Sub-Adviser- and TPAM-IA Relationships

Last time I detailed two phone conversations I had with recruiters. Today I will continue on my brainstorming journey.

After speaking with EJ and LPL Financial last Halloween, I did some research on how to become a third-party asset manager (TPAM) and generation of a GIPS compliant track record. I will discuss the latter in a separate post.

TPAMs are sometimes a broker/dealer offering. In other words, if an investment adviser (IA) signs on with a broker/dealer then TPAMs may be available under a drop-down menu on the platform.

A fine line differentiates TPAMs from sub-advisers. A sub-adviser is hired by the IA to manage client portfolios. The sub-adviser manages assets in accordance with IA guidelines and objectives. In contrast, a TPAM is an external manager hired by the client to manage assets based on client investment objectives. In a sub-advisory relationship, the IA is responsible for the recommendation and selection of the manager. With a TPAM, the client enters into a separate and distinct contract that gives the client ultimate authority to retain or to fire. An IA may or may not recommend a particular TPAM.

The level of supervision (accountability) maintained in sub-adviser vs. TPAM relationships is noteworthy. Due diligence is the depth of investigation expected of a prudent IA to determine whether a financial arrangement makes sense. This falls under the IA’s fiduciary obligation to clients and is probably greater for a sub-adviser than a TPAM. According to one lawyer, most advisers use questionnaires, in-person and telephone meetings, and performance reports on a quarterly basis to make sure sub-advisers abide by IA guidelines and objectives. TPAMs may be reviewed on a semi-annual or annual basis with regard to performance, personnel, and overall client services.

Due diligence commonly includes manager expertise, assessment of fit between investment strategy and client suitability objectives, fee structure, disclosures, and regulatory status. The IA should also review compliance controls and specify how communication between manager and client will proceed to define expectations for all parties involved.

Sub-advisers and TPAMs are two concepts that help me to better understand XC’s hypothetical scenario where I might trade for one of their clients. In that case, I would be a TPAM rather than a sub-adviser, which is why he would not risk their reputation by explicitly recommending me. I’m sure this could change if he got to know more about me and my trading philosophy.