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How to Write a Model Investment Advisory Agreement: CFDD 2011

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Protect yourself through clarity. Bruce Ashton, ERISA attorney with Drinker Biddle, stressed to attendees at the Center for Due Diligence’s 2011 conference on Monday that while disclosures must be written, agreements don’t necessarily have to be; still, having a written document with services you provide—and perhaps more importantly, services you don’t provide—is valuable. In fact, “from the standpoint of establishing a service relationship, written agreements are essential,” Ashton said.

Advisors should resist the temptation to simply rehash their normal wealth management agreements, according to Ashton. While they may be able to use these documents as a base, they must be modified to avoid automatically creating prohibited transactions.

Reasonable is an attorney’s favorite word, Ashton joked, because he can define it however he wants. For advisors, though, that lack of definition presents a challenge. To try to counter that, advisors should spell out in their agreements exactly what they do and don’t do. For example, if an advisor doesn’t offer tax guidance, it should be clearly stated in the agreement.

Arbitration clauses are another “essential” clause in an effective agreement, Ashton said, though he acknowledged that some clients may be turned off by such a clause. Even if advisors don’t include an arbitration clause, they should consider a venue clause. Then, in the event of a conflict, they don’t have to travel to defend their firm.

Additionally, written agreements should identify which state law applies to the contract.

Gary Sutherland, CEO of NALPIA, urged advisors to be aware of their protections.

“You can’t just wonder about coverages,” he said. “You have to know. If you have the ability to steal from the plan, you should be bonded.”