The Custom Troops/Mercenaries (ingame called Freelancers, not to be confused with the Freelancer mod) are an additional, faction-independent troop tree which offers a variety of units for all purposes, yet not as specialized as the equivalent faction units.
In return each units is customizable in their gear by talking to them in the Party view and selecting "I would like to select your equipment.". On the appearing inventory screen you can drag the gear from the right panel into the left one (CTRL-click is a fast way of doing this) or the other way around. After exiting this screen, all the units of the selected troop type will automatically select the best choice for their purpose from items that were placed in the left panel.
For some reason archers select equipment randomly, which can make things confusing.
Note: that you should ignore the equipment slots in the middle. Every item that is placed in them will be removed and is gone forever after you exit the inventory screen.
With this mechanic you can customize them to whatever you want them to look like or to use as weapons. For example you could have your Archers carry two quivers instead of the default shield or even let them run around naked. Remember though, without the proper gear for their specific purpose, they will be mostly useless in battle.
Sigmund is the recruiter from which all Freelancer units are recruited. He can be found at random in a tavern of a town and offers each week a random number (between 10 and 20) of recruits to hire. Additionally he offers some information about the customizable gear system and also is for hire to reside in your court for a fee of 10,000 denars. If you do not have a town or a castle fief yet, he can also reside in any town's tavern and will ask you to specify which one. After this you can send him to other towns too but when you send him to your court, he will stay there forever and cannot be send somewhere else again (though he is as easily accessable as your other court members anyway).
Note: In Floris 2.5, even after hiring him, he still offers you the same choice to hire him. Do not do this since it will only cost you another 10,000 denars but will not change anything.