As an investment advisor, it`s crucial to establish a strong working relationship with your clients. Part of this process is drafting and presenting an investment advisory agreement. This legally binding document outlines the terms and conditions of the relationship between the advisor and the client and is crucial in aligning interests and expectations.
So what exactly is the purpose of an investment advisory agreement?
1. Establishes Roles and Responsibilities
The agreement sets out the roles and responsibilities of both parties. This helps clients understand what they can expect from their advisor and what their responsibilities will be in the relationship. For example, the advisor may agree to provide investment advice and make specific investments on behalf of the client. In turn, the client may have responsibilities around providing necessary documentation, timely communication, and understanding investment risks.
2. Defines the Scope of Services
The agreement outlines the scope of services the advisor will provide to the client. This is important because it ensures that the client understands exactly what they are paying for. It may include services such as investment recommendations, portfolio management, financial planning, and ongoing monitoring of the portfolio.
3. Establishes Compensation
The investment advisory agreement also outlines the compensation structure for the advisor. This may be a flat fee, a percentage of assets under management, or a combination of both. It`s important that the client fully understands the compensation structure and any associated fees or expenses.
4. Addresses Conflict of Interest
One critical aspect of investment advisory agreements is addressing conflicts of interest. It`s important that the advisor discloses any potential conflicts upfront. This could include situations where the advisor stands to gain financially from a particular investment or has a personal relationship with a company they are recommending. The agreement will also outline how the advisor will avoid or manage conflicts of interest.
5. Provides Legal Protection
The investment advisory agreement is a legally binding document that protects both the advisor and the client. It ensures that both parties are aware of their rights and responsibilities and provides a framework for resolving disputes.
In conclusion, an investment advisory agreement is a crucial document that establishes the roles and responsibilities of both the advisor and the client, defines the scope of services, establishes compensation, addresses conflict of interest, and provides legal protection. By taking the time to create a comprehensive agreement, advisors can build strong and trusting relationships with their clients.