Authority and fees
The agreement sets the scope of the adviser's authority, often discretionary within investment guidelines, and those guidelines need precision about permitted asset classes, concentration, leverage, and liquidity. Fee terms cover the management fee and any performance-based fee, how assets are valued for billing, and how fees are handled on termination. Federal rules limit performance fees for registered advisers to certain categories of clients, so whether that term is available depends on who the client is. Custody arrangements, trading practices, and any use of affiliated brokers should be disclosed and understood, because they can create conflicts. Reporting terms, including how often performance is reported and against which benchmark, deserve attention as well.
Duties a contract cannot remove
Investment advisers owe their clients a fiduciary duty under federal law, and the SEC has stated that a contract cannot waive that duty entirely, although the scope of the services can be defined by agreement. Clauses that appear to limit the adviser's liability too broadly can draw regulatory attention. For registered advisers, the contract generally cannot be assigned without the client's consent, which matters when an advisory firm is sold. Clients should read the adviser's disclosure brochure alongside the agreement, since the conflicts and fees described there are part of the picture. Keep the signed agreement, guideline amendments, account statements, and correspondence about any departure from the guidelines.
Negotiating, or reviewing a relationship in trouble
For clients, we look at the guidelines, reporting, fee calculation, termination rights, and what happens to positions on exit. For advisers, we review whether the agreement matches the firm's disclosures and compliance procedures, whether the liability and indemnification terms are defensible, and how the contract handles a change of control. When losses have occurred and a guideline breach is suspected, the question becomes what the agreement and the account records show. Many agreements require arbitration, which shapes how any claim would proceed. We start with the documents and the account history before forming a view.
