Sub-advisory fee: Overview, definition, and example
What is a sub-advisory fee?
A sub-advisory fee is a fee paid by a primary advisor (usually a fund manager, investment advisor, or asset manager) to a sub-advisor for providing specialized services, such as portfolio management or investment research, as part of a larger investment strategy. In many cases, the primary advisor engages a sub-advisor to manage a specific portion of an investment portfolio, especially when specialized expertise or knowledge is required. The sub-advisor, in return for their services, receives a fee from the primary advisor, typically based on the assets under management (AUM) or a flat fee arrangement.
Sub-advisory fees are commonly seen in mutual funds, pension plans, and other managed investment products, where the primary advisor may need to delegate specific duties to specialized firms or individuals.
Why are sub-advisory fees important?
Sub-advisory fees are important because they facilitate the delegation of investment management responsibilities to firms or individuals with expertise in specific sectors, asset classes, or investment strategies. By paying a sub-advisory fee, the primary advisor can access specialized skills or resources that may enhance the overall performance of the fund or portfolio.
For businesses, sub-advisory fees allow them to offer more comprehensive investment management services without having to employ all the necessary expertise in-house. For investors, the use of sub-advisors can improve the quality of the investment strategy by leveraging specialized knowledge, though the costs associated with sub-advisory fees should be considered when evaluating the overall value of the managed product.
Understanding sub-advisory fee through an example
Imagine an investment management firm that offers a diversified mutual fund with a broad portfolio of stocks and bonds. To enhance the fund's performance in the international markets, the firm hires a sub-advisor who specializes in international equities. In exchange for managing the international portion of the portfolio, the sub-advisor is paid a sub-advisory fee, which is typically a percentage of the assets they manage. This allows the primary advisor to offer a well-rounded fund that benefits from the sub-advisor’s specialized knowledge in international markets.
In another example, a pension fund hires a primary advisor to manage its overall investment strategy. The primary advisor contracts with a sub-advisor to handle the management of alternative investments like real estate or private equity. The primary advisor pays the sub-advisory fee to the sub-advisor based on the assets managed in these areas, allowing the pension fund to benefit from specialized expertise in these niche sectors.
An example of a sub-advisory fee clause
Here’s how a sub-advisory fee clause might appear in a contract between a primary advisor and a sub-advisor:
"The Advisor agrees to pay the Sub-Advisor a fee equal to [X]% of the assets under management allocated to the Sub-Advisor’s portfolio. The Sub-Advisor’s fee will be calculated on a quarterly basis and paid in arrears within 30 days of the end of each quarter. The Sub-Advisor’s fee is subject to adjustment based on performance metrics as outlined in Schedule A."
Conclusion
Sub-advisory fees are a key part of the investment management industry, enabling primary advisors to access specialized expertise and enhance their investment offerings. For businesses, these fees provide a way to delegate complex tasks while maintaining a competitive portfolio, and for investors, they help ensure that their funds benefit from the best possible management strategies. However, understanding the structure and impact of sub-advisory fees is essential for evaluating the overall cost and potential return on investment in managed products.
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.