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Things to Include in a Financial Advisory Agreement

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When looking for a suitable financial advisor to manage your finances, most people tend to look at the fee structure, working model, reviews and feedback, and professional compatibility. While all of these factors are essential, there is another component that you must pay attention to. Before entrusting someone with your financial future, it is essential to clearly understand the terms and conditions that will administer your relationship. The financial advisory agreement is one of the most important documents in an investor-advisor relationship. This legal document outlines the services, fees, and responsibilities of both the advisor and client. 

You can discuss the components of a financial advisory agreement with your financial advisor to know more. This article will discuss the key elements that should be included in a financial advisory agreement to ensure you are fully informed and protected.

What is a financial advisory agreement?

A financial advisory agreement is a legal document that clarifies and states the terms and conditions of the relationship between a financial advisor and their client. It establishes the scope of the financial advisor's services, such as investment management, retirement planning, tax planning, estate planning, debt management, and others. It also mentions the fees they will charge and the precise model and frequency for it. For instance, some financial advisors charge a percentage of the client's Assets under Management (AUM), while others may charge a monthly or hourly fee. 

A financial advisory agreement is essential for anyone seeking financial advice, as it ensures that the client and the financial advisor are on the same page. It can help prevent misunderstandings or disagreements and ensure a smooth association between the parties.

The financial advisory agreement template

The financial advisory agreement template is simple and straightforward and typically contains the following details:

  • The name of the financial advisor and the client
  • The date of signing the agreement
  • The period for which the agreement is valid, such as a year or a month
  • The business addresses of the client and the financial advisor

The agreement will also have other contract components that will lay down the foundation of the professional association between the financial advisor and the client. At the end of the document, there will be two sections for signatures. Both parties are expected to sign the agreement and keep a copy each for future use and reference. 

11 financial advisory agreement requirements

A financial advisory agreement contains the following key components:

1. The agreement

The first component of the document is the agreement. This part states that you and the financial advisor are willingly entering into a contract. The section will include your name and the financial advisor's general details and simply declare the components of your agreement. 

2. The terms of the agreement 

The terms of the agreement include the conditions when the agreement is valid and when it may cease to exist. For instance, it can contain the dates the document was signed and the period for which it stands valid. It will also include the details of the termination of the association between the client and the financial advisor. For example, it could state the agreement will end on a particular date. Or it could express that the agreement will terminate if the client does not pay the financial advisor the fixed amount of fee by the stipulated time. This part of the document could also contain information on refunds that the financial advisor may owe the client in the case of any breach. 

3. The financial advisor’s services

The financial advisory agreement should clearly outline the financial advisor's services, such as investment management, financial planning, tax planning, or retirement planning. It should also detail any limitations on the financial advisor's services. A financial advisor's services can be diverse. Your requirements can also vary. Therefore, it is advised to include the exact list of services in the agreement to avoid conflicts or confusion at a later stage in the association. For example, if the professional offers investment management, the agreement can include details on the exact role of the financial advisor. This can include investment advice, tracking and monitoring, risk management and assessment, rebalancing asset allocation, and more. 

It is essential to have a detailed description of all services to establish the correct flow of communication and expectations from the very start. It is also vital to ensure this section is not vague or ambiguous but clear and concise. 

4. The advisor’s compensation method

The agreement should specify how the advisor will be compensated, such as through a percentage of AUM, an hourly rate, or a flat fee. It should also state how often the fees will be charged and how they will be calculated. For instance, An AUM-based financial advisor charges a percentage of your AUM. So, the higher the value of your total investments, the higher their fee will be. An hourly fee-based financial advisor will charge you by the hour. So, the more time you spend, the more you will pay. A flat-fee financial advisor will charge you per month, quarter, or year. They will not charge any commissions. Some financial advisors may follow a blended fee model that may incorporate some of these features. All of these details should be mentioned in the financial advisory agreement.

The agreement must also include the amount of the fee. For instance, in the AUM-based model, the agreement must mention the percentage of AUM the financial advisor will get as fees. In addition, any commissions or additional costs over and above the base fee must also be mentioned. Another critical detail in this section is the frequency of the fee payment. You may pay the fee every month, annually, or with every session. You can discuss what suits you and then include it in the agreement. 

5. The advisor’s fiduciary duty

A fiduciary duty is a legal obligation that requires the financial advisor, known as the fiduciary, to act in the beneficiary's best interests, in this case, the client. A fiduciary financial advisor is legally bound to work in your best interests. This means that the financial advisor must prioritize your interests over their own and provide suitable and appropriate advice for your specific financial situation and goals. The financial advisor cannot put their interests or the likelihood of earning commissions over your financial well-being.

It is important to note that not all financial advisors are fiduciaries. Likewise, some advisors may claim to be fiduciaries but may not always act in your best interests. It is essential to ask questions about the financial advisor’s qualifications, experience, and credentials to ensure that you hire a trustworthy fiduciary. You can ask for references or read reviews from other clients to understand their track records. Additionally, you can check whether they have any disciplinary actions or complaints filed against them with the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA).

Hiring a fiduciary financial advisor offers you an additional layer of protection concerning your financial security. However, make sure to add this to the financial advisory agreement. The agreement should explicitly state if your financial advisor is a fiduciary or not.


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6. The client’s responsibilities

Since you are about to enter a two-person association, you may have some responsibilities too. These include providing accurate and complete information about your income, goals, debt, etc. You must also promptly notify the advisor of any changes in your financial situation, such as losing a job, inheriting a large sum of money or other financial assets, etc. The agreement should specify your responsibilities and the need to keep the financial advisor updated while being truthful. 

Clients must hold their end of the bargain to ensure the financial advisor has the complete information they need to advise their clients. Hiding financial information can lead to incomplete or incoherent advice and guidance from the financial advisor and ultimately harm you. 

7. The advisor’s managed assets

The financial advisory agreement must contain a list of all the assets a financial advisor manages for you. For instance, if you hire a financial advisor for your 401(k) plan, the agreement must specify this. If you hire a financial advisor for multiple assets, such as mutual funds, cryptocurrencies, stocks, bonds, etc., all of these should be specified in the document. This establishes a clear set of duties and responsibilities for the financial advisor. The agreement should ideally include all assets and accounts the financial advisor manages or monitors for you, including brokerage accounts, retirement accounts, bank accounts, etc. 

8. The advisor’s limitation of liability

The financial advisory agreement should state the advisor's liability limitations and exclusions. It should set forth the extent of the financial advisor's liability in the case of any losses incurred by the client. This clause is usually added to limit the financial advisor's liability in case of losses resulting from their advice or actions.

You need to understand that this section may limit your ability to recover your losses caused by the financial advisor's negligence, breach of fiduciary duty, or any other wrongful conduct. Therefore, it is essential to carefully review and understand the provisions of this section before signing it.

9. Disclosures

The agreement should include disclosures about conflicts of interest, the financial advisor's educational qualifications and certifications, and any disciplinary history like lawsuits, complaints, etc. The agreement specifies these disclosures to ensure clients have access to clear and transparent information about the financial advisor and their professional history.

10. Terms of confidentiality

Matters of finance can be sensitive. Therefore, it is vital to ensure that your private financial information is always kept confidential. The agreement should include a confidentiality clause that specifies how the advisor will protect your personal information, such as bank account numbers, account balances, names of investments, amount of money invested in a particular investment, and more. It is essential to mention that all such information is only shared with the financial advisor for the purpose of work and financial advice. The financial advisor cannot use it for personal gains or any other professional endeavor not mentioned in the financial advisory agreement.

11. A termination clause

A termination clause is a crucial component of a financial advisory agreement as it protects the interests of both the client and the financial advisor and ensures the termination process is straightforward and transparent. The agreement should outline the circumstances under which either party can terminate the contract. This section can include the process for transferring assets and account information in the event of termination. It can also enlist the reasons that can be counted as a breach of the agreement by either party, such as fraud or other illegal acts, etc. 

7 things to pay attention to when reviewing the financial advisory agreement

Here are some things you must keep in mind before you sign the contract:

  1. It is essential to carefully review and understand all disclosures in a financial advisory agreement. 
  2. Ask questions or seek professional legal advice if anything is unclear or confusing. 
  3. Take your time, and do not rush through the contract. Make sure to read every word, as such documents can be twisted to suit the interests of one party. 
  4. Do not enter into an agreement without signing the financial advisory agreement.
  5. Review the agreement to understand the fees and expenses the financial advisor will charge for their services, including hidden costs.
  6. Ensure the advisor is properly licensed and registered with the appropriate regulatory authorities.
  7. Insist on keeping the financial advisory agreement clear, precise, and concise. 

To conclude

A financial advisory agreement is an important document that protects both the client and the financial advisor. It is important to clearly outline the services provided, compensation, fiduciary duty, client responsibilities, termination, confidentiality, limitations of liability, disclosures, and other similar details to ensure all parties accurately understand the agreement. Including these critical components in a financial advisory agreement can help ensure a successful and mutually beneficial relationship between a financial advisor and their client. 

The financial advisory agreement template is more or less the same across the board. So it is easy for clients to spot any inconsistencies, if any. In the case of doubt, you can always consider hiring a legal expert to review the document before signing it. 

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The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice.
A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.