Crypto sub-advisory is an arrangement in which one investment adviser engages a second adviser to manage part of a client’s portfolio, here the digital asset part, under a contract between the two firms. What most people get wrong: the primary adviser keeps the client relationship and keeps the duty to supervise the specialist. My view is that the agreement should settle who may instruct the custodian before it settles anything about fees.
Crypto sub-advisory: the short version
- The contract usually runs firm to firm, so the client’s advisory agreement stays with the primary adviser.
- Supervision does not travel with the work. It is unlawful to do through another person what the Advisers Act forbids directly (15 U.S.C. § 80b-8(d)).
- The same assets can appear in both firms’ regulatory assets under management, as the SEC said in 2016.
- Custody follows key access and withdrawal rights, whichever firm holds them (17 CFR 275.206(4)-2).
- Exit is a drafting problem before it is a market problem. An advisory contract must bar assignment without client consent (15 U.S.C. § 80b-5(a)(2)).
Who is engaged to do what
A digital asset sub-adviser is usually engaged to select assets inside a stated mandate, size positions, decide rebalancing, place or instruct trades, and produce holdings data. The primary adviser keeps onboarding, suitability of the overall allocation, tax coordination, the client conversation, billing, and the decision to retain or replace the specialist. None of that second list crosses the specialist’s desk, so the first has to be written down.
Two contract shapes carry most arrangements. Under a single contract the client signs only with the primary adviser, which signs separately with the specialist; under a dual contract the client signs with both. That fixes whose brochure is delivered, whose Part 2B supplements describe the decision makers, and which firm the client can sue. I have yet to meet a client who could name their shape from memory.
Discretion is the second fork. A sub-adviser with discretion trades the account; one delivering a model portfolio hands over a target the primary adviser implements. Push a single undifferentiated model across many accounts and the arrangement starts to resemble a pooled product, which the advisory program safe harbor guards against by requiring that each account be “managed on the basis of the client’s financial situation and investment objectives,” with knowledgeable personnel reachable for consultation (17 CFR 270.3a-4). Ask which humans that covers when the manager sits at a second firm.
Whose client is the client
Privity and duty are separate questions. Under a single contract the specialist’s counterparty is the primary firm. The Advisers Act antifraud provision reaches further, applying to “any investment adviser” since the limitation to registered advisers was struck out in 1960 (15 U.S.C. § 80b-6). Section 208 closes the indirect route:
“It shall be unlawful for any person indirectly, or through or by any other person, to do any act or thing which it would be unlawful for such person to do directly under the provisions of this subchapter or any rule or regulation thereunder.”
Registration lands on both firms independently. A sub-adviser is an investment adviser in its own right, registering federally or by state under Section 203A and 17 CFR 275.203A-1: available at $100 million of assets under management, required at $110 million, withdrawable below $90 million. Form ADV then reports the arrangement twice by design. Amending the form in 2016, the SEC said a sub-adviser reports only the portion it sub-advises, then added:
“these instructions may require both advisers and subadvisers to report on the same regulatory assets under management (i.e., the assets that they both manage in an account) in Sections 5.K.(1) and (2) of their separate Form ADVs”
SEC, Form ADV and Investment Advisers Act Rules, Federal Register, 1 September 2016
One account can sit inside two firms’ reported totals, so neither number tells you who does the work. Item 10 of Part 2A is where a firm selecting other advisers describes its compensation arrangements and business relationships with them, and the conflicts those create.
The duty the primary adviser keeps
Hiring a specialist changes who does the analysis. The client still receives advice from the primary adviser, who still owes a reasonable basis for it. The compliance rule requires written policies “reasonably designed to prevent violation” of the Act, reviewed “no less frequently than annually” (17 CFR 275.206(4)-7), and retaining a sub-adviser puts the specialist’s conduct inside that perimeter.
Anyone reaching for the 2022 outsourcing proposal as a checklist should stop. It would have set specific diligence and monitoring steps for retaining a service provider, and it was withdrawn on 17 June 2025, alongside the safeguarding proposal that would have replaced the custody rule, with the Commission stating it “does not intend to issue final rules with respect to these proposals” (Withdrawal of Proposed Regulatory Actions). What governs is the fiduciary duty and the two rules above, so the primary adviser’s own due diligence file carries the weight.
Custody, fees, and what termination moves
Custody attaches to powers. An adviser authorized to withdraw client assets on its instruction, or holding legal ownership of or access to them, has custody under 17 CFR 275.206(4)-2, and access to digital assets means key material or a seat in a signing quorum. Either firm can end up there without deciding to. The rule then requires a reasonable basis for believing the qualified custodian sends the client a statement “at least quarterly.” The mechanics sit in qualified custody and the custody hub.
Who may instruct the custodian is a separate question, and it leaves a record either way:
“A memorandum of each order given by the investment adviser for the purchase or sale of any security, of any instruction received by the investment adviser concerning the purchase, sale, receipt or delivery of a particular security, and of any modification or cancellation of any such order or instruction.”
Those books stay accessible for five years. Fees follow the contract shape: one fee billed by the primary adviser with a share paid onward, or two billed separately, with the description and the conflicts landing in Items 5 and 10 of each Part 2A. Item 5 also covers refunding a prepaid fee when a contract ends mid-period.
The harder termination questions are operational. An advisory contract must bar assignment without the client’s consent, and assignment reaches an indirect transfer or a transfer of a controlling block of the assignor’s voting securities (15 U.S.C. § 80b-5), so a change of control at the specialist becomes a consent event. An exit also has to move key access, withdrawal whitelists, exchange API credentials, staking positions inside lock-ups, and cost basis records. Draft that list while both firms still like each other.
What I actually see with crypto sub-advisory
First, the oversight file that stops at onboarding. A firm ran genuine diligence once, papered it well, then never repeated it. Two years on the specialist has changed custodians, added a venue, and replaced the person running the book, and the primary adviser learned all three from a client question.
Second, the instruction path nobody wrote down. I ask which firm can move coins and on whose authority, and I get two confident answers from two people at the same firm. Underneath there is usually a whitelisted withdrawal address added during onboarding, or a signing key handed over for convenience, while one of the two Form ADVs reports no custody.
Third, reconciliation against the wrong record. The quarterly client report is built by the primary adviser from data the specialist supplied, and nothing compares it against the custodian’s own statement. Spread positions across a custodian, an exchange, and a staking contract and that comparison gets deferred until a reporting error has survived four quarters.
Here is the check I would run this quarter, on one page. List six functions: choose an asset, place an order, move an asset off the platform, add a withdrawal address, produce the client report, answer the client’s call. Against each write the entity responsible, the named individual, and the document that says so. Then set it beside Items 15 and 16 of both Part 2A brochures and the custody agreement. Any function whose owner appears in no document is the finding, and there are usually two.
Where crypto sub-advisory goes wrong
Most of the damage comes from treating the sub-advisory agreement as a vendor contract rather than a delegation of fiduciary work.
The specific failures: a function list agreed in a kickoff call and never written down, so authority gets reconstructed from memory during a dispute. A single-contract structure described to the client as though they had hired the specialist directly. Fee arrangements between the firms that appear in one Part 2A and not the other. Diligence run on the entity and never on the individual who manages the book, who then leaves. And the exit drafted last, so key rotation and record transfer get negotiated after the relationship sours. Documenting the recommendation as it is made heads off most of it.
The decision rule for crypto sub-advisory
- Choose the contract shape deliberately, single or dual, since it fixes whose brochure is delivered and where the contract claim sits.
- Write the function list into the agreement: what the specialist selects, what it may instruct, what it may never touch.
- Settle custody before funding, listing everyone holding keys, signing seats, or withdrawal rights, and confirm both firms describe it identically.
- Read both Form ADVs yourself at Investment Adviser Public Disclosure, through Items 5, 10, 15 and 16 of each Part 2A.
- Fix the fee mechanics in writing: who bills, who pays whom, how a prepaid fee is refunded mid-period.
- Date the monitoring file, because the annual review under Rule 206(4)-7 is proved by records rather than intentions.
- Reconcile to the custodian’s statement on a stated cadence, keeping the memoranda Rule 204-2 requires.
- Draft the exit before signing: notice, key rotation, whitelist removal, model access, lock-ups, records.
Where crypto sub-advisory fits
Sub-advisory is one response to a client holding digital assets and referral is another, so start with when to refer instead. If the assets are staying where the client already put them, held-away positions is the nearer question, and a trustee facing the same delegation problem under state trust law should read can a trustee hire a crypto advisor.
Four documents govern one arrangement here, and they are usually drafted by people who never speak: the client’s advisory agreement, the sub-advisory agreement between the firms, the custody agreement, and whatever instrument holds the account. The tax preparer sees none of them and rebuilds the year from statements. Each document is competent alone, and the failures live in the seams: an authority granted in one and withheld in another, a termination clause assuming a counterparty who has already gone, a reporting duty each side believes the other owns. Somebody has to read all four in one sitting, and that job is usually unassigned.
Sources
- 15 U.S.C. § 80b-6, Prohibited transactions by investment advisers (Cornell Legal Information Institute)
- 15 U.S.C. § 80b-8, Unlawful representations (Cornell Legal Information Institute)
- 15 U.S.C. § 80b-5, Investment advisory contracts (Cornell Legal Information Institute)
- 17 CFR 270.3a-4, Status of investment advisory programs (Cornell Legal Information Institute)
- 17 CFR 275.204-2, Books and records to be maintained by investment advisers (Cornell Legal Information Institute)
- SEC, Form ADV and Investment Advisers Act Rules (GovInfo, Federal Register, 1 September 2016)
- SEC, Withdrawal of Proposed Regulatory Actions (GovInfo, Federal Register, 17 June 2025)
Related
- When should an advisor refer crypto clients to a specialist?
- Crypto due diligence checklist for RIAs
- Qualified custody for RIAs managing digital assets
- Crypto model portfolios for financial advisors
- Crypto compliance checklist for RIAs
- Crypto for advisers and RIAs
Last updated: 3 August 2026.
This article is general education, not legal, tax, or investment advice. It describes how advisory work is divided between two firms and the filings that report it, and it does not recommend any adviser, sub-adviser, custodian, mandate, or fee arrangement. Talk to a qualified securities attorney and your own compliance counsel about your own situation.
