Working with Outside Managers: Third-Party Asset Managers or Sub-Advisers – What is the Difference?

Investment advisers understand that selecting a portfolio which meets a client’s goals and objectives is a fiduciary duty. Sometimes, this involves working with outside managers who have specialized investment management knowledge to further diversify a client’s portfolio investments.

Advisers will often access outside managers to help them service their clients. This includes working with multiple managers to create a multi-discipline account or to provide clients with specialized investment strategies. When working with outside managers, there are two primary arrangements to choose from: a sub-adviser arrangement or a third-party asset manager (“TPAM”) arrangement. Both relationship structures offer strong advantages, but understanding the core differences between the two and how that difference affects legal considerations and regulatory compliance is vital to selecting the right asset manager structure.

Sub-advisers work with investment advisers to manage some or all their client portfolios. They usually come in with specialized knowledge or expertise in service offerings that allows the investment adviser to offer a wider range of services to their clients, resulting in increased returns.

Working with sub-advisers offers several advantages. Depending on the agreed terms, they can help with the day-to-day management of investments or focus on special funds and strategies. Most have investment experience and are hired due to their expertise and performance track record in certain investment strategies.

In a sub-advisory arrangement, the client must grant the adviser discretionary authority to select the sub-adviser.  In turn, the adviser provides supervisory services and monitors the sub-adviser’s performance.  In this arrangement, the adviser, rather than the client, has the authority to hire or fire the sub-advisory manager. Once engaged, the adviser has a duty to conduct ongoing due diligence of the sub-adviser, and in return, the sub-adviser must earn their place in remaining the sub-adviser for managing client portfolios.  Notably, here the contractual relationship is between the adviser and sub-adviser, and thus the adviser needs to liaise between the client and the sub-adviser, delivering whatever client paperwork is required by the sub-adviser to manage the client’s portfolio.

If advisers decide to engage a sub-adviser, they must disclose this information to their clients in Forms ADV. They also need to ensure that their clients are learning about the sub-adviser’s service offerings, conflicts of interest and fees, which are in addition to the fees assessed by the adviser.  The adviser remains the primary contact for servicing the client accounts and often gathers and distributes information from the sub-adviser to their clients directly.

Third-Party Asset Manager Arrangement (TPAM)
TPAMs offer similar services as sub-advisory managers, with one distinguishing factor: they are hired by the client, not the investment adviser. In a TPAM arrangement, managers work directly for the investor. Investment advisers should continue due diligence efforts and offer advice related to the TPAM’s performance; however,  it must be the client who hires the TPAM and can terminate the relationship.

Although an investment adviser may collaborate and liaise directly with a TPAM to serve the client’s best interests, the TPAM has a direct relationship with the client which is governed by the TPAM’s advisory contract, and unless expressly agreed upon, can contact the client directly without the adviser’s involvement.

Quick View of Investors, Investment Advisers and Outside Managers

Sub-Advisory Manager Relationship

Third-Party Asset Manager (TPAM)

Is hired by the investment adviser

Is hired by the client

Can be fired by the investment adviser

Can be fired by the client.

The contract is between the adviser and the manager

The contract is between the client and the manager

Adviser is responsible for due diligence, ongoing supervisory services, delivery of disclosures and asset allocations to sub-advisers

Adviser is responsible for due diligence, monitoring and recommendations to the client related to TPAMs

Must report the relationship on Form ADV 

Must report relationship on Form ADV

Adviser can count client assets managed by the sub-adviser as AUM

Adviser cannot count assets managed by the TPAM as AUM

Key Considerations for Sub-Advisory and TPAM Relationship Structures
An investment adviser has several obligations when working with an outside manager in both a sub-advisory relationship structure and a TPAM. Generally, the level of due diligence performed at the onset is substantially similar, as is the ongoing monitoring.  Where the two structures differ is the adviser’s ability to hire and fire the manager, and to include the client’s securities portfolios in the adviser’s assets under management (“AUM”).  In a sub-advisory relationship, the adviser is performing ongoing advisory and supervisory services and thus can count those assets as part of the advisory firm’s AUM.  That is not the case with TPAM relationships where the management of the client’s portfolio is done by the TPAM directly.  While in a TPAM relationship the adviser could include the client’s securities portfolios in the adviser’s assets under advisement assuming recommendations are made related to the TPAM, (“AUA”), ultimately, the TPAM has a direct relationship with the client and is responsible for the portfolio management, delivery of disclosures, and providing other material information directly to the investor. [This does not mean that a TPAM will not have the adviser liaise to gather documents or information on the TPAM’s behalf; but unlike sub-adviser arrangements, the TPAM has a direct relationship with the adviser’s client.]

Final Thoughts
Contractual terms and conditions between advisers and outside managers need to be clear and describe the expectation of who is doing what – from liaising with clients to gathering critical information for the manager, to the fees that will be assessed to client portfolios, and who will deliver required regulatory disclosures such as Form ADV.  It is important to work with counsel to ensure that contracts reflect the relationship of the parties and the services that each will respectively provide to the end client.

Jacko Law Group, PC works extensively with investment advisers who make use of outside managers. If you provide sub-advisory or TPAM services or are an adviser wishing to hire an outside manager, get in touch with our legal team to draft or review your sub-advisory and TPAM agreements to make sure you are meeting regulatory requirements. Call 619.298.2880 or email us at


Author: Michelle L. Jacko, Managing Partner, Jacko Law Group, PC (“JLG). JLG works extensively with investment advisers, broker-dealers, investment companies, private equity and hedge funds, banks and corporate clients on securities and corporate counsel matters. For more information, please visit

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