Advisory Agreement

What Is an Advisory Agreement?

An advisory agreement is a contract between a client and an investment adviser or advisory firm. It explains what services the adviser will provide, how the adviser is paid, what authority the adviser has over the account, and how either party can end the relationship.

The agreement is separate from general marketing material. It is the operating document for the advisory relationship, so the details can affect fees, trading discretion, custody arrangements, reporting, conflicts, and account responsibilities.

What the Agreement Usually Covers

An advisory agreement typically identifies the accounts covered, the services provided, the investment approach, the adviser's authority, and the fee schedule. It may also address whether the adviser can trade without advance client approval, whether the adviser can hire subadvisers, and how often the client receives reports.

Fee language is especially important. A percentage-of-assets fee may be billed quarterly in advance or arrears. Flat fees, hourly fees, subscription fees, and project fees may have different refund and termination rules. Some agreements also include account minimums or minimum annual fees.

Discretion and Authority

One of the most important clauses is whether the adviser has discretionary authority. A discretionary adviser can generally place trades within the agreed mandate without asking the client before each trade. A nondiscretionary adviser gives recommendations, but the client must approve transactions.

The agreement may also discuss limited trading authorization, withdrawal authority, proxy voting, tax-loss harvesting, rebalancing, and use of model portfolios. These details determine how much day-to-day control the adviser has and what the client must monitor.

Documents to Read Together

The advisory agreement should be read with Form ADV Part 2, the Form CRS relationship summary when applicable, privacy notices, custodian account agreements, and any investment policy statement. Form ADV provides plain-English disclosure about services, fees, conflicts, disciplinary history, and business practices.

If the agreement and disclosure documents appear inconsistent, that is a question to resolve before signing. The client should understand both the contractual obligation and the disclosed conflicts.

Financial Terms to Inspect

Look closely at how fees are calculated, what assets are included, whether cash is billed, whether outside assets are considered, how prepaid fees are refunded, and what happens when money enters or leaves the account mid-period. Small drafting differences can change the effective cost.

Termination terms also matter. A client should know how to cancel, when fees stop, how final billing works, and whether advisory authority ends immediately or after a transition period.

The Bottom Line

An advisory agreement is the rulebook for the advisory relationship. Before signing, the most important questions are what the adviser will do, what authority the adviser has, how fees are charged, what conflicts exist, and how the relationship can be ended.