Selection and oversight of sub-advisers--obligations and practices

Investment advisers delegate their investment advisory duties to other investment advisers (sub-advisers) for many reasons. For example, some delegate their duties to address a specific client request for exposure to an asset class or strategy outside of the investment adviser's core competency. When an investment adviser is provided with the authority to select a sub-adviser and holds discretion over the continued use of a sub-adviser for a client account, the investment adviser continues to have fiduciary duty obligations to the client. These duties are often satisfied through disclosure to clients, initial due diligence of the selected sub-adviser, and ongoing monitoring with respect to the continued use of the sub-adviser. This article outlines the investment adviser's client disclosure obligations regarding the use of sub-advisers as well as the investment adviser's initial due diligence and continuing sub-adviser oversight obligations. The article also provides legal and compliance practitioners with a framework for designing and implementing a best-in-class sub-adviser due diligence and oversight program.