Investment Advisory Agreements – What to Look Out for

What are Investment Advisory Agreements?
  • An investment advisory agreement outlines the legal relationship between a financial advisor and a client.
  • There are two kinds of advisory agreements: discretionary and non-discretionary.
  • Discretionary agreements allow financial advisors to make decisions on the client’s behalf.
  • Non-discretionary agreements require the client to okay decisions before they are made.
  • Clients may have to sign a new investment advisory agreement if regulations change.
  • Advisors are legally obligated by this agreement to serve a client’s needs.
  • Clients can hold advisors responsible if he or she breaches the terms of the agreement.
  • Advisors should not benefit from fees linked to their performance.
  • Investment advisory agreements should be carefully scrutinized before signing.

Sources of Investment Advice - You have hired an investment adviser to learn about your financial health and financial goals, and then to customize a sound investment strategy around your specific needs and wants. It is a violation of the law for an adviser to offer you advice or services that have not been customized exactly for you. Essentially, advisers cannot offer one-size-fits all investment advice without your permission. Investment advisory agreements are required to have a clause explicitly prohibiting this kind of advice.

Compensation Based on Performance - The job of an investment adviser is to look out for your interests, not the interests of the adviser or the firm. It is against the law for investment advisory agreements to base the adviser’s compensation on the performance of the investments. This helps protect average investors like you from being pressured to make high-risk investments.

Hedge Clauses in Investment Advisory Agreements - In all but a few very limited cases, investment advisory agreements cannot contain hedge clauses. These clauses essentially exempt the adviser from any legal responsibility, even if they are in direct breach of financial regulations. You have a right to hold your adviser responsible if they act recklessly with your money. If you encounter investment advisory agreements that do contain hedge clauses, be sure to carefully evaluate them before signing. You will not want to give any adviser you rely on a “get-out-of-jail” free card if they act irresponsibly.

Reading and understanding investment advisory agreements is an important first step before forming a relationship with any adviser. If you feel that one of these agreements is unlawful, or that your adviser has violated its terms, you have the right to hold them legally responsible. Pursue justice by calling attorney Howard M. Rosenfield at (860) 677-4334.

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