Governing Law
Finally, you'll want to include a provision for which state's governing law will apply to the agreement, but it is important that you also include language that indicates that the governing state's law will apply "only to the extent that it is not inconsistent with applicable federal law."
Much like a prenuptial contract, your client agreements set the relationship expectations right from the start. That way, should trouble ever occur, cooler heads can prevail. Just remember, however, that the process of structuring a solid client agreement is all about finding that balance between saying too much and saying too little. It's about finding the language that's just right for your firm.
Five Common Client Agreement Pitfalls
Unsigned or lost agreements. If you don't have an executed copy, you don't have an agreement. It's a commonly cited deficiency during SEC audits, so follow through.
Stated fees that aren't updated. A change to your fee structure, even a lowering of fees, requires some action such as notification or consent.
Setting the bar too high on assignment. Don't include language that mandates written consent to assignment when negative consent may be all that's required.
Over-committing on privacy. The sharing of client data with custodians, regulators and other third parties is essential, so don't include language that precludes you from doing business.
Forgetting about the states. State-registered advisors need to remember that many states have specific agreement requirements, and many do not allow arbitration clauses.
Daniel Bernstein is the director of professional services of MarketCounsel, a leading business and regulatory compliance consulting firm to independent investment advisors, and a principal of the Hamburger Law Firm, a boutique firm practicing in virtually all areas pertaining to investment and securities law as well as relevant corporate and employment matters.