Advisory Contracts

Treat the contract as an operating document

An investment advisory contract is more than a signature page. It records what the adviser has agreed to do, what the client will pay, who may make investment decisions, how the relationship can end, and what happens when the parties or services change. A contract should be read alongside the Form ADV brochure, account documents, and any applicable state or federal rule. A brochure explains the firm's practices; the contract creates the client-specific agreement.

The first question is identity. Which legal entity is contracting? Which supervised person will provide advice? Is another adviser or solicitor involved? A familiar brand name may cover several entities, and the registration status of one affiliate does not automatically establish the status of another. Confirming the contracting party helps the client understand who owes the contractual obligations and where notices should go.

Next identify scope. An adviser may provide ongoing portfolio management, a one-time plan, advice limited to specified assets, or recommendations about other managers. The word ‘advice’ alone does not tell a client whether the adviser monitors the account continuously or only when asked. The agreement should describe the work and any limits. A client whose account is not included in the mandate should not assume the adviser is monitoring it.

Fees and conflicts belong in the analysis

Determine the fee basis: a percentage of assets, hourly billing, a fixed planning charge, a subscription, commissions, or another arrangement. For an asset-based fee, the agreement should identify how assets are valued, when fees are assessed, whether cash is included, and how partial periods are handled. A fee that sounds small as a percentage can be meaningful in dollars. For example, 1% on $400,000 is $4,000 per year before compounding or any other charge.

Ask whether the adviser or an affiliate receives compensation from product providers, broker-dealers, custodians, or referral sources. A contract may describe direct fees while the brochure explains indirect compensation and conflicts. If the adviser can recommend a proprietary product or earn more from one investment, the client needs enough information to understand the incentive. Disclosure should identify the conflict clearly; vague language may not describe a known arrangement adequately.

A contract's fee clause should also make billing mechanics understandable. Is the fee deducted from an account, paid by invoice, or charged to a credit card? Is it billed in advance or arrears? How are deposits and withdrawals treated? If the adviser uses quarter-end value, a $50,000 contribution made the day before quarter-end could change the calculation. A worked example using the stated method can expose ambiguities before a dispute arises.

Do not infer that a fee arrangement is unlawful simply because it is asset based, hourly, or commission related. Instead, assess disclosure, conflicts, applicable restrictions, and whether the adviser is acting consistently with the agreed services and fiduciary obligations. Performance-based compensation has a separate federal restriction and eligibility framework. A contract cannot make a prohibited fee permissible merely by obtaining a client's signature.

Authority and discretion

A client may authorize the adviser to select investments without seeking approval for each trade. That is discretionary authority. It should be distinguished from limited authority to place trades after the client chooses the security, quantity, and timing. The agreement and custodian paperwork should match the arrangement. An adviser should not treat permission to execute a client-directed trade as permission to redesign the portfolio.

If discretion is granted, determine its boundaries: account or assets covered, investment restrictions, liquidity needs, concentration limits, and whether the adviser can hire a subadviser. A client might authorize discretion for a retirement account while keeping a separate account self-directed. The contract should not be read as granting control over all of the client's finances unless it says so and the client intends that scope.

Authority to withdraw fees or pay expenses can have custody implications under applicable rules, even if the adviser does not hold the securities. Fee deduction is not the same as unrestricted access to client funds, but custody analysis depends on the specific legal definition and current exceptions. A contract’s authorization should be compared with the actual account setup and regulatory requirements. Avoid assuming that a contractual label determines custody status.

Term, termination, and assignment

Review when services start, whether the relationship renews automatically, and how either side can terminate. A practical contract states how to provide notice and how prepaid fees or accrued charges will be handled. If a client terminates halfway through a billing period, the refund formula should be clear. Some rules impose specific requirements on contracts or fees; others may depend on state law or the type of adviser.

Assignment occurs when an adviser transfers the contract or a client’s relationship in a way treated as an assignment under applicable law. A change in control, ownership, or key personnel can raise assignment issues even if the firm's name remains the same. Under federal law, an advisory contract generally cannot be assigned without the client's consent. The statutory definition and exceptions matter, so examine the transaction rather than relying on a company’s label.

Suppose a small advisory firm is sold to a bank, but the portfolio team remains in place. The client should not assume the change is immaterial. The new owner may have different conflicts, services, or business incentives. Determine whether the transaction is an assignment under the applicable law and whether consent is required. If consent is needed, it should be obtained in the required manner rather than inferred from the client's silence unless the rule permits that process.

Fiduciary limits on contract language

A contract cannot simply declare that the adviser has no fiduciary duty while the adviser continues to exercise investment discretion or provide fiduciary advice. The relationship and conduct matter. Waivers of compliance with the Advisers Act are generally void under the Act's §215 framework. A provision that purports to excuse fraud or eliminate statutory duties should be scrutinized under applicable law.

This does not mean every limitation in a contract is invalid. The parties may define a limited engagement, exclude specified assets, or allocate responsibility for tasks the adviser does not perform, provided the arrangement is lawful and accurately disclosed. For example, a planning engagement may state that the adviser does not prepare tax returns. That scope limit differs from a clause excusing the adviser from care in the financial analysis it agreed to provide.

Read disclaimer language in context. A statement that investment returns are not guaranteed can accurately explain market risk. A statement that the adviser has no responsibility for misleading recommendations would raise a different issue. A client may accept investment risk, but acceptance does not automatically waive legal obligations relating to truthful disclosure, reasonable care, conflicts, or contractual performance.

Worked contract review

Suppose a household pays 0.90% on managed assets. The adviser will choose securities and rebalance quarterly, but the contract says cash is excluded from billing. The brochure describes a 1.10% fee when cash is included and says the adviser may receive compensation from affiliated funds. The client should ask which fee applies, whether the contract or brochure controls, how cash is treated, and how affiliate compensation affects recommendations. The mismatch needs clarification before the client assumes the lower cost.

Suppose a client later learns that the firm was acquired and the adviser started recommending a new affiliated fund. Analyze separate issues: did the acquisition constitute an assignment requiring consent; did the firm deliver updated disclosure about the new conflict; does the fund fit the client's objectives and costs; and did the adviser follow the contract's investment restrictions? One business event can raise contract, disclosure, and fiduciary questions without automatically proving a violation.

A client terminates after six weeks of a quarter billed in advance. If the contract says fees are prorated by calendar day, calculate the unused period under that method and compare the refund to the account statement. If the language is silent, do not invent a universal refund rule. Determine the agreement, governing law, and any regulatory requirement. The exam may test the principle of reading the stated terms rather than a particular arithmetic convention.

Contract review checklist

Before signing, identify the contracting entity, the services, the assets covered, the adviser’s authority, the fee calculation, additional compensation, conflicts, reporting frequency, termination procedure, and assignment provisions. Compare the contract against the brochure and account authorization. Ask which document governs if a clause conflicts. Keep copies of the signed agreement and disclosures, and retain later amendments.

When a provision is unclear, ask for an explanation in writing. ‘Reasonable expenses’ may cover a broad range unless defined. ‘Discretionary management’ should not leave the client guessing about who selects investments. ‘Annual review’ may mean a meeting, a portfolio check, or an updated plan; the contract can clarify the promised service. These questions are practical because a dispute often begins with different expectations about what the adviser agreed to do.

For exam questions, sort each fact into contract formation, scope, fee, authority, assignment, or termination. Then ask whether a statutory rule limits the term. This helps distinguish a merely unfavorable bargain from an unlawful waiver or an undisclosed conflict. The best answer is usually the one that identifies the controlling obligation and the missing fact, not one that treats every contract clause as automatically binding or automatically void.

Advisory contracts also create a record of the client's instructions. If a client prohibits a particular issuer or needs a large cash reserve, the restriction should be transmitted into the operational portfolio process. A restriction that appears in an email but not in the investment system may be overlooked. The adviser should reconcile written instructions, contract scope, and trading controls so that day-to-day practice follows the agreement.

The agreement should be revisited when circumstances change. A new account, inheritance, liquidity need, change in employment, or revised objective can make an old mandate unsuitable. The client and adviser may update scope or restrictions through an amendment. An old signed form is not a substitute for current information about the client's needs and the services actually being provided.

Finally, distinguish a contract dispute from a regulatory violation. Failure to perform a promised service can support contractual arguments. A misleading fee statement may implicate antifraud and disclosure standards. An unauthorized trade can raise authority and custody questions. The same facts can support more than one theory, but each theory has its own elements, defenses, and remedy. Use the agreement as evidence of the relationship, then apply the relevant legal rule.

Consent matters when the adviser changes the arrangement. A client who signs an updated fee schedule has agreed to a different economic term; a client who receives a brochure describing the fee has not necessarily amended the contract. Review whether the agreement requires a signed amendment or permits another method. Firms should preserve evidence of the client's assent, and clients should compare the revised document with prior terms rather than relying on a verbal description of the change.

A useful meeting exercise is to translate each clause into a concrete event. If the firm says it will rebalance quarterly, ask what happens when the portfolio drifts sharply in between. If the adviser may use subadvisers, ask who selects them and how their fees are disclosed. If the client pays an hourly planning fee, ask which deliverables are included and whether follow-up questions are billed. Concrete examples reveal whether both parties attach the same meaning to the contract's language.