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