When you really want to work with a financial professional like a financial advisor it can bring you a lot of benefits . But before you get into this partnership you might be asked to sign an investment advisory agreement What is this agreement it is actually like a roadmap that outlines the scope of services your financial advisor will provide and any authority they will have in managing your financial accounts . Knowing what’s in this agreement is crucial to know what you’re getting into when working with a financial advisor.
Investment Advisory Agreement Explained
An investment advisory agreement is actually a document that presents the terms of the services you are getting with a financial advisor . It’s really designed to give you a clear understanding of what the financial advisor will do and what your responsibilities as the client are.
Typically this agreement is a written document that you need to date and sign to make it effective . The complexity and content of an investment advisory agreement can vary from one to another.
What’s In an Investment Advisory Agreement?
Every investment advisory agreement is unique in its structure . It’s important to know how to read these agreements and it’s advisable to have a lawyer review the agreement to ensure your protection . However here’s a general breakdown of what you can expect to find when reviewing the agreement provided by your financial advisor.
This section usually appears at the very beginning of an investment advisory agreement . It simply states that you and the financial advisor are entering into an agreement where you’re engaging their services . It outlines the document’s purpose , the parties involved and the type of agreement you’re entering into.
Terms of Agreement
The terms of the agreement section define the start date of your relationship with the financial advisor and how long it’s expected to last . If you don’t have a specific end date the section may state that the agreement will remain in place until mutually terminated by both parties.
This section may also explain how the agreement can be terminated such as through a written request . It might mention any refund of fees you’re entitled to if the agreement is terminated.
Description of Services
This section , also known as “Advisory Services” or “Scope of Services” outlines the specific services that your advisor will provide . It may also mention any services that are explicitly not offered.
It’s essential to carefully read this section to understand what you’re paying for to avoid any misunderstandings . For example if you expect your advisor to provide investment advice on assets they don’t manage but the agreement states otherwise it’s crucial to know this upfront.
Compensation and Fees
Following the description of advisory services the compensation and fees section becomes crucial in your investment advisory agreement . Here you’ll find information about how your advisor will be compensated and how much you’ll need to pay .
This section is particularly important because it determines whether your advisor is fee based or fee only . Fee based advisors earn commissions from the products they sell while fee only advisors solely charge fees for the services they provide . Fee only advisors adhere to a fiduciary standard meaning they must always act in your best interest.
If your advisor is a fiduciary your agreement may include a separate section with a fiduciary oath . This emphasizes that your advisor is bound to act in your best interests when providing financial advice or managing your accounts.
As a client there are certain responsibilities that may be outlined in your investment advisory agreement . For example you may be required to provide your advisor with timely information about your financial accounts.
This section of the agreement may also include a statements recognizing that past performance is not indicative of future results and that you won’t hold the advisor responsible for any losses in your portfolio or something like that .
Privacy and Information Management
It’s important to understand how your information will be handled and kept confidential . This section may reiterate your responsibilities in reporting information and outline what the financial advisor will do with the information they receive from you.
Potential Conflicts of Interest
If your financial advisor has any potential conflicts of interest these should be disclosed in a dedicated section of your advisory agreement . You can also check for potential conflicts by reviewing your advisor’s Form ADV on the SEC’s Investment Advisor Public Disclosure website.
Your agreement may include a section specifying which of your accounts or assets will be managed by the advisor . To complete this section you’ll need to provide the account name , type and number . Keep in mind that any assets not specified in the agreement would be beyond the scope of what your advisor will manage.
In conclusion an investment advisory agreement really is a valuable tool that will help you understand the services your financial advisor provides . It’s real important not to rush things through but to take the time to read and comprehend it . If there’s something you don’t understand don’t think twice to ask about it . Taking these steps can save you headaches down the road and ensure a smoother working relationship with your financial advisor.