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Regulation and Compliance > State Regulation

8 Issues to Address in Your Advisory Contracts

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Investment advisory contracts (and most contracts, in general) are typically long, laborious and full of legalese. Paid-by-the-word attorneys have to pay for their silk ties somehow, right? If drafted properly, however, such contracts can also be immensely helpful in clarifying roles and responsibilities between the advisor and the client, and will hopefully decrease the likelihood of future disputes due to misinterpretations. 

All investment advisory contracts must meet the requirements of Section 205 of the Advisers Act, but that’s not what this article is about. If you’d like to learn more about hedge clause and assignment restrictions contained in Section 205, for example, check out these two prior articles here and here.

NASAA also put together a handy model rule for investment advisory contracts, which can be found here.

What this article is about is the standardized boilerplate that may appear in your advisory contract, as well as some suggested items and clauses that would be a good idea to include.

Entire Agreement
The contract should speak for itself; if it ain’t in the contract, the parties didn’t agree to it.

This clause is intended to eliminate one party’s argument that an oral conversation, side letter, prior understanding or some other arrangement is what the parties agreed to. A related but sometimes distinct clause requires any amendments or superseding contracts to be in writing and signed by both parties.

Just because a party doesn’t hold the other party accountable for a particular breach of the contract doesn’t mean she is prevented from enforcing that same breach should it happen again, or from enforcing other provisions of the contract at her discretion.
In other words, no waiver of rights has occurred. 

If the advisor and the client do not physically sign the same copy of the contract, a counterparts clause simply clarifies that the contract is still enforceable and the disparate signatures are integrated into one signature page. 
Just use a digital signature service already and moot the need for this clause. 

This clause contains the contact information of the parties, and spells out how each party is to make formal notifications should they need to (e.g. notifications of termination, assignment, fee changes, etc.).

A notices clause is important because it sets communication expectations and degrees of formality (e.g. whether email is permitted or certified return-receipt snail mail is required). 

If one section or provision of the agreement is determined to be invalid or unenforceable, a severability clause saves the rest of the contract. It essentially ensures that an isolated screw-up in one area of the contract doesn’t moot the contract overall and provide one party with an automatic “out”.
Trim the contaminate and carry on.

Successors and Assigns
Should one party die or some sort of succession event occur (i.e. a merger, acquisition or assignment), a successors and assigns clause entitles the substituted party to the benefits of the contract and binds him to its obligations.
Given the restrictions on assignment by the advisor under Section 205, successors and assigns must be “permitted” to be valid. 

Force Majeure
If a catastrophic flood sweeps away a client’s house on the day he’s supposed to pay his advisor’s quarterly fee… maybe give him a break. If an advisor gets stuck overseas in a country whose government is in the process of being overthrown… maybe give her a few extra days to rebalance the account.
The point is that there are certain things beyond a party’s control that may prevent performance under the contract, and a force majeure clause allows for that. 

Governing Law
The parties can generally pick which state’s laws govern their contract. Typically this would be the state in which the advisor is located, but could also conceivably be where the client is located or the state of incorporation if the advisor has an incorporated entity. The governing law clause should be closely integrated with the dispute resolution or venue/forum clause, which spells out how and where dispute resolution would occur (e.g. arbitration in Chicago, the Superior Court in Los Angeles, Bob’s E-Z Mediation in Kissimmee… whatever).
It is possible to draft the contract such that a Kentucky court would be tasked with interpreting Nevada law should a dispute arise between a Washington advisor and a Vermont client, but query the sensibility and enforceability of this approach. 

Naturally, a prudent investment advisory contract would include more than mere boilerplate and should describe the services to be provided, responsibilities assumed, fees to be paid, risks of investing, limitations of liability, authorizations granted, and an acknowledgement of receipt of applicable disclosure documents (like the ADV, e.g.). And don’t forget about Section 205 – or for state registered advisors – your particular state’s specific regulations. 

The above boilerplate and advisor-specific provisions are far from an exhaustive list of what could potentially be in a contract, but avoid the temptation to throw in everything but the kitchen sink. No contract is an impenetrable prophylactic to disputes. 


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