Hire an Advisor

What We Do

Resources

About Zoe

Find an Advisor

Investing

How To Understand Financial Advisor Contracts

Zoe Team

Sep 23, 2020

6 min read

A financial advisor reviewing a plan with two clients at a table

Key Takeaways

Understand if the agreement is discretionary or non-discretionary to determine how much control you retain over your financial decisions.
Clarify exactly which services—like estate or insurance planning—are included in your fees to avoid unmet expectations.
Ensure the contract clearly outlines fee structures, dispute resolution procedures, and termination terms to protect your interests.

Frequently Asked Questions

What is a financial advisor contract?

It is a legal agreement, often called an Advisory Agreement or IAA, that defines the relationship, services, and obligations between you and your advisor.

Why is a fiduciary advisor important?

A fiduciary is legally bound to act in your best interest, whereas advisors earning commissions may prioritize products that benefit them financially.

What should I check before signing?

Carefully review clauses on fees, confidentiality, limitations of liability, and how to terminate the contract if the relationship ends.

When hiring a financial advisor, understanding the contract is as important as choosing the right advisor for you. Here are eight things to consider about financial advisor contracts.

Once you’ve made it to the point of reviewing financial advisor contracts, you’ll be close to the finish line of hiring your advisor! This step can often be the most confusing part of your advisor search. Understanding how to navigate an advisor agreement is crucial, particularly if you’re unfamiliar with complex legalese. Advisors often refer to their contracts as “Advisor Agreements,” but if also managing assets, it’s an “Investment Advisor Agreement (IAA).

Keep in mind that if your advisor is discussing your Advisory Agreement or IAA, they are referring to your financial advisor contract. A financial advisor contract is intended to outline the details of the agreement and protect your rights as a client, but what is an advisory agreement?

What Are Financial Advisor Contracts?

A financial advisor contract, also known as an advisory agreement, specifies that the advisor is legally required to serve the client’s needs. This agreement outlines the legal relationship between the advisor and the client. It also offers protection to the client, as the advisors can be held responsible if they breach the terms of the agreement. As a client, it’s essential that you carefully read this document before signing on to work with an advisor. If there’s anything that you don’t understand or agree with, it should be clarified or modified before being signed. In this article, you will find specific topics you should carefully review in your financial advisor contract before making the agreement official.

What You Need to Know About Financial Advisor Contracts

1. Discretionary vs. Non-discretionary Agreements

Discretionary agreements allow the financial advisor to decide on the client’s behalf. Non-discretionary agreements, on the other hand, require the clients to approve any decisions before they’re made. These are crucial distinctions, as some people feel comfortable with their advisors making decisions for them, while others don’t.

2. Description of Services aka What You’re Paying For

Your financial advisor contract should specify which services are included and which aren’t. This part of the contract should be very detailed, as you don’t want to have any false expectations of the services that your advisor will provide. Ultimately, you want to be as clear as possible about what you’re paying for.

Examples include financial planning, insurance planning, and estate planning. If your advisor verbally stated the services they would be providing, review the contract to ensure that all the stated services are included in the advisor agreement. If services are missing or you need to clarify what certain services entail, don’t hesitate to reach out to your potential advisor before signing. A fiduciary advisor will be fully transparent regarding their services and what they want to accomplish.

3. Payment

Every financial advisor will have a different payment schedule and expectation. This section is crucial because you don’t want unexpected fees to add up throughout your contract. Some advisors want their clients to pay for providing statements of advice, ongoing financial advice, annual fees, or even additional fees if the client changes their financial strategy. It should also specify if regular portfolio reports are included in these fees. Whether you work with an advisor on an assets under management basis, flat fee subscription model, or other payment type, it should align with what you are comfortable with as a client.

4. Whether or Not They Have Your Best Interest

Fiduciary financial advisors are legally required to work in their client’s best interests. A red flag that your advisor isn’t acting in your best interest is if they are compensated through commissions. Advisors who earn commissions may prioritize selling products or investments that benefit them financially rather than focusing solely on your needs and goals For this reason, hiring a fiduciary advisor can reduce the stress of worrying about alternative motives. Determining whether or not they have your best interest may also affect whether you want a discretionary or non-discretionary agreement.

5. Confidentiality

Your financial advisor contract should also clarify that all your information is confidential. Some confidentiality agreements have a broad prohibition of sharing confidential information. Other agreements, though, may have permitted disclosures of information in certain situations. Make sure that your contract has confidentiality rules that you feel comfortable with.

6. Dispute Resolution Clause

The dispute resolution clause will determine what should happen if the involved parties (you and your advisor) have a dispute. For instance, you and your advisor may agree to attend mediation before taking any legal action. It’s important that this is agreed on before you and your advisor move forward with this contract. In the case of a disagreement in the future, you will be happy that you addressed this in the financial advisor contract.

7. Limitation of Liability Clause

This clause limits the amount the advisor will pay if the client suffers a loss due to their financial advice. The contract should state which liabilities the client will take on and those that they won’t. This is important when buying risky financial products or having a particularly aggressive asset allocation strategy.

8. Termination of Contract

This section should state how both parties can terminate the contract and what fees will be owed. There are different ways a contract can be terminated. Mutual discharge, for example, is when both parties agree to end the contract. Alternatively, a novation is when a new contract is replaced with an old one. There are other options, so make sure this section specifies the rules.

Understand What You’re Getting Into Before Signing

The most crucial part of embarking on any partnership, particularly one tied to your finances, is having clarity and transparency. By reviewing the financial advisor contracts carefully, you’ll better understand the agreement’s details and what to expect from your advisor. If you have any additional questions, our concierge team can help! Reach out to concierge@zoefin.com.

When hiring a financial advisor, understanding the contract is as important as choosing the right advisor for you. Here are eight things to consider about financial advisor contracts.

What Are Financial Advisor Contracts?

What You Need to Know About Financial Advisor Contracts

1. Discretionary vs. Non-discretionary Agreements

2. Description of Services aka What You’re Paying For

3. Payment

4. Whether or Not They Have Your Best Interest

5. Confidentiality

6. Dispute Resolution Clause

7. Limitation of Liability Clause

8. Termination of Contract

Understand What You’re Getting Into Before Signing

Disclosures: Zoe Financial, Inc. ("Zoe Financial") is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Zoe Financial provides investment advisory services and access to independent registered investment advisers through its platform. The information provided by Zoe Financial is for educational and informational purposes only and should not be construed as personalized investment advice or as an offer to buy or sell any security. All investments involve risk, including possible loss of principal. Past performance is not indicative of future results. Clients should consult with their own financial, tax, or legal professionals before making any investment decisions. The material presented by Zoe Financial is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product. Material presented has been gathered from sources believed to be reliable, however Adviser cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Past performance is no guarantee of future results. Zoe Financial does not provide legal or tax advice, and nothing contained in these materials should be taken as legal or tax advice. SEC Registration does not constitute an endorsement of Zoe Financial by the SEC nor does it indicate that Zoe Financial has attained a particular level of skill or ability. The sole purpose of this material is to inform, and it in no way is intended to be an offer or solicitation to purchase or sell any security, other investment or service, or to attract any funds or deposits. Investments mentioned may not be appropriate for all clients. Before making any investment, each investor should carefully consider the risks associated with the investment, as discussed in the applicable offering memorandum, and make a determination based upon their own particular circumstances, that the investment is consistent with their investment objectives and risk tolerance. Lower expenses do not guarantee better investment performance. Certain information contained herein may constitute forward-looking statements. Due to various risks and uncertainties, actual events, results or the performance of a fund may differ materially from those reflected or contemplated in such forward-looking statements.

Disclosure: This page is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.

Investment advisory services are provided by Zoe Financial, Inc. (Zoe Financial), an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. Learn more about Zoe Financial on the SEC’s Investment Adviser Public Disclosure website. Brokerage services are provided by Zoe Securities LLC and Apex Clearing Corporation, members of the Financial Industry Regulatory Authority Inc. (FINRA) and Securities Investor Protection Corporation (SIPC). Learn more about Zoe Securities and Apex on FINRA’s BrokerCheck website.

The information in the visuals above is for illustrative purposes only and does not represent an actual user's account, balance, or return. Zoe Financial does not provide tax or legal advice.

Explore the Zoe Wealth Platform with AI

Some of this content may have been generated with the assistance of AI. Please review and sense-check all outputs, as AI tools can occasionally produce incomplete or inaccurate information.
In certain situations, you may be required to disclose that the content was “generated by AI.” Please confirm any specific disclosure or labelling requirements with Compliance.

(646) 680-9244

support@zoefin.com

666 Third Ave, 6th Floor
New York, NY, 10017