Working with a financial professional can offer numerous benefits when you need clarity or guidance on managing your money and investments. Once you have decided to engage the services of a financial advisor rather than a financial planner or another type of financial professional, you may be asked to sign an investment advisory agreement. This agreement spells out the scope and terms of the services your financial advisor will offer, as well as any authority you give them to manage your financial accounts. Knowing what’s in the typical agreement can help you better understand what you’re signing off on when working with a financial advisor.
An investment advisory agreement outlines the terms under which you contract a financial advisor’s services. This agreement is meant to be a blueprint of sorts for you as the client because it spells out both what the financial advisor will do you for you, such as provide general advice or recommend specific investment moves for your portfolio, as well as what your responsibilities are.
Typically, this agreement is a written document that you must date and sign for it to take effect. How complex an investment advisory agreement is and what it includes can vary from one advisory firm to the next.
Every investment advisory agreement is structured differently. It’s important to understand how to read these agreements, but you should have a lawyer look over the agreement before you move forward so that you are protected. Generally, here’s what you can expect to see when reviewing the agreement your financial advisor provides, broken down by individual sections you’re likely to see.
This section usually comes at the top of an investment advisory agreement. It basically says that you and the financial advisor are entering into an agreement in which you’re contracting their services. This is a generic section that outlines what the document is, what parties are involved and what type of agreement you are entering into.
The terms of the agreement section refer to when your relationship with the financial advisor begins and how long it’s expected to last. Unless you have a firm end date for working with the advisor, this section may say something to the effect that the agreement will remain in place until mutually terminated by both of you.
This section may also specify how the agreement can be terminated. For example, you may need to send a written request. It may also mention what portion of the fees you’ve paid may be refunded to you if any.
This section can also be referred to as “Advisory Services” or “Scope of Services”. But generally, this is where the advisor will lay out exactly what services they’re providing to you. The advisor can also include mention of any services they won’t offer.
It’s important to read this section carefully so you understand exactly what you’re paying for so there are no misunderstandings. For example, you may be expecting your advisor to offer investment advice for investments you own that the advisor isn’t managing. But if your agreement specifically says they don’t do that, then that’s something you want to know upfront.
After the description of advisory services, the compensation and fees may be the second-most important part of your investment advisory agreement. Here is where you can see how your advisor is compensated and how much you’ll pay for their services.
This is important, specifically because you need to understand whether you’re dealing with a fee-based or fee-only advisor. Fee-based advisors earn commissions on the products they sell while fee-only advisors only charge fees for the services they provide. Fee-only advisors follow a fiduciary standard which means they can only offer advice that’s in your best interest.
If your advisor is a fiduciary, your agreement may have another section that includes a fiduciary oath. This section emphasizes that you’re working with a fiduciary and that the advisor is bound to act in your best interests at all times when offering financial advice or managing your accounts.
As a client, there are certain things your financial advisor may hold you accountable for as part of your working agreement. For example, you may be responsible for providing your advisor with information about your financial accounts in a timely manner.
This section of your investment advisory agreement may also ask you to recognize that past performance is not an indicator of future results and that you don’t hold the advisor responsible for any losses you experience in your portfolio.
One of the questions you should get answers to is how your information will be kept confidential and be managed. This section may mention again what your responsibilities are for reporting your information and it can also include what the financial advisor does with the information it receives from you.
If the financial advisor has any potential conflicts of interest, those may be disclosed in their own section of your advisory agreement. You can also check for potential conflicts of interest by reviewing an advisor’s Form ADV on the SEC’s Investment Advisor Public Disclosure website.
Your agreement may also include a section specifying which of your accounts or assets are to be managed by the advisor. To fill out this section, you’ll need to include the name on the account, the account type and the account number. Remember, any assets not specified in the agreement may be beyond the scope of what your advisor will manage.
The above are the most important things to note when reviewing your investment advisory agreement. But your agreement may also include sections for the following:
At the end of this document, you’ll also see a place for you to sign and date the agreement. Your advisor will also sign and date it. By signing off on the agreement, you’re acknowledging that you receive, accept and agree to the terms outlined in the document.
An investment advisory agreement can be useful to have so you fully understand what your financial advisor will do for you. But don’t skim it over and sign without reading through it first. Doing so can be time-consuming but it can help you avoid headaches down the line. And if there’s something in the agreement that you don’t understand, don’t hesitate to ask your advisor for a detailed explanation.
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Rebecca Lake, CEPF®Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children. Rebecca also holds the Certified Educator in Personal Finance (CEPF®) designation.
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