Some client agreements say way too much. Some of them say much too little. What will ultimately determine the effectiveness of your agreements in protecting both you and your clients, however, is whether they say the right things.

Hands down, the greatest problem that exists with advisory agreements today is the shortcut approach too many advisors take. Simply finding an agreement you like from another firm, changing a few words and rebranding it with your logo is a recipe for disaster. First and foremost, you have no clue about the regulatory knowledge and competency of the individual who drafted the document. More important, the likelihood of your firm being identical in service offering, fee structure and brokerage practices to the firm that the agreement was drafted for is next to impossible.

You wouldn't just copy verbatim another firm's Form ADV, right? The same should hold true for your client agreements.

Are Client Agreements Even Necessary?
The challenges you face in crafting effective and comprehensive client agreements are plentiful. And one of these challenges is knowing whether the agreement is even mandated. The Investment Advisers Act of 1940 only expressly requires a written advisory agreement if you are an advisor to an investment company, not individual clients.

But not only is there extensive language in the Advisers Act that seems to presume the existence of written client agreements, they simply make sense. Not only do well-crafted agreements afford a measure of protection and peace of mind for your clients, they can also serve as your first line of defense when and if a dispute ever arises.

As a fiduciary, it's incumbent upon you to deal fairly with your clients, and that includes making full disclosure of all material information regarding the proposed relationship, including any potential conflicts of interest. The client agreement is the means for doing so. Keep in mind that the general terms of agreement outlined in your client contracts need to be consistent with your Form ADV, as well as your policies and procedures and your marketing materials.

So what information and disclosure should you include in your client agreements and what should you keep out? There are a few general rules of thumb (see sidebar). But be advised, disclosure requirements can vary greatly from state to state, as well as between the SEC and state-registered advisors. So consultation with your attorney is strongly encouraged.

Your Porridge-Fees and Expenses
Fees are the sustenance that feeds your business and fuels your growth. Thus, your investment advisory agreements must clearly describe all fees and expenses that clients may incur. These will include any advisory fees, fees for execution services, administrative fees, wrap fees and any fees imposed by third parties. And in the case of wrap fees, it's important that you clearly disclose within your agreements precisely what services are covered under the fee. All client agreements should at a minimum state:

1. The amount of the fee to be paid;

2. The method that will be used to calculate the fee; and

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