Published on Oct 20, 2026
This article was written by Adem Tumerkan
Content Editor, Dunham | 2025 ThinkAdvisor Luminaries Award Winner | 2026 Wealthies Finalist, Thought Leader of the Year | Macroeconomics, markets, geopolitics & global trends
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A fund sub-advisor is an investment manager hired by a mutual fund’s investment adviser to make some or all of the fund’s investment decisions. The sub-advisor handles security selection within its mandate, while the fund adviser oversees its work.
For financial advisors, that division of labor can provide access to specialized investment expertise without researching every holding yourself. You still evaluate whether the fund fits your clients. Here’s how sub-advised mutual funds work, how managers are selected and paid, and which costs and trade-offs to review.
Adam Smith helped popularize the term division of labor in his book The Wealth of Nations.
His famous example was a pin factory - where workers split the steps rather than each making a pin from start to finish. This meant that specialization helped them build skills they were good at, save time, and produce more efficiently.
Your advisory practice looks a little different from a pin factory from 250 years ago. But the same principle applies.
Client meetings, planning, and prospecting compete for your time. Researching every investment yourself adds another job to the list.
Well, sub-advised funds let you divide that work.
An institutional money manager researches and selects investments inside the fund. And you decide whether the fund fits your clients and review that fit as their needs change.
That puts the day-to-day security decisions in a specialist’s hands, giving you more room for client conversations, planning, and the other work your practice needs.
A fund sub-adviser is an investment manager hired to make some or all of a fund’s investment decisions. Mutual funds and ETFs can use sub-advisers to bring in expertise in a particular asset class or investment style.
Those answers matter more than the appeal of handing off the work.The fund adviser - such as Dunham for the Dunham Funds - selects and monitors the specialist, who chooses investments within the fund’s guidelines.
For example, picture a hypothetical client who’s 55, has $900,000 invested, and hopes to retire in ten years. You select a sub-advised corporate bond fund for part of their portfolio.
The sub-advisor decides which bonds to buy, hold, or sell – and you review whether the fund’s strategy, risks, and costs still fit your client’s retirement plan.
That’s the division of work in practice.
The main reason to use a sub-advised fund is that it gives you access to specialized investment expertise without building that capability inside your practice. You can draw on a manager’s dedicated research and security selection while you focus on how the fund fits your clients.
There’s also the matter of time.
Client meetings, planning, prospecting, and running the business already fill your week. Adding in investment research just adds more work within the same 24-hour day.
Said another way – for every minute you are working with a client or prospecting, that’s one minute less for researching and building a portfolio (which is hard enough full time).
Cerulli’s U.S. Advisor Metrics 2024 via Blackrock put client-facing activities at 50.6% of an advisor’s time – with investment management taking up another 16.8%, while prospecting accounts (how you grow) at only 7%.
|
Activity |
Share of Advisor Time |
|
Client-facing activities |
50.6% |
|
Administrative work |
21.6% |
|
Investment management |
16.8% |
|
Prospecting |
7.0% |
|
Professional development |
4.0% |
*data via Blackrock's "The growing high-net-worth practice"
More than half the time goes to working with clients, while finding new ones gets a much smaller share.
That’s where dividing the investment work can help. A sub-adviser handles security decisions inside the fund. You evaluate the strategy, monitor its fit for your client, and spend less time making those individual decisions yourself.
There’s also the significant amount of time you spend researching and selecting individual securities or funds, thus it can take some of that load off your mind.
The point is, using specialized expertise where it makes sense and giving yourself room for the work only you can do for your clients.
A specialist’s resume can only tell you so much. You also want to know how they invest, how they manage risk, and whether their process holds up when markets get choppy.
That makes the fund adviser’s selection process worth your attention.
A strong recent return often gets a manager noticed. But you need more to judge whether the fund belongs in your client’s portfolio for the long term.
Working with a TAMP such as Dunham is one way to access sub-advised funds that are professionally vetted within a broader investment program.
Dunham’s Asset Allocation Programs (AAP) combines its sub-advised mutual funds with an allocation process across multiple asset classes. You can also use the funds individually.
The selection work starts well before a manager joins the lineup.
At Dunham, vetting a sub-adviser takes four to five months. The review looks beyond recent returns to performance across full market cycles, with an emphasis on institutional managers who specialize in their assigned asset classes.
And the work continues after selection – with managers receiving monthly reviews and formal quarterly assessments from the Dunham analyst team.
For you, that means evaluating two things.
The manager’s ability to run the strategy, and the fund adviser’s process for holding that manager accountable.
Useful questions include:
Dunham adds another consideration. Its sub-advisers agree to fulcrum fees, which tie compensation to performance against applicable benchmarks.
A fulcrum fee is a management fee that adjusts above or below a base fee based on performance against a specified benchmark over a defined period. Stronger relative results can increase compensation – and weaker relative results can reduce it.
Dunham uses this structure to connect its fund sub-advisers’ compensation to their results against applicable benchmarks – giving them skin in the game. Some sub-advisers may receive a minimum fee even when they do not meet or exceed the benchmark.
The key word is “relative.”
In a hypothetical example, a fund could fall 5% while its benchmark falls 10%. The fund did better than the benchmark, even though investors lost money. Depending on the fee formula, that result could support an upward adjustment.
For you, the structure adds another factor to evaluate alongside the manager’s process, risks, and costs.
Here’s one of the most important things to ponder over.
“Is it worth it?”
Start with costs. Review the fund’s expense ratio, any sales charges, and separate advisory or program fees. Sub-advisory arrangements vary, so look at what your client pays in total.
You also give up control over individual holdings inside the fund. You select the strategy, but the sub-adviser makes the security decisions within its guidelines.
Then there’s performance. A manager can follow a sound process and still disappoint (it happens to the best of money managers). A fulcrum fee ties compensation to relative results, but it doesn’t prevent your client from seeing losses.
|
What You Gain |
What You Still Need to Evaluate |
|
Access to a manager with specialized investment expertise |
Whether the strategy fits your client’s goals, risk tolerance, and portfolio |
|
A manager making security decisions inside the fund |
Whether you’re comfortable giving up control over individual holdings |
|
A fund adviser selecting and overseeing the sub-adviser |
How thorough that selection and review process is |
|
In Dunham’s funds, compensation tied to relative performance through fulcrum fees |
The fee formula, any minimum fee, and the client’s total costs |
So, before investing, ask yourself:
Can I explain why this strategy belongs in the portfolio?
Do I understand the risks and total costs?
What would make me reconsider the fund?
Your clients probably won’t ask (or care) what Adam Smith would do. They’ll just ask you whether they can retire, help their kids, or spend a little more without worrying.
And those conversations need your full attention and time.
If sub-advised funds fit your approach, they can give your clients access to institutional investment managers while specialists handle the security decisions inside the funds. You still choose the funds and review their fit.
Depending on how you invest today, that division of work could leave more room for client conversations, prospecting, and growing your practice.
Smith had his pin factory. You run an advisory that could maybe use some breathing room.
Does a sub-advised mutual fund add another layer of fees? Not necessarily. In a typical arrangement, the fund’s investment adviser pays the sub-adviser from its management fee, rather than billing shareholders separately. Advisors should still review the fund’s expense ratio, any sales charges, and separate advisory or platform fees to understand the client’s total cost.
What’s the difference between a sub-advised mutual fund and a separately managed account? A sub-advised mutual fund pools investors’ money, and clients own shares of the fund. In a separately managed account, clients directly own the underlying securities. An SMA may allow security restrictions and tax-loss harvesting at the individual holding level, depending on the manager and program.
What does a financial advisor still need to monitor when using a sub-advised mutual fund? The financial advisor still needs to assess whether the fund’s strategy, risks, and total costs fit the client’s goals. The fund’s investment adviser oversees the sub-adviser. That fund-level oversight serves a different purpose from the financial advisor’s ongoing review of the investment’s role in the client’s portfolio.
What should financial advisors review before recommending a sub-advised mutual fund? Review the sub-adviser’s investment process, relevant experience, performance, risk controls, and fees. Then assess how the fund’s investment adviser selects and oversees that manager. Look beyond recent returns to understand the strategy’s risks, its role in the client’s portfolio, and whether its costs are reasonable for the services provided.
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance. All examples are hypothetical and are for illustrative purposes only.
Information contained in the materials included is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of information. This document is provided for information purposes only and should not be considered as investment advice.
Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA/SIPC. Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc.
