An investment advisory contract is an important legal agreement between a financial advisor and their client. It outlines the terms of the advisory relationship, fees, services provided, and legal protections. Having a simple, clearly written contract is beneficial for both advisor and client. This article will provide a sample free investment advisory contract and highlight key elements to include. Properly drafted agreements lead to transparent, productive advisor-client relationships.
Define the scope of services and client needs
The investment advisory contract should clearly define the services the advisor will provide, tailored to the client’s needs and goals. This includes investment management, financial planning, retirement planning, education planning, etc. The contract should state whether the advisor will provide discretionary or non-discretionary management, account monitoring and reporting frequency, rebalancing procedures, and restrictions on types of investments or transactions. Defining the scope upfront ensures both parties understand the relationship and prevents misunderstandings later.
Specify fee structure and payment methods
The contract must disclose how the advisor is compensated, whether by assets under management fee, fixed retainer, hourly rate, or other methods. Fee schedules and formulas should be clearly stated, including how and when fees are calculated and collected. Common fee structures are percentage of AUM, tiered fees based on account size, and flat or hourly rates. The payment methods, such as directly debiting client accounts or separate billing, should also be defined.
Outline fiduciary duty and conflicts of interest
A key section is the advisor’s fiduciary duty to act in the client’s best interest. This sets the relationship apart from one based solely on suitability. The contract should state the advisor will make recommendations and take actions believed to be in the client’s best interest. It should also disclose any potential conflicts of interest, like compensation from proprietary products or third parties. Addressing fiduciary duty and conflicts upfront fosters trust.
Specify account authority and investment restrictions
If the advisor will have discretionary account authority, the contract grants them power to execute trades without prior client approval. Non-discretionary agreements require the client to approve each transaction. Discretionary authority can be faster and more convenient but requires high trust. The contract should also note any client-imposed restrictions on investments or transactions, such as prohibiting margin trading, options, or certain assets.
Include termination provisions and assignability clause
It’s important to cover how the agreement can be terminated, by either party, and how client accounts and assets will subsequently be handled. Typically 30 days advance written notice is required. An assignability clause allows an advisor’s successor to take over the accounts if the advisor retires, becomes incapacitated, or dies. This supports continuity of management.
A simple, clearly written investment advisory contract protects both advisors and clients. Defining services, fees, fiduciary duty, and termination upfront fosters transparent relationships. Advisors should provide agreements that demonstrate their commitment to clients’ best interests.