Investment Advisory Agreement Template for the United States
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What is a Investment Advisory Agreement?
The Investment Advisory Agreement serves as the foundational document for establishing and governing the relationship between investment advisers and their clients in the United States. This agreement is essential for compliance with the Investment Advisers Act of 1940 and related SEC regulations, as well as applicable state laws. It details the scope of services, fiduciary obligations, fee arrangements, and risk disclosures while protecting both parties' interests. The document is particularly crucial for registered investment advisers and must incorporate specific regulatory requirements, including mandatory disclosures and fiduciary duty acknowledgments.
Frequently Asked Questions
Is an Investment Advisory Agreement legally binding in the United States?
Yes, an Investment Advisory Agreement is legally binding under federal securities law in the United States. The agreement establishes a fiduciary relationship between the investment adviser and client, with enforceable obligations under the Investment Advisers Act of 1940 and SEC regulations. Courts recognize these agreements as contracts that create legal duties and liability for both parties.
Can I operate as an investment adviser without a written advisory agreement?
No, SEC regulations require registered investment advisers to have written advisory agreements with clients before providing services. Operating without a compliant written agreement violates federal securities law and can result in SEC enforcement actions, fines, and potential criminal charges. The agreement must contain specific mandatory disclosures and terms.
How does an Investment Advisory Agreement differ from a brokerage agreement?
An Investment Advisory Agreement creates a fiduciary relationship where the adviser must act in the client's best interest at all times, while a brokerage agreement only requires suitable recommendations. Advisory agreements typically involve ongoing portfolio management and comprehensive financial planning, whereas brokerage agreements focus on individual transaction execution and sales.
How long does it typically take to prepare an Investment Advisory Agreement?
A properly drafted Investment Advisory Agreement typically takes 2-4 weeks to prepare when working with a securities attorney. The timeline includes reviewing the adviser's business model, ensuring SEC compliance requirements are met, customizing terms for the specific advisory services offered, and incorporating required regulatory disclosures under federal law.
Which federal regulations must be included in an Investment Advisory Agreement?
Investment Advisory Agreements must comply with the Investment Advisers Act of 1940, SEC Rule 205-3 (performance fees), and Form ADV disclosure requirements. The agreement must include mandatory provisions regarding fiduciary duties, fee structures, termination procedures, and specific regulatory disclosures. State blue sky laws may also apply depending on the adviser's registration status.
Can an investment adviser charge performance fees under their advisory agreement?
Performance fees are only allowed for qualified clients meeting specific SEC criteria under Rule 205-3, including having over $1.1 million in assets under management or net worth exceeding $2.2 million. The advisory agreement must include detailed performance fee calculations, benchmark comparisons, and risk disclosures. Most retail clients cannot be charged performance-based compensation.
How often should an Investment Advisory Agreement be updated for compliance?
Investment Advisory Agreements should be reviewed and updated annually or whenever there are material changes to services, fees, or regulatory requirements. SEC rules require prompt updates when business practices change, and advisers must deliver updated Form ADV disclosures to clients annually. Regular reviews help maintain compliance with evolving federal securities regulations.
About the Investment Advisory Agreement
An Investment Advisory Agreement is a legally binding contract that establishes the professional relationship between you as a client and a registered investment adviser. This document serves as your roadmap for understanding the services you'll receive, the fees you'll pay, and the legal protections in place under federal securities law.
When do you need this document?
You need an Investment Advisory Agreement whenever you engage a professional investment adviser to manage your portfolio or provide ongoing investment advice. This includes situations where you're working with a fee-only financial planner, enrolling in a robo-advisor platform, or hiring a wealth management firm. The agreement is mandatory before any advisory services begin and must be provided at least 48 hours before entering into the advisory relationship, or at the time of entering if you have the right to terminate without penalty within five business days. Whether you're a high-net-worth individual seeking comprehensive wealth management or an investor looking for specific portfolio guidance, this agreement protects your interests and ensures regulatory compliance.
Key legal considerations
The most critical aspect of your Investment Advisory Agreement is the adviser's acknowledgment of fiduciary duty, which legally requires them to act in your best interests at all times. Pay close attention to the fee structure section, as it must clearly outline all costs including management fees, performance fees, and any third-party expenses. The scope of services clause defines exactly what investment advice and portfolio management services you'll receive, while the termination provisions explain how either party can end the relationship. Risk disclosure requirements mandate that advisers explain potential losses and conflicts of interest. The agreement must also address custody arrangements if the adviser has access to your funds, and include specific language about proxy voting authority and trade execution practices.
Legal requirements in United States
Under the Investment Advisers Act of 1940, registered investment advisers must provide you with Form ADV Part 2, which serves as the disclosure brochure, before or at the time of entering into the advisory agreement. The contract must comply with SEC Rule 206(4)-3 regarding custody requirements if applicable, and incorporate anti-fraud provisions under Section 206 of the Act. State-registered advisers must follow additional state regulations that may impose stricter requirements. The agreement must include specific disclosures about the adviser's disciplinary history, business practices, and potential conflicts of interest. Privacy protections under Regulation S-P require explicit consent for sharing your personal financial information. For advisers managing over $100 million, federal registration and compliance with enhanced reporting requirements under the Dodd-Frank Act apply, which may affect the agreement's terms regarding oversight and regulatory examinations.
GOVERNING LAW
Applicable law
This Investment Advisory Agreement is drafted to comply with United States law. Key legislation includes:
Form ADV Requirements: SEC registration and disclosure form requirements for investment advisers
Regulation S-P: Privacy regulations governing the collection and protection of client information
Blue Sky Laws: State-specific securities regulations that may affect investment advisory services
ERISA: Regulations governing retirement accounts and related investment advisory services
Bank Secrecy Act: Anti-money laundering requirements applicable to investment advisers
USA PATRIOT Act: Requirements for client identification and anti-terrorism measures
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