An investment advisory contract is an important document between an investment advisor and their client. It outlines the terms of their relationship, including services provided, fees charged, and parties’ responsibilities. When entering into an advisory agreement, it’s crucial for both advisor and client to understand key elements like:
Scope of services – What specific investment services, advice, and activities are covered. This defines the advisor’s duties.
Fees and compensation – How much does the advisor charge, how are fees calculated and collected. Common fee structures are assets under management percentage, hourly rates, or fixed fees.
Length of agreement – Is it an open-ended or fixed-term arrangement. Terms like 30 days notice for termination should be included.
Disclosures – Advisor should disclose any potential conflicts of interest, affiliations with brokerages or other parties.
When drafting an investment advisory contract, advisors must follow SEC and state regulations. Reviewing samples helps tailor agreements to your specific needs. It’s ideal to consult a legal professional when creating your document.
Define the scope of investment advisory services in the contract
The investment advisory agreement should explicitly define what services, advice and responsibilities the advisor will provide, and which types of investments or accounts are covered under the contract terms. This scope section protects both advisor and client by managing expectations.
Typical provisions include discretionary or non-discretionary account management, financial planning, portfolio construction, securities analysis and selection, regular reporting, and account monitoring. Make sure the scope aligns with the advisor’s abilities and credentials.
Also specify any services not covered, like legal or tax advice, or explicit timing guarantees. Defining the scope upfront prevents confusion down the road.
Specify fee schedule and payment logistics in detail
The fees and compensation section is crucial for avoiding disputes. It should outline:
– Fee structure – Common models are percentage of assets under management, hourly rates, fixed project fees.
– Fee rates and schedules – Percentage amount charged, minimum account size, tiered rates if applicable. Any fee discounts should be noted.
– Payment timing – When are fees charged and collected, monthly, quarterly, annually.
– Billing procedures – How will the client be invoiced.
– Other client expenses – Additional trading, custodian, brokerage fees that may apply.
– Fee changes policy – Under what conditions fees can be increased or modified.
All fee details, calculations, and examples should be disclosed in a transparent manner. Advisors must follow SEC rules around performance fees.
Specify the length of agreement and termination conditions
The contract should define the length of the advisory relationship agreement – whether it’s open-ended or for a fixed term of months or years.
Open-ended agreements allow the flexibility to continue the arrangement indefinitely. They require language about termination policies and notice periods for ending the contract, often 30 days written notice from either party.
Fixed-term agreements end on a defined date unless renewed. These are common for one-time financial plans. Include whether renewal happens automatically or requires consent.
Specifying the length prevents confusion about when services end or require renewal. Termination policies protect the advisor if a client departs unexpectedly.
Include required advisor disclosures about conflicts of interest
Reputable advisors disclose potential conflicts of interest that could influence their advice. Common disclosures include:
– If they earn commissions for selling certain products
– Affiliations with brokerages, insurance companies or other financial entities
– Any proprietary products or investments they have a stake in
– Referral arrangements with other professionals
– Any other substantial client they advise or represent
Required by SEC rules, these disclosures demonstrate the advisor prioritizes ethics and transparency. They reveal potential biases clients should consider when receiving recommendations.
Specify how client information and records will be handled
Advisors access extensive sensitive client information – account details, SSN, financial history, etc. The agreement should outline policies for securing and maintaining confidentiality of this data.
Privacy and information security provisions could include:
– Not sharing info except as needed to perform agreed services
– Storage and transmission security protocols
– Access limitations and employee confidentiality training
– Client right to review stored personal information
– Data retention and destruction policies after contract ends
Clear security provisions build trust and satisfy advisor compliance duties.
Reviewing investment advisory contract samples helps advisors draft agreements that align with a client’s needs while protecting their practice. Key elements to outline include service scope, fee schedule, length of agreement, terminations policies, required disclosures, and information security protocols. Legal guidance ensures provisions follow industry regulations.