An investment advisory agreement is a crucial legal contract between an investment advisor and its client. It outlines the rights, responsibilities and services to be provided by the advisor. With the rising popularity of robo-advisors and online investment platforms, more retail investors are signing these agreements. However, investment advisory agreements contain complex legal terminology and provisions that are not easily understood by average investors. Therefore, it is important to carefully review the agreement template and negotiate favorable terms before signing. This article will analyze the key elements in a typical investment advisory agreement template, and provide useful strategies for retail investors to negotiate better contractual terms.
Core Services and Fees Structure in Advisory Agreement
The investment advisory agreement template will specify the core services provided by the advisor, which usually includes portfolio management, financial planning, retirement planning and tax advice. The agreement should clearly state whether the services are discretionary or non-discretionary. For discretionary services, the advisor has full authority to buy and sell investments on behalf of the client without consent. For non-discretionary services, the advisor can only provide recommendations and execute upon client approval. The fee structure is another critical component. Most agreements adopt an asset-based fee model, charging a percentage fee on assets under management (AUM). Typical fee rates range from 0.5% to 2.0% depending on AUM size and services rendered. Some agreements also include performance-based fees on investment profits generated.
Custody Arrangements and Standard of Care
A key consideration is whether the advisor will have custody of client assets. Retail investors should avoid granting custody rights to advisors unless absolutely necessary, as it increases risks of fraud and mismanagement. If custody by advisor is unavoidable, insist on strict audit and reporting requirements as safeguards. The standard of care imposed on the advisor is also vital. Most agreements only require the advisor to act in ‘good faith’, which is a low bar. Aim to negotiate for a higher ‘fiduciary’ standard requiring advisors to place client interests first at all times.
Termination Clauses and Assignment Rights
Investment advisory agreements are often perpetual without a fixed term, so termination clauses are important. Retail investors should bargain for termination without cause on 30 days written notice, avoiding lock-in periods. Assignment clauses allow the advisor to transfer the agreement to third parties, creating uncertainty. Restrict assignability without consent, or prohibit outright. Confidentiality, non-compete clauses and governing laws also deserve scrutiny before signing.
In summary, investment advisory agreement templates contain many complex provisions impacting investor rights. Retail investors should carefully review all terms, understand fee structures, negotiate better standard of care and termination rights before entering into these legally binding contracts. Assistance from professionals may be required to secure favorable contractual terms.