Drafting RIA Advisory Agreements: Best Practices And Essential Elements To Include

Drafting RIA Advisory Agreements: Best Practices And Essential Elements To Include

Advisory agreements for Registered Investment Advisers (RIAs) contain many sections that are important both for the purposes of complying with SEC and state securities regulations, and for constituting a valid agreement between the RIA and the client.

In his latest article for the Nerd’s Eye View blog, Chris Stanley, investment management attorney and Founding Principal of Beach Street Legal, laid out the statutory requirements for RIA advisory agreements and what to include in the agreement when describing the RIA’s services and fees. In this follow-up guest post, Chris expands upon the best practices for drafting advisory agreements and covers numerous other essential elements for advisory agreements to contain, including identifying the client and effective date of the agreement, disclosure responsibilities for the RIA and client, the language around both parties’ rights and responsibilities in the event of a dispute, and how the agreement can be modified or terminated.

To start, the agreement should contain basic information about the adviser-client relationship, including who the client is (e.g., a single person, a couple, a business, or a retirement plan) and the date on which the agreement will become effective.

The agreement should also lay out some acknowledgments for the client to review. These include the acknowledgment that the adviser has provided required disclosure documents like Forms ADV Part 2A/B and Form CRS (and, importantly, has obtained consent to have those documents delivered electronically), acknowledgment of the client’s responsibilities to provide complete and accurate information needed by the adviser in a timely manner and to communicate any changes relevant that might affect the advice given by the adviser, and an acknowledgment that investment and financial planning recommendations involve risk and that there is no guarantee of future performance.

Another important section of the agreement concerns the resolution of disputes between the adviser and the client. While many IRAs include a clause in their advisory agreements limiting their liability in giving financial advice in good faith, the SEC and state regulators have recently been scrutinizing such ‘hedge clauses’ to the extent that they may be found impermissible going forward. At a minimum, the agreement should describe in detail how and where such disputes should be resolved (including which state’s laws the proceedings would be pursuant to).

Finally, the advisory agreement should include provisions for how it may be amended, modified, or terminated, as well as standard legal ‘boilerplate’ language and, of course, a space for the adviser and client to sign the agreement (either physically or electronically).

The key point is that, while the specific requirements for advisory agreements required by the Advisers Act may be fairly narrow in scope, in reality, there are many contractual best practices that advisers can follow to fully comply with Federal and state securities regulations. And even though many advisory agreement provisions can be standardized, agreements should still accurately reflect the advisory relationship with each client (meaning they shouldn’t be so broadly worded as to not reflect the specific services provided and fees charged by the adviser). And while it may not be necessary to have an attorney review every individual agreement signed by a client, it may be wise to obtain some legal advice to aid in the drafting of template agreements (especially given the many state-specific nuances in securities regulation that may diverge from the broad provisions of the Advisers Act).

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