, reduce risk, and ensure accountability in the management of assets or services.
For clients and investors, knowing that subadvisers are liable for their actions provides additional assurance that their investments or services are being managed competently and according to contractual terms.
Understanding liability of subadviser through an example
Imagine an investment firm, WealthMax, that hires a subadviser, FinTech Investments, to manage a portion of its client portfolios. The subadviser is responsible for selecting stocks and bonds within the portfolio. If FinTech Investments makes a mistake in its stock selections that leads to a significant financial loss for the clients, WealthMax, as the primary adviser, may hold FinTech Investments liable for the losses caused by its failure to meet the agreed-upon investment strategy.
In another example, a financial advisory firm hires a subadviser to manage a specialized fund. If the subadviser breaches its fiduciary duty or fails to comply with regulatory standards, resulting in legal penalties or financial losses, the subadviser could be held liable for damages, and the firm may seek compensation for those losses.
An example of a liability of subadviser clause
Here’s how a clause like this might appear in a contract:
“The Subadviser shall be liable for any losses, damages, or claims arising from its failure to perform its obligations under this Agreement, including errors in investment decisions or non-compliance with applicable laws and regulations.”
Conclusion
The liability of a subadviser refers to the legal responsibility a subadviser has for its actions or omissions while managing assets or providing services under the terms of an agreement with a primary adviser. Understanding subadviser liability is crucial for businesses and clients to ensure that services are delivered competently and that appropriate accountability mechanisms are in place. By outlining liability in the contract, both parties can manage risks and expectations effectively.
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.