When starting an investment advisory business, having a solid advisory contract is crucial for clearly defining the relationship with clients. A simple investment advisory contract sample can serve as a useful template that covers the key provisions to legally protect both parties. This article will examine the core components that every basic advisory agreement must include, such as services provided, fees and compensation, disclosure of conflicts, and more. Proper drafting of these clauses is vital for investment advisors to avoid liability issues down the road. There are also optional clauses that can be incorporated to tailor the agreement to the specific advisory services offered. Understanding the fundamentals of drafting a compliant advisory contract will equip advisors with the knowledge to create effective client agreements that foster productive partnerships.
Clearly State Services and Advice Provided in investment advisory contract
The services section is arguably the most critical part of an investment advisory contract sample. This clause should outline in detail the specific advisory services, investment recommendations, and planning activities that will be delivered. Basic provisions to cover include:
– Investment management services (e.g. discretionary or non-discretionary account management)
– Financial planning and consulting (e.g. retirement, tax, or estate planning)
– Administrative services (e.g. account monitoring, custody, reporting)
– Any other services pertinent to the advisory relationship
The contract should clearly indicate whether services are tailored or model-based. Defining the scope upfront aligns expectations for both advisor and client. Furthermore, limitations around services not provided should also be explicitly stated to avoid confusion.
Specify Fee Schedule and Billing Method in investment advisory contract
The fees and compensation section outlines how the advisor will be paid for services. Key details to include:
– Fee amount or formula (fixed rate, hourly rate, percentage of AUM)
– Billing frequency (monthly, quarterly, annually)
– Payment methods (deducted from account, invoiced to client)
– Fee discounts or negotiating policies, if any
– Termination fee procedures, if applicable
– Refund policy for pre-paid unearned fees
Advisors must disclose their full fee schedule, avoiding vague ‘fees may apply’ type language. Fee rates can be tiered based on account size. Defining expectations for both invoicing and payment helps avoid confusion. Flexibility can be built in by allowing modifications to the fee schedule upon written client consent.
Specify How investment advisory contract Can Be Terminated
Advisors should outline the conditions under which a client agreement can be terminated in the contract. Typical termination clauses cover:
– Ability for either party to terminate upon x days written notice
– Termination triggers like a material breach of contract
– Post-termination provisions regarding fees, account transitions, final reports
Specifying termination protocols promotes stability by preventing arbitrary cancellations. Reasonable notice periods allow for orderly transfer of assets and records. Including termination fee formulas reduces disputes. Clear termination clauses give clients peace of mind that they can exit an advisory relationship if ever dissatisfied.
Disclose Potential Conflicts of Interest in investment advisory contract
A properly drafted advisory agreement will identify situations where potential conflicts of interest may exist between advisor and client. Common conflicts to disclose include:
– Advisor receives commissions for product sales
– Advisor has financial interest in certain investments recommended
– Advisor serves on board of directors or owns stock in certain companies
– Soft dollar or referral fee arrangements with third parties
Simply stating that conflicts may exist is inadequate – actual or potential conflicts present should be clearly disclosed. Advisors can also describe their policies and procedures for addressing conflicts (e.g. adopting a fiduciary standard, using third party custodians). Transparency around conflicts allows clients to make informed decisions.
Specify Client Reporting in Simple investment advisory contract sample
Advisory contracts should define client reporting processes and frequency. Typical clauses cover:
– Content of periodic statements/reviews (performance results, holdings, transactions)
– Delivery method (paper statements, online portal access)
– Frequency of reports (monthly, quarterly, annually)
– Other reporting like trade confirmations, tax forms, proxies, etc.
Detailing what information will be reported and when gives clients clear performance and account visibility. Standardizing reporting procedures also reduces administrative burdens for advisors. Optional clauses could specify if additional reports are available upon request and any associated fees.
In summary, a simple investment advisory contract requires clear specification of services provided, fee schedule, termination clauses, conflict disclosures, and reporting processes. Additional provisions can address investment authority, liability limitations, governing laws, and more. With the essential components covered, advisors can draft compliant agreements that establish transparency upfront and prevent misunderstandings down the road.