RIA Sub-Advisory Agreement: Understanding the Basics

Registered Investment Advisors (RIAs) often seek the help of sub-advisors to manage investments on their clients` behalf. A sub-advisory agreement is a contract between the RIA and the sub-advisor, outlining the terms of their partnership. This article aims to provide a basic understanding of RIA sub-advisory agreements and their impact on investment management.

What is an RIA Sub-Advisory Agreement?

An RIA sub-advisory agreement is a legal contract between the RIA and the sub-advisor that outlines the terms and conditions of their partnership. In the agreement, the sub-advisor is usually responsible for providing investment advice and managing clients` portfolios on behalf of the RIA.

An RIA may enter into a sub-advisory agreement for several reasons:

1) To gain access to specialized investment expertise that the RIA may not possess in-house.

2) To expand the range of investment solutions available to clients.

3) To manage large pools of assets more efficiently.

4) To focus on client relationship management while leaving investment management to a sub-advisor.

How Does a Sub-Advisory Agreement Work?

The sub-advisor is responsible for providing investment advice to the RIA and managing clients` portfolios in accordance with the RIA`s investment strategies. The sub-advisor also manages the day-to-day operations of the investment portfolios, including buying and selling securities, monitoring performance, and making adjustments to the portfolio as necessary.

Under the sub-advisory agreement, the RIA typically retains control over the accounts and maintains regular communication with the sub-advisor. The RIA also retains responsibility for compliance, client reporting, and fee collection.

What are the Key Provisions of an RIA Sub-Advisory Agreement?

An RIA sub-advisory agreement typically contains the following key provisions:

1) The term of the agreement: The sub-advisory agreement specifies the length of the partnership between the RIA and the sub-advisor.

2) The investment strategy: The agreement outlines the investment strategy that the sub-advisor must adhere to when managing clients` assets.

3) Fee structure: The agreement specifies the fees that the sub-advisor will receive for its services, which can be a percentage of assets under management, a flat fee, or a combination of both.

4) Termination provisions: The agreement outlines the circumstances under which either party may terminate the agreement, including breaches of the contract and changes in regulatory requirements.

5) Confidentiality provisions: The sub-advisory agreement also includes provisions that protect the confidentiality of the RIA`s client information that the sub-advisor may have access to.

Conclusion

An RIA sub-advisory agreement is a critical document that outlines the terms of the partnership between an RIA and a sub-advisor. It helps ensure that the RIA`s clients` assets are managed in accordance with the RIA`s investment strategies while providing access to specialized investment expertise and managing large pools of assets more efficiently. As such, it is important to carefully consider the terms of the agreement and work with legal and compliance professionals to draft an agreement that minimizes risks and maximizes benefits.