Putting together an advisory agreement with clients is one of the most important parts of a registered advisory firm. It is a contract, an agreement between you (the advisory firm) and your customers. By executing an agreement with a customer, you are giving yourself legal responsibilities to fulfill.
This article discusses many of the issues facing investment advisory firms in designing these agreements.
The executed agreement between the firm and a client defines and establishes the relationship between the two parties. Most states, if not all, require that advisors memorialize their agreement in writing through an advisory contract. Believe it or not, the SEC does not require that advisory "agreements" be in writing. However, no firm that deals with the general public does that (or if some do, they shouldn't.)
Two guidelines that should always be followed when formulating or reviewing an agreement for use are that the he advisory agreement should not be inconsistent with the firm's regulatory filings (e.g., Form ADV) and not be in conflict relevant laws and regulations.
Provisions of the Agreement
The agreement should delineate the terms and provisions of the agreement. Most states require that certain provisions be in the agreement and, if you're seeking registration in a state, that state will require those provisions before approving the firm in the state.
Some terms and provisions that are either required or customary in the agreement include:
- The scope of the advisor’s services
- Whether the advisor will have discretionary authority and, if so, any applicable limits
- Whether the advisory has proxy voting authority
- The agreed upon fees
- Termination provisions
- Dispute resolution provisions
- How and in what manner the contract may be amended
The items listed above are not exhaustive; there are many other provisions and terms that can included in the agreement. Just as important as what's in the agreement is what's not in the agreement. Both state and the SEC rules have prohibitions against hedge clauses, assignment without consent of the client and certain statements about performance fees.
In other articles, we will discuss other information about advisory agreements.
