Contracts between IAs and Clients
While state laws require that contracts between state-registered IAs and clients be in writing, the Investment Advisers Act of 1940 does not.
However, most IAs take the initiative to put their contracts in writing to avoid misunderstandings.

SEC Rules on WrittenIA Contracts
SEC rules impose the following conditions on a written investment advisory contract:

  • Performance-based fees are generally prohibited (we'll discuss further in the next section).
  • Contract language must not lead clients to believe they have waived rights to take legal action against the adviser.
  • There must be no provisions that force the client to waive compliance with any of the rights or rules within the Investment Advisers Act of 1940.
  • The contract must prohibit the IA from assigning the contract without the client's consent.


Exam Tips and Tricks
Although the NASAA Model Rule on Unethical Business Practices states that written contracts are required, the questions on the exam reference oral contracts.


Uniform Securities Act Rules on Contracts
Under the Uniform Securities Act, IA contracts must do the following:

  • Disclose all material information regarding the services to be provided and the fees to be charged
  • Disclose conditions under which the contract may be assigned to another party
  • Require client consent prior to the IA assigning the contract
  • Require the IA (if a partnership) to notify the client of any change in the membership of the partnership
  • Prohibit the IA from being compensated on the basis of sharing in capital gains or capital appreciation of the client's accounts (however, fees based on the total value of the account, such as an assets under management fee, are allowed)

Performance Guarantees
Performance guarantees are generally considered a conflict of interest. The hallmark of an investment adviser is objectivity, so there must be no personal interest in the outcome of any specific investment recommendation. Also, guaranteeing a client's account against loss is specified as an unethical business practice under the Uniform Securities Act.


Look Out!
Remember that guaranteeing a client\'s account against loss is a type of performance guarantee. The Series 65 exam is not likely to test you on any distinction between these two concepts.



Advertising

Related Articles
  1. Investing

    How Google & Twitter Compete with Facebook's Instant Articles (FB, GOOG)

    Look at how Facebook's Instant Articles feature works, and how it differs from the new Accelerated Mobile Pages feature from Google and Twitter.
  2. Managing Wealth

    Asset Manager Ethics: Acting In the Benefit of Clients

    Investment managers should always act to benefit the client. Learn what actions managers should take on a client's behalf.
  3. Trading

    The Difference Between Forwards and Futures

    Both forward and futures contracts allow investors to buy or sell an asset at a specific time and price.
  4. Financial Advisor

    What To Do When Your Client Behaves Badly

    As a financial advisor managing your client's assets is only part of the job; sometimes you have to manage your client, as well.
  5. Financial Advisor

    Divorce and Annuities: What Clients Need to Know

    Divorce can be the most financially devastating event in a person’s life. Here’s what your clients need to know about handling annuities in a divorce case.
  6. Financial Advisor

    What Is Your Client's Willingness and Ability to Take Risk?

    Financial advisors must carefully consider a client's willingness and ability to take investment risks, including tax concerns and liquidity needs.
  7. Financial Advisor

    5 Traits the Best Financial Advisors Share

    Discover what the best financial advisers share in terms of the traits they possess, and learn what clients value most in their advisers.
  8. Financial Advisor

    Losing a Client Is Not Always The End of The World

    Losing a client is never pleasant for a financial advisor, but sometimes this is a better outcome than continuing the relationship.
  9. Financial Advisor

    The Fiduciary Rule: What Advisors Need to Know

    The rules surrounding the DOL's fiduciary proposal are confusing for advisors and clients. Here’s what we know so far.
Frequently Asked Questions
  1. What is the difference between yield and return?

    While both terms are often used to describe the performance of an investment, yield and return are not one and the same ...
  2. What are the Differences Among a Real Estate Agent, a broker and a Realtor?

    Learn how agents, realtors, and brokers are often considered the same, but in reality, these real estate positions have different ...
  3. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ...
  4. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ...
Trading Center