An External Manager is a third-party investment professional or firm hired to manage an investment portfolio on behalf of a client such as a family office or wealth manager.
In finance and wealth management, External Managers enable clients to access diverse investment strategies and professional insights without maintaining a full internal team. They provide scalability, specialized knowledge, and potentially enhanced diversification and alpha generation. Selection typically involves due diligence on investment philosophy, track record, fees, and alignment with client goals. Reporting and communication protocols are established to maintain transparency and governance.
Furthermore, working with External Managers impacts tax planning and reporting since transactions and income generated externally require integration with client tax and accounting systems. Robust performance evaluation and risk management frameworks are critical to monitor these relationships effectively. Ultimately, well-chosen External Managers can contribute significantly to meeting bespoke investment objectives, preserving wealth, and managing risk in complex family office structures.
A family office hires an External Manager specializing in emerging markets equities to manage $50 million of its portfolio. The family office retains strategic oversight, but the External Manager is responsible for security selection and portfolio rebalancing within their mandate. The manager charges a 1% annual fee on assets under management. If the portfolio grows to $55 million in a year, the fee paid would be $550,000.
Sub-Advised Fund
A Sub-Advised Fund is an investment fund that hires an external management firm (sub-advisor) to manage portions or the entirety of the fund's portfolio, similar to how family offices use External Managers to leverage specialized expertise.
What distinguishes an External Manager from an in-house investment team?
An External Manager is a third-party professional or firm engaged externally to manage investments, whereas an in-house team is employed directly within the organization. External Managers provide specialized expertise and often manage specific asset classes or strategies.
How are fees typically structured for External Managers?
Fees for External Managers are usually asset-based, often a percentage of assets under management, and may include performance fees. The exact fee structure depends on the manager and the negotiated contract.
What are key considerations when selecting an External Manager?
Important factors include the manager's investment track record, strategy alignment with client objectives, fee structure, transparency, regulatory compliance, and how they integrate with existing reporting and governance processes.
