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31 January 2019

Ethics in Practice: Use of Subadvisers. Case and Analysis–Week of 28 January

CFA Institute Ethical Decision-Making Framework

Check the analysis of this week’s case (28 January) to see if you made the right choice.


Reeves is the CEO and founding partner of Luxor Asset Management. Reeves provides asset management and allocation services for high-net-worth individuals and a number of small institutional clients. His services include investing client funds with third-party subadvisers who have a specialty in a particular asset class. Reeves’ clients are aware of and approve Luxor’s allocation of their assets to subadvisers. The third-party subadvisers make payments to Luxor based on the total amount of a client’s assets placed or invested in certain subadviser funds. Reeves initially sought to negotiate a direct economic benefit for clients, but the subadvisers would not agree and payments were made directly to Luxor. Reeves’ actions are

  1. appropriate because Reeves has disclosed the use of subadvisers.
  2. inappropriate unless Reeves discloses the financial arrangement with the subadvisers to his clients.
  3. appropriate if the clients receive the ultimate benefit of the subadviser payments in the form of discounted Luxor fees.
  4. inappropriate because the payments are an improper referral fee.
  5. none of the above.


This case relates to conflicts of interest between an advisor and clients. CFA Institute Standard VI(A): Disclosure of Conflicts requires CFA Institute members to make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with their duties to their clients. The payments by subadvisers to Luxor based on the amount of client assets that Luxor places with the subadvisers create a potential conflict of interest because it incentivizes Reeves to hire those subadvisers that pay the fee to Luxor, but who may not necessarily be the best subadvisers for his clients. Reeves could mitigate the conflict by passing on any economic benefit received from the subadvisers to his clients.

Reeves initially attempted to negotiate a direct benefit for his clients, but his proposal was rejected by the subadvisers. And it is not clear from the facts that Reeves is ultimately passing the benefit on to his clients. Even if that were the case, Reeves should disclose the source and nature of the discount to clients. Reeves has disclosed Luxor’s use of subadvisers, but it seems the financial incentive for Luxor has not been disclosed. Although referral arrangements may be acceptable with full disclosure to clients, Reeves is not referring clients to the subadvisers but hiring them directly on his clients’ behalf. Choice B is the best answer.

This case is based on a December 2018 enforcement action by the US SEC.

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More About the Ethics in Practice Series

Just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. The Ethics in Practice series gives you an opportunity to “exercise” your ethical decision-making skills. Each week, we post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions. We then encourage you to assess the case using the CFA Institute Ethical Decision-Making Framework and through the lens of the CFA Institute Code of Ethics and Standards of Professional Conduct. Then join the conversation and let us know which of the choices you believe is the right one and explain why. Later in the week, we will post an analysis of the case and you can see how your response compares.

Image Credit: ©CFA Institute

About the Author(s)
Jon Stokes

Jon Stokes is the Director of Ethics and Standards Education at CFA Institute. His responsibilities include design and creation of on-line ethics education, development and maintenance of the CFA Institute Code of Ethics and Standards of Professional Conduct, and the design and management of the CFA Institute Ethical Decision-Making and Giving Voice to Values education programs. Stokes holds a JD degree.

1 thought on “Ethics in Practice: Use of Subadvisers. Case and Analysis–Week of 28 January”

  1. Jackson Rutahinzibwa says:

    B he had to communicate subadvisory services

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