Investing
Zoe Team
6 min read
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.
It is an agreement describing the services, fees, responsibilities, and other terms of your relationship with a financial advisor. An agreement covering investment advice or portfolio management is commonly called an investment advisory agreement.
Review the services, total costs, decision-making authority, conflicts of interest, and cancellation process. Also read the provisions covering disputes and liability. Ask for clarification on unclear language, and make sure agreed changes appear in the final documents. Source: Investor.gov
Ask whether the proposed fee is negotiable and what services it covers. Compare the written offer with the firm’s fee disclosures. A lower fee is only useful if the service still meets your needs.
Check the agreement’s termination provision and applicable rules. The notice method, effective date, final charges, and treatment of prepaid fees can differ. Do not assume there is a universal penalty-free cancellation period.
Do not assume that it does. Ask the advisor and receiving firm which holdings can transfer, which may need to be sold, and whether restrictions, charges, or tax consequences could affect the transition.
Ask the advisor to explain a sample bill, the services you will receive, and the steps for ending the relationship. Use our first advisor meeting checklist to organize your remaining questions.
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?
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
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.
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.
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.
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.
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.
The dispute resolution clause determines what happens 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 to agree on this before you and your advisor move forward with the contract. If a disagreement arises later, you will be glad you addressed it in the financial advisor contract.
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.
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.
A financial advisor contract should explain what you will receive, what you will pay, what decisions the advisor can make, and how the relationship can end. When comparing advisors, review these terms side by side rather than comparing the quoted fee alone.
Read the agreement alongside the firm’s Form ADV Part 2 brochure and relationship summary, where applicable. Ask the advisor to explain any differences between those documents and what you were told during your meetings. Source: Investor.gov
Contract term | What to compare | Question to ask |
|---|---|---|
Services | Investment management, financial planning, meeting frequency and exclusions | “Which services are included, and which cost extra?” |
Decision-making authority | Whether the advisor can trade without your approval and any limits on that authority | “Which decisions require my approval?” |
Advisory fees | Percentage, flat, hourly or subscription charges; minimum fees; billing frequency | “Can you show me an example bill using my account size?” |
Additional expenses | Investment expenses, custody charges, transaction costs and other third-party fees | “What could I pay beyond your advisory fee?” |
Changes and renewal | How fees or services can change and how notice is provided | “How will I learn about changes to this agreement?” |
Ending the relationship | Notice requirements, effective date, final billing and prepaid-fee treatment | “What happens if I decide to leave?” |
NASAA recommends checking that contract terms, authority, fees, and refund policies match the firm’s disclosures and actual practices. Requirements can vary by jurisdiction. Source: NASAA
Ask each advisor for an estimated annual cost using the same account balance and service needs.
For illustration, a 1% annual advisory fee on a constant $500,000 balance equals $5,000 a year. If billed in four equal installments, that would be $1,250 per quarter. Your actual bill may differ because of market movements, deposits, withdrawals, fee tiers, minimums, and the valuation method specified in the agreement.
That advisory fee may not represent your total cost. Ask which investment and account expenses are additional, whether fees are charged in advance or after services are provided, and how prepaid fees are handled if you terminate. Form ADV Part 2A, Item 5 addresses these fee disclosures. Source: SEC
For more background, see financial advisor fees and costs.
A clear termination provision helps you understand the practical steps and costs of leaving. Ask the advisor to walk through this scenario: “If you receive my cancellation notice today, what happens next?”
Confirm:
How to submit notice and who must receive it.
When services and trading authority end.
How the final advisory fee is calculated.
Whether any prepaid amount is refundable.
Whether separate account-transfer, closing, or investment-related charges could apply.
Who coordinates the transition and what you must do.
Request clarification in writing before signing. Avoid assuming that every agreement offers the same notice period, refund or cancellation rights.
The most crucial part of any partnership, especially one tied to your finances, is 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.
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