Is there a better way to supervise your sub-advisors?

The sub-advisor relationship within the US investment sector isn't a recent development; in fact, it's a concept that has been in existence for over six decades. However, the use of sub-advisory services has surged in recent years, as investors have grown more at ease with the notion of entrusting investment management to specialized external firms.

Investment managers can efficiently introduce new fund offerings with reduced costs and improved operational processes via a sub-advisory relationship. Under this arrangement, the investment manager delegates day-to-day fund management to a more operationally adept firm. The sub-advisor receives compensation for their services, while the investment manager remains accountable for the fund's performance.

In a recent Financial Times article, Brooke Masters discusses how the trend of using subadvisors is particularly pronounced among European money managers aiming to enter the US market, as well as institutional managers seeking to attract individual investors.

Sub-advisor monitoring

Advisors now bear a more proactive role in ensuring each sub-advisor fulfills its fiduciary obligations and adheres to the investment strategies laid out in the client's investment policy statement. Although this heightened scrutiny might increase the advisors' workload, it ultimately safeguards investors and ensures that their assets are managed in a secure and responsible manner.

Sub-advisors should undergo thorough vetting to ensure their expertise aligns with managing the fund according to the investment manager's objectives. Furthermore, investment managers need to consistently monitor the sub-advisor's performance to ensure the partnership meets expectations. The SEC mandates that advisors must disclose their use of sub-advisors in their Form ADV and provide insights into their supervisory arrangements with sub-advisors.

Sub-advisor supervision challenges

One of the main challenges in sub-advisor supervision is the lack of transparency in sub-advisor activities. Investment managers may not have full access to the information and data that sub-advisors use to make investment decisions, which can create communication gaps and increase operational risks. Moreover, they need to ensure that sub-advisors are aligned with the investment strategies and goals of the fund and its shareholders, and that they comply with the regulatory and contractual requirements.

Manual monitoring and reporting

The traditional approach to sub-advisor supervision relies on manual monitoring and reporting of sub-advisor activities and performance. Investment managers communicate with sub-advisors via email, which can be inefficient, and they use spreadsheets to track sub-advisor data, which can be time-consuming and difficult to maintain. This strategy can limit the ability to oversee sub-advisors efficiently.

The need for a better solution

The need for an improved approach to supervising sub-advisors becomes apparent due to the rising complexity of investment strategies, the presence of regulatory demands and compliance concerns, and the demand for real-time data and insights. Investment managers face challenges in managing multiple sub-advisors with different investment styles, objectives, and processes. They also need to ensure that sub-advisors follow mandated rules and regulations, and that they report any issues or incidents promptly. Furthermore, investment managers need to access and analyze sub-advisor data quickly and accurately, to identify opportunities and risks to optimize portfolio performance.  

Introducing technology solutions

Using technology-driven solutions can provide many benefits for sub-advisor supervision. It can enhance transparency by enabling investment managers to access sub-advisor data and activities in real-time, and to monitor sub-advisor performance and compliance more effectively. Technology can also improve communication by facilitating information exchange and collaboration, and by automating alerts and notifications. Moreover, it can streamline reporting and data analysis by integrating sub-advisor data from various sources, and by providing tools and dashboards for data visualization and insights.

Dasseti's role in mitigating sub-advisor risk

Dasseti offers a due diligence and monitoring platform for investment managers and advisors to maintain rigorous oversight of sub-advisors. This secure digital platform automates data requests, highlights, and evaluates responses for convenient comparison and risk management. The platform offers a complete audit trail and enables managers to meet compliance requirements pertaining to third-party usage.

To be able to effectively monitor your sub-advisors, you need a platform that can gather the information you need in a fast and easy way. Dasseti provides:

• DDQ Engine: Ask the questions you want to your sub-advisors, using a simple, intuitive, and customizable interface.
• Data Tracking: Set up pre-defined flags and alerts to track risks within your sub-advisors, such as performance issues, compliance breaches, or operational incidents.
• Workflows and Collaboration Tools: Allocate tasks, track activities and progress, and see a full audit trail of your sub-advisor supervision process.
• Review and Risk Management: Review only the data you want to see in the fully customizable review module, and manage the risks associated with your sub-advisors.
• Automated Scoring and Comparison: Monitor your sub-advisors at a glance with customizable, automated scoring and comparison of their data and performance.
• Response Portal: Your sub-advisors can use a user-friendly, white-labelled response portal to answer your questions. They can pre-fill from previous answers or drag and drop where required.
• Analytics and Reporting: Create fully customized, automatic reports in any format, using the data and insights from your sub-advisor supervision. You can also link the reports directly to your CRM or database.
• CRM and Document Management: Enrich your data by integrating your Outlook and SharePoint tools. You can track contacts, emails and shared documents related to your sub-advisors.

Next steps

If you are looking for a more effective way to monitor your sub-advisors, get in touch with the Dasseti team today.