How To: Understand 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 [email protected].