assignment of investment advisory agreement

• Investment Advisory Agreement

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on January 25, 2024

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Table of contents, what is an investment advisory agreement.

An investment advisory agreement is a legally binding document that outlines the terms and conditions of the relationship between an investment advisor and a client.

The agreement details the scope of services that the advisor will provide , the compensation that the advisor will receive , and the responsibilities of both parties.

The document also outlines the obligations of the advisor to act in the best interests of the client and to disclose any conflicts of interest that may arise.

The purpose of an investment advisory agreement is to establish a clear understanding between the advisor and the client about the services that will be provided and the compensation that will be received.

The agreement helps to define the expectations of both parties and reduces the likelihood of misunderstandings or disputes. It also provides a mechanism for resolving any disagreements that may arise between the parties.

An investment advisory agreement is important because it provides legal protection for both the advisor and the client. The agreement outlines the obligations and responsibilities of each party, reducing the likelihood of disputes or misunderstandings.

It also ensures that the advisor is held accountable for their actions and that they act in the best interests of the client. Additionally, the agreement provides a clear framework for resolving any conflicts that may arise between the parties.

Parties Involved in an Investment Advisory Agreement

The parties involved in an investment advisory agreement are the following:

Investment Advisor

The investment advisor is the individual or firm that provides investment advice and management services to the client. The advisor is responsible for developing an investment strategy that aligns with the client's goals and objectives.

They must also ensure that they act in the best interests of the client and disclose any conflicts of interest that may arise. The advisor is compensated for their services through a fee structure outlined in the investment advisory agreement.

The client is the individual or entity that seeks investment advice and management services from the investment advisor. The client's responsibilities include providing the advisor with accurate and complete information about their financial situation and investment goals.

The client must also review and understand the terms of the investment advisory agreement and agree to abide by its terms. The client pays the advisor for their services through a fee structure outlined in the agreement.

Securities and Exchange Commission

The Securities and Exchange Commission (SEC) is the government agency responsible for regulating the investment advisory industry in the United States. The SEC oversees investment advisors and enforces compliance with federal securities laws.

Investment advisors are required to register with the SEC if they manage assets over a certain threshold. The SEC also provides resources for investors to research investment advisors and to file complaints if necessary.

Scope of Services in an Investment Advisory Agreement

The scope of services must be clearly defined in the agreement including the following:

Investment Goals

The investment advisory agreement should clearly outline the client's investment goals and objectives. This includes the client's risk tolerance , investment time horizon, and desired rate of return.

The advisor is responsible for developing an investment strategy that aligns with the client's goals and objectives.

Investment Strategy

The investment strategy outlines the specific investments that the advisor will recommend to the client. The strategy should be tailored to the client's investment goals and objectives and should take into account the client's risk tolerance and time horizon.

The investment strategy may include recommendations for stocks , bonds , mutual funds , and other securities.

Restrictions on the Investment Advisor

The agreement includes restrictions on the investment advisor's activities. For example, the agreement may prohibit the advisor from investing in certain types of securities or from engaging in certain types of transactions .

This may also require the advisor to obtain the client's permission before making certain types of investments.

Review of Investment Portfolio

The investment advisory agreement should include provisions for the periodic review of the client's investment portfolio.

The agreement should specify how often the advisor will review the portfolio and what specific items the advisor will review, such as the performance of individual investments and the overall asset allocation .

The review should take into account any changes in the client's financial situation or investment goals and may result in recommendations for changes to the investment strategy.

Compensation in an Investment Advisory Agreement

The compensation details must also be included in the agreement:

Fee Structure

The investment advisory agreement should clearly outline the fee structure that the advisor will charge for their services.

This may include a flat fee, a percentage of assets under management , or a performance-based fee. The agreement should also specify how the fee will be calculated and when it will be due.

Payment Terms

The investment advisory agreement should specify the payment terms for the advisor's fees. This may include a schedule of payments or a lump sum payment . The agreement should also specify how the advisor will be paid, such as through a direct debit from the client's account.

Termination and Refund Policies

There must be provisions for termination and refund policies. The agreement should specify the circumstances under which the agreement may be terminated, such as breach of contract or failure to provide agreed-upon services.

The agreement should also specify whether any fees will be refunded in the event of termination.

Confidentiality and Disclosure in an Investment Advisory Agreement

A section on confidentiality and disclosure must be included in the agreement with the following details:

Confidentiality Obligations

The investment advisory agreement should include provisions for confidentiality obligations. The agreement should specify how the advisor will handle confidential information about the client, such as their financial situation and investment goals.

The agreement should also specify the circumstances under which the advisor may disclose confidential information, such as to comply with a legal obligation.

Disclosure Requirements

It should specify the advisor's disclosure requirements. The agreement should require the advisor to disclose any conflicts of interest that may arise and any fees or compensation that the advisor may receive from third parties.

The agreement should also specify the advisor's obligations to provide the client with regular reports on the performance of their investments.

Insider Trading Policy

The investment advisory agreement should include provisions for an insider trading policy . The agreement should prohibit the advisor from engaging in insider trading and require the advisor to disclose any material nonpublic information that they may possess.

Representations and Warranties in an Investment Advisory Agreement

Information regarding the representations and warranties should be available:

Investment Advisor Representations

It must be clearly specified that the advisor is registered with the SEC (if applicable) and that the advisor has the necessary qualifications and expertise to provide investment advice.

The agreement should also include representations that the advisor will act in the best interests of the client and disclose any conflicts of interest.

Client Representations

The investment advisory agreement should also include representations and warranties from the client. The agreement should specify that the client has provided accurate and complete information about their financial situation and investment goals.

The agreement should also include representations that the client has the authority to enter into the agreement and to authorize the advisor to make investment decisions on their behalf.

Termination and Amendment in an Investment Advisory Agreement

There should be a section with details on the termination and amendment of the agreement.

Termination of Agreement

The terms should specify the circumstances under which the agreement may be terminated, such as breach of contract or failure to provide agreed-upon services. The agreement should also specify the notice requirements and any fees that may be due upon termination.

Amendment of Agreement

There should be clear specifications of the circumstances under which the agreement may be amended, such as changes to the client's financial situation or investment goals.

The agreement should also specify the process for amending the agreement, such as requiring written consent from both parties.

Dispute Resolution in an Investment Advisory Agreement

A section on dispute resolution should include:

There must be a provision for the resolution of disputes. The agreement may require the parties to attempt to resolve any disputes through mediation before pursuing other options.

The agreement should specify the process for selecting a mediator and how the costs of mediation will be allocated.

Arbitration

The investment advisory agreement may contain clauses allowing for the resolution of disputes via arbitration, which would bind the parties involved to an arbitrator's decision instead of resorting to litigation.

The procedure for selecting an arbitrator and how the arbitration expenses would be divided must be clearly indicated in the agreement.

It is possible for the investment advisory agreement to indicate that disputes will be resolved via litigation, and the agreement ought to identify the legal proceedings' jurisdiction and location, and possibly include clauses that allow for the recovery of legal expenses and attorney fees.

Governing Law and Jurisdiction in an Investment Advisory Agreement

There are certain legal considerations that must be considered:

Choice of Law

The investment advisory agreement should specify the governing law that will apply to the agreement. The agreement should specify which state's law will apply to the agreement and any disputes that may arise.

Jurisdiction

Additionally, the investment advisory agreement must specify the governing law and the jurisdiction that would have the power to hear any disputes that may arise under the agreement.

The agreement should also identify the location for any legal proceedings and might feature provisions for recovering attorney fees and costs.

Final Thoughts

An investment advisory agreement is a critical legal document that outlines the terms of the investment advisory relationship between the investment advisor and the client.

The key sections of the agreement cover a range of topics, including the scope of services, compensation, confidentiality and disclosure, representations and warranties, termination and amendment, dispute resolution, and governing law and jurisdiction.

The agreement's purpose is to establish a clear understanding of the obligations and responsibilities of both parties, provide legal protection, and ensure that the client's investments are managed in their best interests.

It is essential to understand the investment advisory agreement thoroughly to avoid any misunderstandings and ensure a successful relationship between the investment advisor and the client.

Understanding the investment advisory agreement is vital to ensuring a successful relationship between the advisor and the client when taking advantage of wealth management services.

Investment Advisory Agreement FAQs

What is an investment advisory agreement.

An investment advisory agreement is a legal document that outlines the terms and conditions of the investment advisory relationship between an investment advisor and a client.

What are the key sections of an investment advisory agreement?

The key sections of an investment advisory agreement include the scope of services, compensation, confidentiality and disclosure, representations and warranties, termination and amendment, dispute resolution, and governing law and jurisdiction.

Why is an investment advisory agreement important?

An investment advisory agreement is important because it establishes a clear understanding of the obligations and responsibilities of both parties, provides legal protection, and ensures that the client's investments are managed in their best interests.

What is the purpose of confidentiality and disclosure provisions in an investment advisory agreement?

The purpose of confidentiality and disclosure provisions in an investment advisory agreement is to ensure that confidential information is not disclosed to unauthorized parties and to provide transparency about the investment advisor's activities.

What is the role of the SEC in an investment advisory agreement?

The Securities and Exchange Commission (SEC) is responsible for regulating investment advisors and may review investment advisory agreements to ensure compliance with federal securities laws.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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Investment Advisory Contract

Jump to section, what is an investment advisory contract.

Investment advisory contracts are legal documents that outline the relationship between the client and the investment advisor. They provide clear guidelines of what is expected of each party in order for your needs to be met.

Investment advisory agreements typically include terms related to the advisors fee structure, investment methodology, level of risk a client is willing to take, and more.

Common Sections in Investment Advisory Contracts

Below is a list of common sections included in Investment Advisory Contracts. These sections are linked to the below sample agreement for you to explore.

Investment Advisory Contract Sample

Reference : Security Exchange Commission - Edgar Database, EX-99.D 17 rs28exd.htm INVESTMENT ADVISORY CONTRACT , Viewed September 21, 2021, View Source on SEC .

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15 U.S. Code § 80b–5 - Investment advisory contracts

For purposes of paragraph (2) of subsection (b), the point from which increases and decreases in compensation are measured shall be the fee which is paid or earned when the investment performance of such company or fund is equivalent to that of the index or other measure of performance, and an index of securities prices shall be deemed appropriate unless the Commission by order shall determine otherwise.

As used in paragraphs (2) and (3) of subsection (a), “ investment advisory contract ” means any contract or agreement whereby a person agrees to act as investment adviser to or to manage any investment or trading account of another person other than an investment company registered under subchapter I of this chapter.

The Commission , by rule or regulation, upon its own motion, or by order upon application, may conditionally or unconditionally exempt any person or transaction, or any class or classes of persons or transactions, from subsection (a)(1), if and to the extent that the exemption relates to an investment advisory contract with any person that the Commission determines does not need the protections of subsection (a)(1), on the basis of such factors as financial sophistication, net worth, knowledge of and experience in financial matters, amount of assets under management, relationship with a registered investment adviser, and such other factors as the Commission determines are consistent with this section. With respect to any factor used in any rule or regulation by the Commission in making a determination under this subsection, if the Commission uses a dollar amount test in connection with such factor, such as a net asset threshold, the Commission shall, by order, not later than 1 year after July 21, 2010 , and every 5 years thereafter, adjust for the effects of inflation on such test. Any such adjustment that is not a multiple of $100,000 shall be rounded to the nearest multiple of $100,000.

The Commission , by rule, may prohibit, or impose conditions or limitations on the use of, agreements that require customers or clients of any investment adviser to arbitrate any future dispute between them arising under the Federal securities laws, the rules and regulations thereunder, or the rules of a self-regulatory organization if it finds that such prohibition, imposition of conditions, or limitations are in the public interest and for the protection of investors.

2018—Subsec. (b)(3). Pub. L. 115–141 substituted “ section 80a–60(a)(4)(B)(iii) of this title ” for “ section 80a–60(a)(3)(B)(iii) of this title ” and “ section 80a–60(a)(4)(B) of this title ” for “ section 80a–60(a)(3)(B) of this title ”.

2010—Subsec. (a). Pub. L. 111–203, § 928 , in introductory provisions, substituted “registered or required to be registered with the Commission” for “, unless exempt from registration pursuant to section 80b–3(b) of this title ,” and struck out “make use of the mails or any means or instrumentality of interstate commerce, directly or indirectly, to” after “shall” and “to” after “in any way”.

Subsec. (e). Pub. L. 111–203, § 418 , inserted at end “With respect to any factor used in any rule or regulation by the Commission in making a determination under this subsection, if the Commission uses a dollar amount test in connection with such factor, such as a net asset threshold, the Commission shall, by order, not later than 1 year after July 21, 2010 , and every 5 years thereafter, adjust for the effects of inflation on such test. Any such adjustment that is not a multiple of $100,000 shall be rounded to the nearest multiple of $100,000.”

Subsec. (f). Pub. L. 111–203, § 921(b) , added subsec. (f).

1996—Subsec. (b)(4), (5). Pub. L. 104–290, § 210(1) , added pars. (4) and (5).

Subsec. (e). Pub. L. 104–290, § 210(2) , added subsec. (e).

1987— Pub. L. 100–181 completely revised and expanded provisions on investment advisory contracts, changing structure of section from a single unlettered paragraph to one consisting of four subsections lettered (a) to (d).

1980— Pub. L. 96–477 provided that par. (1) of this section was not to apply with respect to any investment advisory contract between an investment adviser and a business development company so long as the compensation provided for in such contract did not exceed 20 per cent of the realized capital gains upon the funds of the business development company and such business development company did not have outstanding any option, warrant, or right issued pursuant to section 80a–60(a)(3)(B) of this title and did not have a profit-sharing plan.

1970— Pub. L. 91–547 substituted reference to section “80b–3(b)” for “80b–3” of this title in first sentence, redesignated as second sentence former third sentence, designating existing provisions as cl. (A) and adding cl. (B) and items (i) and (ii) and provision respecting compensation based on asset value of company or fund under management averaged over a specified period in relation to investment record of an index of securities or such other measure of investment performance specified by Commission rules, regulations, or orders, inserted third sentence provision respecting point from which compensation is to be measured, substituted in fourth, formerly third, sentence “paragraphs (2) and (3) of this section” for “this section” and in definition of “investment advisory contract” the words “account of another person other than an investment company registered under subchapter I of this chapter” for “account for a person other than an investment company” .

1960— Pub. L. 86–750 substituted “unless exempt from registration pursuant to” for “registered under”.

Amendment by sections 921(b) and 928 of Pub. L. 111–203 effective 1 day after July 21, 2010 , except as otherwise provided, see section 4 of Pub. L. 111–203 , set out as an Effective Date note under section 5301 of Title 12 , Banks and Banking.

Amendment by section 418 of Pub. L. 111–203 effective 1 year after July 21, 2010 , except that any investment adviser may, at the discretion of the investment adviser, register with the Commission under the Investment Advisers Act of 1940 during that 1-year period, subject to the rules of the Commission, and except as otherwise provided, see section 419 of Pub. L. 111–203 , set out as a note under section 80b–2 of this title .

Amendment by Pub. L. 91–547 effective on expiration of one year after Dec. 14, 1970 , see section 30(1) of Pub. L. 91–547 , set out as a note under section 80a–52 of this title .

For transfer of functions of Securities and Exchange Commission , with certain exceptions, to Chairman of such Commission, see Reorg. Plan No. 10 of 1950, §§ 1, 2, eff. May 24, 1950 , 15 F.R. 3175 , 64 Stat. 1265 , set out under section 78d of this title .

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Investment Company Act

Investment advisers act, investment management staff issues of interest.

Oct. 12, 2017

CERTAIN STATEMENTS ON THIS WEBPAGE MAY HAVE BEEN MODIFIED OR WITHDRAWN. Please consult the  Modified or Withdrawn Staff Statements page for more information.

The staff in the Division of Investment Management occasionally identifies issues under the Investment Company Act, the Investment Advisers Act or other federal securities laws that may benefit from being highlighted generally for investment companies, investment advisers and their counsel. The staff is providing summaries of these issues below. The summaries are not intended as a comprehensive summary of all legal and compliance matters pertaining to the topics discussed herein.  Rather, these responses are intended as general guidance and should not be relied on as definitive.  The summaries are not rules, regulations or statements of the Commission, and the Commission has neither approved nor disapproved these summaries.

Questions regarding the Issues of Interest should be directed to (202) 551-6865.

• Investment Advisers Registered with the Commodity Futures Trading Commission ("CFTC") that Advise Private Funds (November 15, 2012)
• Advisory Contracts - Consent (June 15, 2012)
• Dodd-Frank Act Changes to Investment Adviser Registration Requirements (January 2013)
• Regulation of Investment Advisers: Outline and Staff Views (March 2013)
• Advisory Contracts - Transition for Newly Registered and Registering Advisers (March 30, 2012)
• Persons Who Provide Advice Solely Regarding Matters Not Concerning Securities (March 27, 2012)
• After-Tax Return (February 22, 2013)
• Joint Transactions — Portfolio Holdings of Companies Electing Status as Business Development Companies (“BDCs”) (November 27, 2012)
• Affiliated Funds of Funds — Section 12(d)(1) of the Investment Company Act (October 19, 2012)
• Advisory Contracts — Combined Investment Advisory and Service Fees (October 5, 2012)
• Funds Using Tender Option Bond (TOB) Financings (March 29, 2012)
• Business Development Companies — Auditor Verification of Securities Owned (March 12, 2012)
• Rule 18f-3 under the Investment Company Act — Removal of a Class (September 2, 2010)
• Rules 436 and 482 under the Securities Act (August 10, 2010)

Investment Advisers Registered with the Commodity Futures Trading Commission ("CFTC") that Advise Private Funds

The staff has received inquiries about the ability of certain CFTC-registered investment advisers to private funds to rely on the exemption from registration under the Advisers Act provided by Section 203(b)(6) of that Act, as amended by the Dodd-Frank Act.

Prior to the passage of the Dodd-Frank Act, Section 203(b)(6) of the Advisers Act excluded from the registration requirement in Section 203(a) of the Advisers Act any investment adviser registered with the CFTC as a commodity trading advisor whose business did not consist primarily of acting as an investment adviser, as defined in Section 202(a)(11) of the Advisers Act, and who did not act as an investment adviser to an investment company registered under the Investment Company Act of 1940 ("Registered Fund") or a business development company ("BDC"). We refer to that provision as "Old Section 203(b)(6)." As introduced in December 2009, the legislation that became the Dodd-Frank Act would have amended Old Section 203(b)(6) to further limit the exemption to investment advisers that did not act as investment advisers to private funds. As enacted in July 2010, the Dodd-Frank Act preserved Old Section 203(b)(6), but redesignated it as Section 203(b)(6)(A) and added a new Section 203(b)(6)(B). Section 203(b)(6) now exempts from the requirement to register with the Commission: "(A) any investment adviser that is registered with the Commodity Futures Trading Commission as a commodity trading advisor whose business does not consist primarily of acting as an investment adviser, as defined in section 202(a)(11) of this title, and that does not act as an investment adviser to (i) an investment company registered under title I of this Act; or (ii) a company which has elected to be a business development company pursuant to section 54 of title I of this Act and has not withdrawn its election; or (B) any investment adviser that is registered with the Commodity Futures Trading Commission as a commodity trading advisor and advises a private fund, provided that, if after the date of enactment of the Private Fund Investment Advisers Registration Act of 2010, the business of the advisor should become predominately the provision of securities-related advice, then such adviser shall register with the Commission."

The staff has received inquiries asking whether a CFTC-registered adviser may rely on the exemption provided by new Section 203(b)(6)(B) if it advises a private fund and: (i) advises a Registered Fund or BDC; or (ii) its business was (and remains) predominantly the provision of securities-related advice before the Dodd-Frank Act was enacted, and thus has not "become" predominately the provision of securities-related advice. The staff believes such an adviser — one to a Registered Fund or BDC, or one whose business is predominantly the provision of securities-related advice — is not exempt under Section 203(b)(6)(B). The staff believes that any other reading of Section 203(b)(6)(B) as it applies to an investment adviser to a private fund would not be consistent with the protection of investors or the purposes fairly intended by the policy and provisions of the Advisers Act, as amended by the Dodd-Frank Act. For example, the staff believes that the exemption in Section 203(b)(6)(B) is not available to a CFTC-registered investment adviser who advises a private fund and whose business is not predominately the provision of securities-related advice, if such investment adviser acts as an investment adviser to a Registered Fund or a BDC. The staff is not aware of any suggestion in the legislative history of the Dodd-Frank Act that Congress intended to exempt from the requirement to register as an investment adviser any adviser to a Registered Fund or a BDC. The staff also believes that the exemption in Section 203(b)(6)(B) is not available to a CFTC-registered investment adviser who advises a private fund and whose business was (prior to the enactment of the Dodd-Frank Act) and remains predominately the provision of securities-related advice. [November 15, 2012]

Advisory Contracts — Consent

Section 205(a)(2) of the Advisers Act generally makes it unlawful for an SEC-registered adviser to enter into or perform any investment advisory contract unless the contract provides that no assignment of the contract shall be made by the adviser without client consent. The staff recently was asked for its views on when an investment adviser may obtain consent for these purposes with respect to the assignment of an advisory contract that involved two steps. In particular, the assignment involved a transfer of 100% of the adviser’s outstanding voting securities. The securities of the investment adviser were transferred first temporarily (in this case for one day) to an intermediate entity solely for tax purposes, and then to the ultimate purchaser. The requestor asked whether it could obtain consent to both steps in the transaction at the same time, rather than obtaining consent separately ( i.e., obtaining consent to the temporary transfer first, and then obtaining consent to the ultimate transfer).

We advised the investment adviser that it may be sufficient for the adviser to obtain consent to both steps in the transaction at the same time. We noted that regardless of whether the adviser obtains consent at the same time or separately, it must provide sufficient information to its clients to enable them to make an informed decision, and the opportunity for the clients to withhold consent. We also noted that we were taking no position relating to the tax issues raised by the inquiry.

In providing this guidance, we noted certain previously issued related guidance. In particular, the staff previously has clarified that Section 205(a)(2) does not prohibit an adviser’s assignment of an investment advisory contract without client consent. The section merely provides that the contract must contain the specified provision. (See American Century Companies, Inc./J.P. Morgan & co. Incorporated Staff No-Action Letter (12/23/1997) available at http://sec.gov/divisions/investment/noaction/1997/americancentury122397.pdf )

Thus, the assignment of a non-investment company advisory contract without obtaining client consent could constitute a breach of the advisory contract, but not a violation of Section 205(a)(2). [June 15, 2012].

Advisory Contracts — Transition for Newly Registered and Registering Advisers

Sections 205(a)(2) and (3) of the Advisers Act generally prohibit registered advisers, and advisers required to be registered, from entering into, extending, renewing, or performing under an advisory contract that fails to include the provisions specified by those sections. In general, this means that an advisory contract must provide that (i) the contract may not be assigned by a registered adviser without the consent of the client and (ii) the registered adviser, if a partnership, will notify its clients of any change in membership within a reasonable time after such change.

As a result of the Dodd-Frank Act changes to the Advisers Act, previously exempt advisers are now required to register with the Commission. Nevertheless, newly registering advisers may be operating under existing advisory contracts that were entered into when such advisers were neither registered nor required to be registered with the Commission. As a result, these advisory contracts may fail to include the specified provisions of sections 205(a)(2) and (3). Advisers may need to seek the consent of their clients to amend the advisory contracts to include these provisions. Obtaining the consent of clients in a timely fashion to amend all existing advisory contracts, however, may be impracticable for some advisers.

The Commission has previously sought to minimize the disruption to the contracts of newly registering advisers when such contracts were permissible at the time they were entered into. See e.g ., Investment Advisers Act Release No. 2333 (Dec. 2, 2004) (the Commission adopted rules to grandfather pre-existing contractual arrangements providing for performance-based compensation that were entered into when the adviser was exempt from registration) and Investment Advisers Act Release No. 3372 (Feb. 15, 2011) (the Commission adopted rules to grandfather pre- existing performance fee contractual arrangements that satisfied the requirements of the rule at the time that the contract was entered into ).

Accordingly, the staff would not recommend enforcement action to the Commission under sections 205(a)(2) and (3) of the Advisers Act if an adviser that has applied for registration but was not registered, nor required to be registered, when it entered into its advisory contracts, did not amend an advisory contract to include the provisions required by sections 205(a)(2) and (3), provided that: (i) the adviser undertakes to operate and perform under the advisory contract as if it contained the provisions specified in sections 205(a)(2) and (3), (ii) the adviser discloses such undertaking to the client and, in the case of a private fund client, each investor (or independent representative of the investors) in such client, (iii) the advisory contract was entered into or last amended prior to the submission of the adviser’s application for registration; and (iv) any future amendment of the advisory contract would include the statutory provisions set forth in sections 205(a)(2) and (3). [March 30, 2012]

Persons Who Provide Advice Solely Regarding Matters Not Concerning Securities

The staff occasionally is asked about the status under the Investment Advisers Act of 1940 ("Advisers Act") and the Investment Company Act of 1940 ("Company Act") of persons who provide advice solely regarding matters that do not concern securities (collectively, "Non-Securities Matters," and such persons, "Non-Securities Advisers"), including commodities, diamonds, precious metals, coins, and stamps. The staff's analysis of the status of Non Securities Advisers under the Advisers and the Company Acts is set forth below.

An investment adviser, as defined in Section 202(a)(11) of the Advisers Act, generally is required to register with the Commission unless the adviser qualifies for an exemption under Section 203(b) of the Advisers Act or is prohibited from registering under Section 203A of the Advisers Act. Section 202(a)(11) defines "investment adviser," in relevant part, as "any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities." A Non-Securities Adviser therefore is not an investment adviser as defined in Section 202(a)(11) and would not be required to register under the Advisers Act, even if the Non-Securities Adviser provides advice on Non-Securities Matters to an investment company registered under the Company Act ("RIC") or a company which has elected to be a business development company pursuant to Section 54 of the Company Act ("BDC"). The staff understands that many Non-Securities Advisers to RICs register under the Advisers Act as a precautionary matter because they are not certain that the advice they provide has not or would not concern securities.

A Non-Securities Adviser may meet the definition of investment adviser under Section 2(a)(20) of the Company Act. Section 2(a)(20) of the Company Act defines an investment adviser to an investment company, in part, to include a person who "regularly furnishes advice to such company with respect to the desirability of investing in, purchasing or selling securities or other property, or is empowered to determine what securities or other property shall be purchased or sold by such company." A Non-Securities Adviser to a RIC or a BDC that meets the definition in Section 2(a)(20) of the Company Act is subject to the provisions of the Company Act that apply to an investment adviser. These provisions include, among others, Section 15 of the Company Act governing the investment adviser's contract and Section 17 of the Company Act prohibiting certain affiliated transactions. [March 27, 2012]

After-Tax Return

Effective January 1, 2013, the Health Care and Education Reconciliation Act of 2010 (Pub. L. No. 111-152, 124 Stat. 1029 (2010)) imposed on certain taxpayers a 3.8% tax on net investment income (“3.8% tax”).

The staff recently was asked for its views on whether the 3.8% tax should be included in determining the highest individual marginal federal income tax rate used to calculate after-tax return required by Instructions 4 to both Item 26(b)(2) and (3) of Form N-1A. Since investors that are subject to the highest marginal rate on taxable income (currently 39.6%) are also subject to the 3.8% tax, we believe that registrants should include the 3.8% tax in after-tax return calculations (e.g., use 43.4% as the highest individual marginal federal income tax rate on ordinary income). Similarly, we believe that registrants should include the 3.8% tax in calculating the tax on qualified dividend income and long-term capital gains or any tax benefit resulting from capital losses required by Instruction 7 to Item 26(b)(3) (i.e., use 23.8% as the highest individual federal long-term capital gains tax rate, which is the sum of the 3.8% tax and the 20% maximum long-term capital gains tax rate). [February 22, 2013]

Joint Transactions — Portfolio Holdings of Companies Electing Status as Business Development Companies (“BDCs”)

The staff is aware that certain private funds that plan to elect status as business development companies under the Investment Company Act (“Planned BDCs”), hold securities (typically, debt securities) issued by companies (“Portfolio Companies”) controlled by other private funds (“BDC Affiliates”) advised by the Planned BDC’s investment adviser or an entity controlling, controlled by or under common control with the Planned BDC’s investment adviser. The staff is of the view that if, following the election of BDC status, the BDC holds securities issued by a Portfolio Company controlled by a BDC Affiliate, the BDC and the BDC Affiliate may be participating in a “joint enterprise or other joint arrangement or profit-sharing plan” within the meaning of section 57(a)(4) of the Investment Company Act and rule 17d-1 under that Act (“Joint Transaction”). Section 57(i) of the Investment Company Act makes rule 17d-1 applicable to BDC Affiliates. Under rule 17d-1, a BDC Affiliate may not participate in a Joint Transaction unless an application regarding the Joint Transaction has been filed with the Commission and granted by an order. [November 27, 2012]

Advisory Contracts — Combined Investment Advisory and Service Fees

The staff recently was asked for its views on the following situation: a fund had separate administration and advisory agreements and its board wanted to combine the terms of each agreement into a single “management agreement” without obtaining shareholder approval of the single agreement under Section 15(a) of the Investment Company Act of 1940. The contractual relationships would be adjusted so that a different entity ( i.e. , the adviser) would be responsible for providing fund administration services, but the nature and level of services would not decrease. The management agreement would provide for a management fee rate equal to the sum of the advisory fee rate assessed under the existing advisory agreement, and the fee rate payable under the existing administration agreement. The management agreement would be approved by the board of directors of the fund, including a majority of independent directors. The fund would provide written notice of the new arrangement to existing shareholders no later than the mailing of the fund’s next periodic (annual or semi-annual) report, and would include this notice in any prospectus delivered to prospective shareholders, until such time as the prospectus is amended to reflect the existence of the new agreement. The fund’s prospectus fee table would be updated to reflect the new fee rate as part of the fund’s “management fees,” and not as an “other expense” of the fund. A footnote to the fee table breaking out the fee rates attributable to the advisory and administration services also would be included.

The staff previously granted no-action relief to the Franklin Templeton Group of Funds in the reverse situation: the fund sought to unbundle a combined advisory and administration agreement without obtaining shareholder approval based on certain representations. 1 In Franklin Templeton , and in this situation, the proposed changes would not reduce or modify in any way the nature or level of the advisory or administration services provided to the fund, and the aggregate advisory and administration fee rate payable by the fund would not exceed the aggregate fee rate payable by the fund under its existing agreements. In Franklin Templeton, and in this situation, the funds asserted that the contractual change described should not require shareholder approval as shareholders would not be disadvantaged by the change and obtaining shareholder approval would not serve a useful purpose and would involve unnecessary costs.

In our view, this situation is consistent with Franklin Templeton . We note that any future material change to the management agreement, including any amendment that results in increasing the overall combined advisory and administrative fee rates for the fund, would require approval by shareholders in accordance with Section 15(a).

1 See Franklin Templeton Group of Funds , Staff No-Action Letter (July 23, 1997).

Affiliated Funds of Funds — Sections 12(d)(1) and 17(a) of the Investment Company Act

Section 12(d)(1) of the Investment Company Act of 1940 (" Investment Company Act ") generally limits certain investment companies from purchasing shares of other investment companies, and limits certain investment companies from selling their shares to other investment companies, in excess of certain percentage limitations(“ fund-of-funds limitations ”). The limitations are intended to address a number of abuses, including: (1) the pyramiding of voting control in the hands of persons with only a nominal stake in the controlled fund; (2) the ability of the controlling fund to exercise undue influence over the adviser of the controlled fund though the threat of large-scale redemptions, and loss of advisory fees to the adviser; (3) the difficulty for investors of appraising the true value of their investments due to the complex structure; and (4) the layering of sales charges, advisory fees, and administrative costs. 1

In 1996, Congress enacted Section 12(d)(1)(G) of the Investment Company Act, which provides that the fund-of-funds limitations do not apply if, among other things, the acquired and acquiring companies are part of the same fund group. The intent underlying section 12(d)(1)(G) was to codify certain exemptive orders that the Commission had issued permitting certain funds to purchase shares of other funds in the same family or group of funds without having to comply with the fund-of-funds limitations. 2

These exemptive orders typically provided relief from both section 12(d)(1) and section 17(a) of the Investment Company Act. Section 17(a) generally prohibits an affiliated person of a fund, or an affiliated person of the affiliated person, from knowingly selling securities or other property to the fund, or purchasing securities or other property from the fund. Section 17(a) was designed to prohibit self-dealing and other forms of overreaching of a fund by its affiliates. 3

Since section 12(d)(1)(G) was adopted, we have received inquiries about whether a fund that intends to operate in reliance on that section is required to obtain relief from section 17(a). Those inquiring have argued that the intent of Congress in codifying this exemptive relief would be frustrated by requiring these funds to obtain section 17(a) relief in order to rely on section 12(d)(1)(G). We agree.

1 See Funds of Funds Investments , Investment Company Act Rel. No. 26198 (Oct. 1, 2003). See also South Asia Portfolio , SEC No-Action Letter (Mar. 12, 1997).

2 See, e.g. , T. Rowe Price Spectrum Fund, Inc. , Investment Company Act Rel. Nos. 21371 (Sept. 22, 1995) (notice) and 21425 (Oct. 18, 1995) (order); Vanguard Star Fund , Investment Company Act Rel. Nos. 21372 (Sept. 22, 1995) (notice) and 21426 (Oct. 18, 1995) (order). See also MassMutual Institutional Funds, SEC Staff No-Action Letter (Oct. 19, 1998).

3 See Investment Company Mergers, Investment Company Act Rel. No. 25259 (Nov. 15, 2001) (proposing amendments to rule 17a-8 under the Investment Company Act)(citing, among other things, Investment Trusts and Investment Companies: Hearings on S. 3580 Before a Subcomm. of the Senate Comm. on Banking and Currency, 76th Cong. 3d Sess., at 256- 59 (1940)).

Funds Using Tender Option Bond (TOB) Financings

EFFECTIVE August 19, 2022, THIS STATEMENT IS WITHDRAWN. Please consult the  Modified or Withdrawn Staff Statements  page for more information.

An open-end or closed-end investment company ("fund") registered under the Investment Company Act of 1940 ("Investment Company Act") may seek to arrange a secured financing through a special purpose trust (“TOB trust”). In this arrangement, the fund deposits a tax-exempt or other bond into the TOB trust. The TOB trust issues two types of securities: floating rate notes (“floaters” or “TOBs”) and a residual security junior to the floaters (“inverse floater”). The TOB trust sells the floaters to money market funds or other investors and transfers the cash proceeds and the inverse floater to the fund. The fund typically purchases additional portfolio securities with the cash proceeds. The inverse floater entitles the fund to any value remaining after the TOB trust satisfies its obligations to the TOBs holders and allows the fund to call in the floaters and "collapse" the TOB trust. A third-party liquidity provider guarantees the TOB trust's obligations on the floaters. 

This arrangement involves a borrowing by the fund and implicates section 18 of the Investment Company Act, which prohibits an open-end fund from issuing any “senior security,” except for a borrowing from a bank with 300% asset coverage, and generally requires a closed-end fund to have 300% asset coverage for any "senior security" that represents an indebtedness. Section 18(g) generally defines a "senior security" as "any bond, debenture, note, or similar obligation or instrument constituting a security and evidencing indebtedness,” and provides that "‘senior security representing indebtedness' means any senior security other than stock.” The staff has addressed TOB financings under section 18 on multiple occasions in reviewing fund registration statements and in the context of other communications with various funds and their counsel. In particular, the staff's position is that a TOB financing involves the issuance of a senior security by a fund unless the fund segregates unencumbered liquid assets (other than the bonds deposited into the TOB trust) with a value at least equal to the amount of the floaters plus accrued interest, if any. [March 29, 2012] 

Business Development Companies — Auditor Verification of Securities Owned

Under section 30(g) of the Investment Company Act and the Commission's Accounting Series Release No. 118 (Dec. 23, 1970), the certificate of independent public accountants ("auditor") contained in the financial statements of investment companies registered under the Investment Company Act must include a statement "that such independent public accountants have verified securities owned, either by actual examination, or by receipt of a certificate from the custodian." Although section 59 of the Investment Company Act does not make section 30(g) applicable to business development companies ("BDCs"), a BDC's auditor plays an important role under the Investment Company Act in preventing a BDC's assets from being lost, misused or misappropriated. Therefore, the staff believes that it is a best practice for a BDC to have its auditor verify all of the securities owned by the BDC, either by actual examination or by receipt of a certificate from the custodian, and affirmatively state in the audit opinion whether the auditor has confirmed the existence of all such securities. [March 12, 2012]

Rule 18f-3 under the Investment Company Act — Removal of a Class

Section 18(f)(1) generally prohibits a registered open-end investment company or series thereof (“Fund”) from issuing any “senior security.” Section 18(g) of the Investment Company Act defines “senior security,” in relevant part, as “any class of a stock having priority over any other class as to distribution of assets or payment of dividends.” Section 18(i) generally requires that every share of stock issued by a Fund “shall be a voting stock and have equal voting rights with every other outstanding voting stock.”

Rule 18f-3 under the Investment Company Act provides a conditional exemption from sections 18(f)(1) and 18(i) of the Investment Company Act to permit a Fund to issue more than one class of voting stock, each subject to certain different expenses and rights as specified in the rule, provided that each class in all other respects has the same rights and obligations as each other class. Rule 18f-3(f)(1) states that a Fund may offer a class of shares with an exchange privilege providing that the shares may be exchanged for certain securities of another Fund. Rule 18f-3(f) permits a Fund, subject to certain conditions, to offer a class of shares that converts to shares of another class of the same Fund. Nothing in rule 18f-3 permits a Fund with multiple classes of shares to separate a class from the other classes and merge that class into another Fund.

The staff is aware of a provision in the organizational documents of certain Funds that purports to authorize each Fund's board of directors or trustees to designate any class of the Fund as a separate series (the “Provision”). The Provision is intended to facilitate the merger of the series created from the designated class into another Fund. The staff takes the view that the Provision conflicts with sections 18(f)(1) and 18(i) of the Investment Company Act. The staff believes that a Fund's designation of any or all classes as separate series pursuant to the Provision creates differences in the rights and obligations of the classes not permitted by rule 18f-3, thus making the rule unavailable to the Fund. [September 2, 2010]

Rules 436 and 482 under the Securities Act

The staff has been asked whether an investment company registered under the Investment Company Act of 1940 ("Investment Company Act") or a company that has elected to be treated as a business development company under the Investment Company Act (each, a "Fund") may include ratings information from a nationally recognized statistical rating organization ("NRSRO") about securities issued by the Fund in an advertisement that complies with Rule 482 under the Securities Act of 1933 ("Securities Act") without including a written consent of the NRSRO that assigned the rating in the registration statement for the Fund's securities.

Rule 436 under the Securities Act, which generally requires the filing of written consents of experts ("Written Consents"), applies to an expert's report or opinion quoted or summarized in a prospectus or a registration statement. Rule 405 under the Securities Act defines "prospectus" as "a prospectus meeting the requirements of section 10(a) of the [Securities] Act," unless the context otherwise requires. An advertisement that complies with Rule 482 is a prospectus under Section 10(b), rather than Section 10(a), of the Securities Act. Pursuant to Rule 482(h), an advertisement that complies with Rule 482 need not be filed as part of the Fund's registration statement. Therefore, Rule 436 does not require a Fund to file a Written Consent for an expert's report or opinion quoted or summarized in a Rule 482 advertisement that is not filed as part of the Fund's registration statement. A Fund would be required to file a Written Consent for an expert's report or opinion quoted or summarized in a Rule 482 advertisement that is filed as part of the Fund's registration statement. [August 10, 2010]

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Advisory agreement statutory requirements: what advisors need to know to stay compliant.

August 17, 2022 07:07 am 1 Comment CATEGORY: Regulation & Compliance

Executive Summary

Registered Investment Advisers (RIAs) are generally required to enter into an advisory agreement with their clients prior to being hired for advisory services. And while there is no standard ‘template’ language applicable to all advisory agreements, there are a number of best practices that RIAs can follow in drafting and reviewing their agreements to ensure they can pass legal and regulatory muster.

In this guest post, Chris Stanley, investment management attorney and Founding Principal of Beach Street Legal, lays out the statutory requirements for RIA advisory agreements and some of the essential elements for advisory agreements to include when describing the RIA’s services and fees.

Advisory agreements for SEC-registered RIAs are governed by Section 205 of the Investment Advisers Act of 1940. In terms of specific advisory agreement language, the Advisers Act focuses essentially on three items:

• First, the law restricts RIAs from charging performance-based fees unless the client is a “qualified client” (in most cases, a client with at least $1.1 million under the management of the adviser, or with a total net worth of at least $2.2 million);
• Second, advisory agreements are required to give clients the opportunity to consent to their advisory agreement being ‘assigned’ to another adviser (including when an RIA changes ownership by merging with or being acquired by another firm); and
• Third, advisory agreements of RIAs organized as partnerships are simply required to contain a clause informing the client of any change in the membership of that partnership “within a reasonable time after such change”.

But even though the specific requirements of the Advisers Act are relatively narrow in scope, a well-crafted advisory agreement will contain additional elements, including descriptions of the RIA’s services and fees.

When describing the RIA’s services, advisory agreements should lay out the specific services – such as discretionary or nondiscretionary asset management, and the scope and duration of any financial planning services – to be included in the arrangement.

When it comes to fees charged to clients, advisory agreements should include – at minimum – the exact amount of the fee (either as a dollar amount or percentage of assets under management), when the fee will be charged, how the fee will be prorated at the beginning and end of the agreement, how the client can pay the fee, and which of the client’s accounts may be billed. For AUM-based fees, agreements should also include breakpoints for multi-tiered fee schedules (and whether breakpoints are applied on a ‘cliff’ or ‘blended’ basis) and how AUM is calculated (and whether it is based on assets at a single point in time or averaged over a specific period, and if it includes cash and/or margin balances). Any fees for third-party advisers or subadvisers should also be described in the agreement. While these constitute only two core elements of advisory agreements, there are numerous other essential components for RIAs to include (so many, in fact, that covering them all will require another separate article!).

The key point, however, is that a good advisory agreement requires a solid grasp of the Federal and state statutory requirements, and clearly lays out the RIA’s services and fees. For established firms, understanding these points more deeply will allow RIA owners to review their existing agreements – to ensure not only that they comply with existing regulations, but that they also include the elements constituting a valid agreement between RIA and client!

Author: Chris Stanley

Chris Stanley is the Founder of Beach Street Legal LLC, a law firm and compliance consultancy that focuses exclusively on legal, regulatory compliance, and M&A matters for registered investment advisers and financial planners. He strives to provide simple, practical counsel to those in the fiduciary community, and to keep that community ahead of the regulatory curve. When he’s not poring over the latest SEC release or trying to meet the minimum word count for a Nerd’s Eye View guest post, you’ll find Chris enjoying the outdoors away from civilization. To learn more about Chris or Beach Street Legal, head over to  beachstreetlegal.com .

Read more of Chris’ articles  here .

As unbelievable as it may be, the Investment Advisers Act of 1940 and the rules thereunder don’t require client advisory agreements to be in writing.

Technically speaking, an oral understanding that is never memorialized to a written instrument may be deemed a valid means by which a client can retain an SEC-registered investment adviser to render advice and other services in exchange for compensation. My son’s T-ball league requires that I sign a written agreement waiving every conceivable right I have (and some I didn’t know I had) before he even steps out onto the diamond, yet the fiduciary act of managing someone’s life savings is not deemed statutorily worthy of the same written memorialization.

I cannot emphasize the following enough, though: I do not advocate or endorse oral agreements in lieu of written agreements. This is partially due to my personal marital experience of never remembering what I agreed to do with or for my wife during casual conversations (don’t worry, she remembers everything ), but also because it invites revisionist history of what was actually agreed to between client and adviser, and a resultant battle of he-said, she-said, that never ends well.

In addition, from a practical perspective, professional malpractice insurance carriers, custodians, potential succession partners, and most clients would likely shy away from an adviser that isn’t prepared to sign on the dotted line. It also should be noted that most, if not all, state securities regulators require that client advisory agreements be in writing, so state-registered advisers can simply ignore everything written above.

Whether oral or written, though, Section 205 of the Advisers Act imposes specific requirements and restrictions upon client advisory agreements, most of which are dedicated to the logistics of charging performance fees . Still, in order to comply with Section 205, there are many contractual best practices and drafting techniques that advisers (even those not charging performance fees) can use in the course of updating or replacing their existing advisory agreement(s).

Importantly, state securities regulators often impose different or additional requirements and restrictions with respect to advisory agreements used with their respective state’s constituents. Any state-registered adviser that has the misfortune of enduring multiple different state registrations has likely experienced this first-hand during the registration approval process. While each state’s whims will not be reviewed in this article, sections in which state rules and regulations will likely vary will be flagged.

Lastly, the contractual best practices and drafting techniques offered here are topics squarely within an attorney’s bailiwick. While they are meant to help advisers better understand and comply with advisory agreement requirements, they should not be construed as legal advice.

Editor’s Note: Because of the sheer volume of information related to advisory agreement requirements, this article has been divided into 2 parts. Part 1 will focus only on the statutory requirements of Section 205 of the Advisers Act, as well as the ‘core’ elements of any advisory agreement: a description of the adviser’s services and fees. Part 2 will address the additional considerations that should be made in any advisory agreement. Each part is intended to be read in conjunction with the other, so as to provide a holistic view of a robust and complete advisory agreement.

Section 205 Of The Advisers Act On Investment Advisory Agreements

Relative to the Advisers Act as a whole, Section 205 is fairly short and is the sole section dedicated to “investment advisory contracts”. It focuses on essentially three items:

• charging performance-based fees;
• client consent to the assignment of the agreement; and
• partnership change notifications.

Section 205(f) is also the section of the Advisers Act that reserves the SEC’s authority to restrict an adviser’s use of mandatory pre-dispute arbitration clauses (i.e., that require clients to agree to settle disputes through arbitration before any disputes even arise) – an authority that has yet to be exercised.

Charging Performance-Based Fees

The primary takeaway from Section 205 regarding performance-based fees is that an advisory agreement cannot include a performance-based fee schedule unless the client signing the agreement is a “qualified client”, as such term is defined in Rule 205-3(d)(1) .

A qualified client includes a natural person or company that:

• Has at least $1.1 million under the management of the adviser immediately after entering into the advisory agreement;
• Has a net worth of at least $2.2 million immediately prior to entering into the advisory agreement; or
• Is a “qualified purchaser” as defined in section 2(a)(51)(A) of the Investment Company Act of 1940 at the time the client enters into the advisory agreement.

Qualified clients also include executive officers, directors, trustees, general partners, or those serving in a similar capacity to the adviser, as well as certain employees of the adviser.

Notably, the Dodd-Frank Act requires the SEC to adjust the dollar amount thresholds in the rules set forth by Section 205 every 5 years. The SEC’s most recent inflationary adjustment to these dollar thresholds was released in June 2021 .

For a more fulsome explanation of the restrictions imposed on advisers that charge fees “on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client” (i.e., performance-based fees), refer to this article and the rulemaking history described therein.

The dollar thresholds triggering “qualified client” status may differ in certain states, as the automatic inflationary adjustments made by the SEC do not automatically apply to the states. In other words, state securities rules may include a different definition of what constitutes a qualified client, and/or still be using ‘prior’ thresholds not in line with more recent SEC adjustments. This poses a potentially awkward scenario in that a particular client may be charged a performance fee while an adviser is state registered, but not if the adviser later transitions to SEC registration.

Client Consent To Assignment

Section 205(a)(2) prohibits advisers from entering into an investment advisory agreement with a client that “fails to provide, in substance, that no assignment of such contract shall be made by the investment adviser without the consent of the other party to the contract.” In other words, an advisory agreement must, without exception, afford the client the opportunity to consent to his or her advisory agreement being “assigned” to another adviser.

An “assignment” of an agreement occurs when one party transfers its rights and obligations under the agreement to a third party not previously a signatory to the agreement. The new third-party assignee essentially stands in the shoes of the assigning party to the agreement going forward, and the assigning party is no longer considered a party to the agreement. In the context of an adviser-client relationship, an adviser that assigns its rights and obligations to another adviser is no longer the client’s adviser… such that Section 205(a)(2) requires the client to acquiesce to such a change.

Notably, an assignment to a new “adviser” in this context is in reference to the investment adviser (as a firm), not necessarily to a new investment adviser representative within the firm. Still, though, Section 202(a)(1) broadly defines an assignment to include “any direct or indirect transfer or hypothecation of an investment advisory contract by the assignor or of a controlling block of the assignor’s outstanding voting securities by a security holder of the assignor […]”. There are a few more sentences specific to partnerships in the definition, but the general concept of the “assignment” definition is that there are essentially two situations in which an assignment is deemed to have occurred:

• When advisory agreements are transferred to another adviser or pledged as collateral; or
• The equity ownership structure of an adviser changes such that a “controlling block” of the adviser’s outstanding voting securities changes hands.

Both scenarios described above would trigger the need for client consent.

Transferring Advisory Agreements To Another Adviser

A transfer of an advisory agreement from one adviser to another most commonly arises in the context of a sale, merger, or acquisition of one adviser by another (which is also often the case upon the execution of a succession plan).

If Adviser X (the ‘buyer’) is to purchase substantially all of the assets of Adviser Y (the ‘seller’) – including the contractual right to become the investment adviser to the seller’s clients going forward – the seller’s clients must either sign a new advisory agreement with the buyer, or otherwise consent (either affirmatively or passively) to the assignment of their existing advisory agreement with the seller to the buyer.

Controlling Block Of Outstanding Voting Securities

With respect to the second scenario contemplated by the Section 202(a)(1) definition of assignment, the logical next question is: what constitutes a “controlling block?” Unfortunately, the Advisers Act does not define what a “controlling block” is, but based on various sources, including the Adviser Act itself, Form ADV, SEC rulings and no-action letters, and the Investment Company Act of 1940 (a law applicable to mutual funds and separate from the Investment Advisers Act of 1940), we can reasonably conclude that such control is having at least 25% ownership or otherwise being able to control management of the company.

Thus, the logistics of client consent to assignment need to be considered both in adviser sale/merger/acquisition scenarios and in adviser change-of-control scenarios. To come full circle, the existing advisory agreement signed by the client must provide that the adviser can’t assign the advisory agreement without the consent of the client.

Importantly, Section 205(a)(2) does not contain the word “written” before the word “consent,” and does not define what constitutes consent. Must the client affirmatively take some sort of action to provide consent to an assignment, or is the client’s failure to object to an assignment within a reasonable period of time sufficient?

If the existing advisory agreement does require the client’s written consent to an assignment, the assignment cannot occur until the client physically signs something granting his or her approval (i.e., “positive” consent). If the existing advisory agreement does not require written consent, an assignment may automatically occur if the client fails to object within the stated period of time after being notified (i.e., “negative” or “passive” consent). If the existing advisory agreement does not address the assignment consent issue, though, it does not meet the requirements of the Advisers Act.

The important takeaway for SEC-registered advisers, however, is that negative/passive consent is generally permissible in the context of an assignment, so long as the advisory agreement is drafted appropriately. The SEC affirmed this view through a series of no-action letters from the 1980s, which were later reaffirmed in further no-action letters from the 1990s (see, e.g., American Century Co., Inc. / J.P. Morgan and Co. (Dec. 23, 1997) .

Many states prohibit negative/passive consent assignment clauses and require clients to affirmatively consent to any assignment. Texas Board Rule 116.12(c), for example, states that “The advisory contract must contain a provision that prohibits the assignment of the contract by the adviser without the written consent of the client.”

Negative/passive ‘consent to assignment’ clauses should afford the client a reasonable amount of time to object after receiving written notice of the assignment (which ideally would be delivered at least 30 days in advance of the planned assignment). The clause should also make it clear to the client that a failure to object to an assignment within X number of days will be treated as de facto consent to the assignment.

Partnership Change Notifications

The third Section 205 provision with respect to advisory agreements is specific to advisers organized as partnerships and simply requires that advisory agreements contain a clause requiring the adviser to notify the client of any change in the membership of such partnership “within a reasonable time after such change.”

Disclosing Services And Fees In Advisory Agreements

With an understanding of the requirements set forth by Section 205 of the Investment Advisers Act, advisers can now supplement those requirements with additional best practices and techniques when creating or reviewing advisory agreements. Two key considerations include providing a good description of the firm’s services and fees. (Established advisory firms may wish to pull out a copy of their own advisory agreement and read through the sections of their own agreement as they explore the sections discussed below.)

Describing The Firm’s Services

The first keystone component of an advisory agreement (or any agreement) is a complete and accurate description of the services to be provided by the adviser in exchange for the fee paid by the client. The exact nature of services will naturally vary on an adviser-by-adviser basis, but good advisory agreements should account for at least the following services:

If rendering asset management services:

• For discretionary management services, include a specific limited power of attorney granting the adviser the discretionary authority to buy, sell, or otherwise transact in securities or other investment products in one or more of the client’s designated account(s) without necessarily consulting the client in advance or seeking the client’s pre-approval for each transaction. For non-discretionary management services, state that the adviser must obtain the client’s pre-approval before affecting any transactions in the client’s account(s).
• Clarify whether the adviser’s discretionary authority extends to the retention and termination of third-party advisers or subadvisers on behalf of the client.
• Consider provisions that discourage or restrict the client’s unilateral self-direction of transactions if they will interfere or contradict with the implementation of the adviser’s strategy (e.g., that the client shall refrain from executing any transactions or otherwise self-directing any accounts designated to be under the management of the adviser due to the conflicts that may arise).
• Consider identifying the account(s) subject to the adviser’s management by owner, title, and account number (if available) in a table or exhibit, noting that the client may later add or remove accounts subject to the adviser’s management so long as such additions and removals are made in writing (or pursuant to a separate custodial LPOA form). This is particularly important if some accounts are to be managed on a discretionary basis and others are to be managed on a non-discretionary basis (or if some of the client’s accounts will be unmanaged).
• Identify any client-imposed restrictions that the adviser has agreed to (e.g., not investing in certain companies or industries).

If rendering financial planning services:

• Describe whether the rendering of financial planning services is for a fixed/limited duration (e.g., if the adviser is simply engaged to prepare a one-time financial plan, after which the agreement will terminate) or whether the financial planning relationship will continue indefinitely until terminated. For ongoing financial planning service engagements, either describe what financial planning services will be rendered on an ongoing basis or consider preparing a separate financial planning services calendar . Advisers can either limit financial planning topics to an identifiable list (if the adviser and/or client want to be very prescriptive in the scope of the relationship) or generally describe that the adviser will render advice with respect to financial planning topics as the client may direct from time to time (if the adviser and/or client want to keep the scope of potential financial planning topics open-ended).
• Clarify that the adviser is not responsible for the actual implementation of the adviser’s financial planning recommendations and that the client may independently elect to act or not act on the adviser’s recommendations at their sole and absolute discretion. Even though the adviser may assume responsibility for discretionary management of a client’s investment portfolio, the client remains ultimately responsible for actually implementing any separate financial planning recommendations that the adviser cannot implement on behalf of the client.

Just as important as a description of the services to be provided by the adviser is a description of the services not to be provided by the adviser. While it is impossible to identify by exclusion everything the adviser won’t be doing, it is best practice to clarify that the adviser is not responsible for the following activities if not separately agreed to:

• Rendering legal, accounting, or tax advice (unless the adviser is also a CPA, EA, or has otherwise specifically agreed to render accounting and/or tax advice).
• Advising on or voting proxies for securities owned by the client (unless the adviser has adopted proxy voting policies and procedures and will vote such proxies on the client’s behalf).
• Advising on or making elections related to legal proceedings, such as class actions, in which the client may be eligible to participate.

To the extent that the client is a retirement plan (such as a 401(k) plan), it will be important to distinguish what plan-specific services will be provided and whether the adviser is acting as a non-discretionary investment adviser (under Section 3(21)(A)(ii) of ERISA) or a discretionary investment manager (under Section 3(38) of ERISA) , and what specific plan and/or participant related services are being provided by the adviser.

The nuances of ERISA-specific plan agreements are beyond the scope of this article, but suffice to say that plan agreements should generally be relegated to a separate agreement and should not be combined with a natural-person business owner’s standard advisory agreement, as discussed above.

Advisory Fees

The second keystone component of an advisory agreement, and the one most likely to be scrutinized by SEC exam staff, is the description of the adviser’s fees to be charged to the client. Advisory fees have justifiably received a lot of regulatory attention recently, and advisers should consider reviewing the November 2021 SEC Risk Alert which describes how advisers continue to drop the ball in this respect, from miscalculating fees to failing to include accurate (or sometimes any) disclosures, to lapses in fee-billing policies and procedures and reporting.

At a minimum, an advisory agreement should describe the following with respect to an adviser’s fees:

• The exact fee amount itself (e.g., an asset-based fee equal to X%, a flat fee equal to $X, and/or an hourly rate equal to $X per hour).
• The frequency with which the fee is charged to the client (e.g., quarterly or monthly).
• Whether the fee is charged in advance or in arrears of the applicable billing period (e.g., monthly in advance or quarterly in arrears).
• How the fee will be prorated for partial billing periods, both upon the inception and termination of the advisory relationship.
• How the fee will be payable by the client (e.g., via automatic deduction from the client’s investment account(s) upon the adviser’s instruction to the qualified custodian, or via check, ACH, credit card, etc., upon presentation of an invoice to the client).
• If all fees are to be charged to a specific account and not prorated across all accounts under the adviser’s management, the identity of the account(s) that are the ‘bill to’ accounts. Fees can only be payable from a qualified account(s) specifically for services rendered to such qualified account(s) (e.g., fees associated with a client’s taxable brokerage account should not be payable by the client’s IRA).

Asset-Based Fees

Specifically, with respect to asset-based fees, advisory agreements should include the following:

• Whether fees apply to all client assets designated to be under the adviser’s management and whether the client will be entitled to specific asset breakpoints above which the fee will (typically) decrease.
• If the fee starts at 1.00% per annum but then decreases to 0.70% per annum if the client maintains a threshold amount of assets under the adviser’s management, clarify whether the 0.70% fee amount applies to all client assets back to dollar zero (i.e., a cliff schedule), or only to the band of assets above a certain threshold, with assets below that certain threshold charged at 1.00% (i.e., a blended or tiered schedule).
• If fees are calculated upon assets measured at a single point in time, identify whether fees will be prorated at all for any intra-billing period deposits or withdrawals made by the client.

For example, if fees are payable quarterly in advance based on the value of the client’s assets under the adviser’s management as of the last business day in the prior calendar quarter, will the client be issued any prorated fee refund if the client withdraws the vast majority of his or her assets on the first day of the new quarter? In other words, if the billable account value is $1 million on day one of the billing period but the client immediately withdraws $900,000 on day two of the billing period (such that the adviser is only managing $100,000, not $1 million, during 99% of the billing period), is the client afforded any prorated refund?

Conversely, if fees are payable quarterly in arrears based on the value of the client’s assets under the adviser’s management as of the last business day of the quarter, will the client be charged any prorated fee if the client withdraws the vast majority of his or her assets on the day before the adviser bills? In other words, if the adviser manages $1 million of client assets for 99% of the billing period but the client withdraws $900,000 on the last day before the billable value calculation date (such that the billable value is only $100,000 and not $1 million), is the adviser afforded any prorated fee?

• Charging asset-based fees calculated from an average daily balance in arrears can help to avoid either of the potentially awkward scenarios described above and the need/desire to calculate prorated refunds or fees.
• Whether cash and/or outstanding margin balances are included in the assets upon which the fee calculation is applied.

Flat Or Subscription Fees

To the extent an adviser charges for investment management services on a flat-fee basis, be aware that both certain states and the SEC may consider the asset-based fee equivalent of the actual flat fee being charged for purposes of determining whether the fee is reasonable or not.

For example, if an adviser manages a client’s $50,000 account and charges an annual flat fee of $5,000 for a combination of financial planning and investment management, a regulator may take the position that the adviser is charging the equivalent of a 10% per annum asset-based fee, which, if viewed in isolation, is well beyond what is informally considered to be unreasonable (generally, an asset-based fee in excess of 2% per annum).

The 2% asset-based fee threshold traces its roots back to various no-action letters from the 1970s, like Equitable Communications Co., SEC Staff No-Action Letter, 1975 WL 11422 (pub. avail. Feb. 26, 1975) ; Consultant Publications, Inc., SEC Staff No-Action Letter, 1975 WL 12078 (pub. avail. Jan. 29, 1975) ; Financial Counseling Corporation, SEC Staff No-Action Letter (Dec. 7, 1974) ; and John G. Kinnard & Co., Inc., SEC Staff No-Action Letter (Nov. 30, 1973) .

In these letters, the SEC’s Division of Investment Management took the position that an asset-based fee greater than 2% of a client’s assets under the adviser’s management is excessive and would violate Section 206 of the Advisers Act (Prohibited Transactions By Investment Advisers) unless the adviser discloses that its fee is higher than that normally charged in the industry.

Setting aside the dubious reasoning underlying the citation of advisory fee practices from nearly a half-century prior, one potential way to combat such logic is to charge separate flat fees purely for investment management (with the asset-based equivalent remaining under 2% of a client’s assets under management), and separate flat fees for financial planning (while adhering to a financial planning service calendar).

Fees Involving Third-Party Advisers Or Subadvisers

To the extent the adviser may retain a third-party adviser or subadviser to manage all or a portion of a client’s assets, and the client will not separately sign an agreement directly with such third-party adviser or subadviser that discloses the additional fees to be charged to the client, it is prudent to include such third-party adviser or subadviser’s fees in the adviser’s agreement.

Advisory agreements should also generally describe the other fees the client is likely to incur from third parties in the course of the advisory relationship (e.g., product fees and expenses like internal expense ratios, brokerage commissions, or transaction charges for non-wrap program clients, custodial/platform fees, etc.).

Several states take a rather ‘creative’ position with respect to what constitutes an ‘unreasonable’ fee and may either explicitly or implicitly prohibit certain types of fee arrangements, especially with respect to flat or hourly fees for financial planning. At least two states have even been known to cap the hourly rate an adviser may charge. Many states require that advisers present clients with an itemized invoice or statement at the same time they send fee deduction instructions to the qualified custodian. Such itemization, to use California as an example, is expected to include the formula used to calculate the fee, the value of the assets under management on which the fee is based, and the time period covered by the fee.

Ultimately, the foundation of a good advisory agreement consists of many components, including a complete and accurate description of the firm’s services and advisory fees. While these are only two essential components, there are also many other equally important elements to include and best practices to follow that should be accounted for in any advisory agreement, which will be addressed in Part 2 of this article.

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Investment Advisory Agreement

Last Updated on March 29, 2023

You must clearly understand the Investment Advisory Agreement when working with an investment advisor. What is this document, and what are the responsibilities of the investment advisor and the client? And if things go wrong?

Investment Advisory Agreement Definition

An investment advisory agreement is a contract or document between an investment advisor and their client. This document outlines the responsibilities of both parties responsibilities and what will happen if things go wrong. It’s essential that both the investment advisor and the client are clear on what people expect of them and that they understand the risks involved.

What’s In Investment Advisory Agreements?

The investment advisor advises the client on what investments to make. They must act in the best interests of the client and must disclose any potential conflicts of interest. The investment advisor must also adhere to all relevant laws and regulations.

The client is responsible for following the investment advisor’s advice and paying any fees associated with the agreement. The client must also provide all necessary information to the investment advisor so that they can make informed recommendations.

The investment advisor and the client may be liable if things go wrong. Therefore, it’s essential to understand your rights and protections under the Investment Advisory Agreement.

The Investment Advisory Agreement should include the following:

Agreement, names, and contact information

An investment advisory agreement should include a section that outlines the agreement between the investment advisor and the client. This section should include the following:

– The names and contact information of both the investment advisor and the client

– What services the investment advisor will provide to the client

– What rights and protections do the investment advisor and the client have in the event of a dispute

Terms and services

An investment advisor should provide the following services to their clients:

– Advice on what investments to make

– Acting in the best interests of the client

– Disclosing any potential conflicts of interest

– Adhering to all relevant laws and regulations

The fees associated with investment advisory agreements vary depending on the services provided. Typically, the investment advisor will charge a fee for their services. The price may be fixed or based on the value of investments. The investment advisor should disclose any fees upfront.

Terms of privacy and management

The investment advisory agreement typically outlines the terms of privacy and information management. The investment advisor is responsible for protecting the confidentiality of the client and must keep any confidential information confidential. They may not disclose any information to third parties without the client’s consent.

The client is responsible for providing accurate and complete information to the investment advisor. They must also authorize the investment advisor to access any account or investment-related information.

Assets management

The investment advisor is responsible for managing the assets of the client. They are responsible for making investment decisions on behalf of the client and must act in the client’s best interests. The investment advisor must also adhere to all relevant laws and regulations.

Potential conflict of interest resolutions

An investment advisor is responsible for managing potential conflicts of interest. They must act in the best interests of the client and must disclose any potential conflicts of interest. If a dispute arises, the investment advisor and the client must work together to resolve it. In addition, the investment advisor must adhere to all relevant laws and regulations.

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Financial Advisor Disclosures and What They Mean for You

Check your financial advisor's disclosures for updates annually or during a significant change in your financial situation.

What Are Financial Advisor Disclosures?

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Reviewing your advisor's disclosures shouldn't be a one-time event. Make a habit of checking for updates annually or whenever you experience a significant change in your financial situation.

Advisor's Corner

Advisor's Corner is a collection of columns written by certified financial planners, financial advisors and experts for everyday investors like you.

Choosing a financial advisor goes beyond finding someone to manage your investments. It's about ensuring that they operate with transparency and with your best interests in mind. This requires diving into the advisor's background and understanding their business practices, which are often hidden within complex and jargon-filled disclosure documents.

In this article, we'll clarify these critical disclosures so you can make informed decisions about who manages your finances. By the end, you'll not only understand these documents better, but you'll also be able to choose an advisor whose practices align with your financial goals, safeguarding your financial future.

• What do financial advisors disclose?
• Disclosed fees and negotiability.
• How to read and interpret disclosure documents.
• How to find financial advisor disclosure documents.
• Staying informed with financial disclosures.

What Do Financial Advisors Disclose?

When you begin working with a financial advisor, they'll present you with several important documents. Primarily, the disclosures come through two key documents: Form ADV and Form CRS. Here's an overview of what you might expect to get:

• Form ADV: A form with information about the firm, such as services, fees, disciplinary history and conflicts of interest.
• Form CRS: A client relationship summary of the information in Form ADV.
• Form U4: A document with similar information to Form ADV and criminal and civil judicial records.
• Privacy policy: A document that describes how the firm will use your personal information.

Note that Form ADV has two parts. "Part 1 focuses on the advisor's business and regulatory history, while Part 2 serves as a narrative brochure outlining services, fees and strategies, as well as potential conflicts of interest," says Dennis Shirshikov, a finance professor at the City University of New York.

The Securities and Exchange Commission (SEC) didn't require advisors to provide Form CRS until 2020. It contains some of the same information as Form ADV but is limited to just two pages. It outlines the advisor's services, fees, compensation and disciplinary actions.

Like Form ADV, the CRS "is required to be delivered prior to or at the time of signing an investment advisory agreement," says Mario Chilin, chief compliance officer and partner at EP Wealth Advisors.

Broker-dealers and investment advisors use Form U4. It discloses information such as criminal charges and misdemeanors, bankruptcies and judgments. Depending on your chosen advisor, you may not be given this disclosure.

You should also receive a copy of the firm's privacy policy and a revised copy if any amendments are made.

"Every investor and institutions of all sizes continue to (be vulnerable) to fraud, both cyber and human," Chilin says. "It's important to understand how your private identifiable information is handled and the extent that it is safeguarded."

Disclosed Fees and Negotiability

Before signing on as a client, ensure that you have an itemized list of all costs, fees and commissions that the advisor charges. You'll see the advisor's fee structure in Form ADV Part 2, but it's not set in stone.

"Fees can often be negotiable, depending on the advisor's policies and the complexity of services required," says Shirshikov. There's often room for flexibility, "such as lower AUM fees for larger investment accounts or combining different services for a bundled rate."

How to Read and Interpret Disclosure Documents

Decoding disclosure documents starts by identifying the most critical sections of each form. For Form ADV Part 2, focus on services provided, fee structures and any disclosures of conflicts of interest. Then review the services, fees, conflicts and the firm's disciplinary history on Form CRS.

"The fees section is critical, as it directly affects investment returns," says Shirshikov. Look for how fees are structured, such as the percentage of assets managed, hourly rates or fixed costs.

He adds that complex financial jargon can be confusing, especially about fees or potential conflicts of interest. "Investors should be wary of terms like 'may' or 'might,' which indicate potential additional costs or risks not immediately apparent."

You should also "pay special attention to the 'disciplinary information' section for potential red flags ," says Jonathan Feniak, general counsel at LLC Attorney.

He says clients often overlook conflict of interest disclosures, too. "Remember, seemingly innocuous phrases such as 'may have a perceived conflict' can indicate real issues that need clarification," Feniak warns.

How to Find Financial Advisor Disclosure Documents

You typically receive Form ADV Part 2 and Form CRS directly from your financial advisor. However, if you haven't received these documents or if you prefer to do some independent research, finding these documents online is straightforward. Here's how:

• Investment Adviser Public Disclosure (IAPD): The IAPD provides information about registered investment advisors and their firms, including Form ADV. You can search by name or registration number for detailed information about an advisor's qualifications, business practices and affiliations.
• BrokerCheck by FINRA: BrokerCheck is a free tool for researching the backgrounds and experiences of financial brokers, advisors and firms. It gives you access to Form U4, which lists the advisor's professional background and any disciplinary actions.
• SEC's EDGAR database: EDGAR provides filings, registration statements, and periodic reports for advisors and firms registered with the SEC. It's particularly useful for reviewing financial statements and disclosures.
• Advisor websites: Financial advisors often provide disclosure documents directly on their websites. Look for sections titled "Compliance," "Legal" or "Disclosure" to find these documents.

Keep in mind that large advisory firms can have forms that are hundreds of pages long. While pages of fines and court cases are common with the industry's biggest firms, a small-time advisor with a litany of conflicts and rulings against it is cause for concern.

"At a minimum, an investor should review the firm's Form ADV Part 2A and Part 2B with the advisor with whom they'll work and research them on the IAPD website," Chilin says. "A quick Google search is always a good final check."

Staying Informed with Financial Disclosures

Reviewing your advisor's disclosures shouldn't be a one-time event. Make a habit of checking for updates annually or whenever you experience a significant change in your financial situation. Regularly reviewing and "understanding these documents ensures that clients are fully aware of what to expect from their financial advisor relationship," says Shirshikov.

How to Become a Financial Advisor

Marguerita Cheng May 6, 2024

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Assigning an Advisory Contract After a Merger: Ask Permission or Beg Forgiveness?

The purchase, sale or merger of an advisory practice involves a whirlwind of tightly-coordinated efforts by a myriad of different parties. In the shuffle of negotiating the deal terms, settling on a valuation methodology, coordinating with custodians and integrating technological systems, when does the client get a say, if any? In the time-honored tradition of attorneys everywhere, my answer is that it depends.

Section 205(a)(2) of the Investment Advisers Act of 1940 prohibits advisers from entering into an investment advisory contract with a client that “fails to provide, in substance, that no assignment of such contract shall be made by the investment adviser without the consent of the other party by the contract.” This is the baseline requirement that an advisory contract must, without exception, afford the client the opportunity to consent to his or her contract being assigned to another adviser.

That said, the SEC has never explicitly defined what constitutes client consent. Must a client affirmatively take some sort of action to provide consent to an assignment, or is the client’s failure to object to an assignment sufficient? It depends, in large part, in what exactly the signed investment advisory agreement states.

If the signed investment advisory contract requires the client’s written consent to an assignment, the assignment cannot occur until the client physically signs something granting his or her approval (i.e., positive consent). If the investment advisory contract does not require written consent, assignment may automatically occur if the client fails to object within the stated period of time (i.e., negative consent). If the investment advisory contract does not address the assignment consent issue, it does not meet the requirements of the Advisers Act.

The important takeaway for advisors, however, is that negative consent is generally permissible in the context of an assignment. The SEC affirmed this view through a series of no-action letters from the 1980s, which were later reaffirmed in further no-action letters from the 1990s.

A workable assignment clause in an investment advisory contract should afford the client a reasonable amount of time to object after receiving written notice of the assignment (typically 30-60 days). Language should make it clear to the client that a failure to object to an assignment within X number of days will be treated as de facto consent to the assignment.

Though it is beyond the scope of this article, an advisor should also carefully review what the SEC considers to be an “assignment.” At a very high level, an assignment occurs if there is a change in control at the adviser. There is an oft-cited rebuttable presumption that “control” constitutes a 25% or more ownership/voting interest in the advisor, but technically the rebuttable presumption exists in the Investment Company Act and not the Investment Advisers Act.

The point is that advisers should be conscious of positive v. negative consent issues even if their entire practice doesn’t change hands. Another word of caution: advisors to mutual funds are indirectly subject to a separate set of rules promulgated under the Investment Company Act, which states that an advisory contract with a fund automatically terminates in the event of an assignment.

Inserting appropriate negative consent assignment provisions into advisory contracts will help prepare an advisory practice for a smooth transition should an acquisition or merger opportunity present itself. Such provisions are also important to consider when creating a workable continuity or succession plan, as obtaining positive client consent is often easier said than done when the plan actually needs to be executed. As the adage goes, “It’s easier to ask forgiveness than it is to get permission.”

* * * This article originally appeared on May 29, 2014 in   ThinkAdvisor .