Investment Advisory Agreement - Professional Drafting Workflow

Objective and Regulatory Framework

You are tasked with drafting a comprehensive Investment Advisory Agreement that serves as the foundational contractual document between a registered investment adviser and their client. This agreement must comply with the Investment Advisers Act of 1940, applicable SEC regulations including Rule 206(4)-3 regarding cash solicitation, and relevant state securities laws. The document establishes the legal relationship, defines fiduciary duties, outlines service parameters, and provides all mandatory regulatory disclosures required for a compliant advisory relationship.

Before beginning the drafting process, search the user's uploaded documents for any existing client information, firm policies, fee schedules, Form ADV disclosures, or previous advisory agreements that may inform this document. Extract specific details such as the client's name, account type, investment objectives, risk tolerance, and any special instructions or requirements. Similarly, identify the adviser's legal entity name, registration status, standard fee structure, and any firm-specific service offerings or limitations that must be reflected in the agreement.

Services and Fee Architecture

Comprehensive Service Definition

Draft a detailed and precise description of the investment advisory services that clearly delineates the scope, nature, and limitations of the adviser's engagement. Begin by explicitly stating whether the adviser will exercise discretionary trading authority—meaning the power to execute transactions without prior client approval for each trade—or non-discretionary authority, which requires client consent before implementing recommendations. Explain the practical implications of this distinction, including how it affects the adviser's ability to respond to market conditions and the client's level of ongoing involvement in investment decisions.

Describe the specific services to be provided with sufficient detail to set appropriate client expectations while avoiding overly prescriptive language that might limit the adviser's professional judgment. Address portfolio construction and management methodologies, including the investment selection process, asset allocation strategies, rebalancing protocols, and the frequency and nature of portfolio reviews. If the adviser provides financial planning services beyond investment management, clearly define these ancillary services, whether they include retirement planning, education funding strategies, insurance analysis, or estate planning coordination. Explicitly identify services that are outside the scope of the engagement, such as tax return preparation, legal document drafting, or accounting services, and clarify that referrals to qualified professionals will be provided when such services are needed.

Transparent Fee Structure and Billing Methodology

Articulate a complete and transparent fee structure that satisfies SEC disclosure requirements under Form ADV Part 2A while providing the client with clear understanding of all costs associated with the advisory relationship. Specify the exact advisory fee, typically expressed as an annual percentage of assets under management, and detail any tiered fee schedule where different asset levels are charged at different rates. For example, if the fee structure is 1.00% on the first $1 million, 0.75% on the next $2 million, and 0.50% on assets exceeding $3 million, present this clearly with examples showing how fees are calculated at various account values.

Define the billing methodology with precision, including whether fees are calculated based on the account value at the beginning of the billing period, the end of the period, or the average daily balance. Specify the billing frequency—quarterly in advance, quarterly in arrears, monthly, or annually—and explain the exact calculation and payment process. Address how fees will be deducted, whether directly from the client's account pursuant to written authorization or by invoice requiring separate payment, and confirm that the client will receive detailed fee calculations with each billing statement.

Include comprehensive provisions for fee adjustments in various scenarios. Explain how fees will be pro-rated for partial billing periods when accounts are opened or closed mid-period, how significant deposits or withdrawals during a billing period affect fee calculations, and whether there are any minimum account sizes or minimum annual fees. Disclose all additional costs the client may incur beyond the advisory fee, including custodial fees, transaction commissions, mutual fund expense ratios, ETF trading costs, and any other third-party charges. Clearly distinguish between fees paid to the adviser and fees paid to other service providers, ensuring the client understands the total cost of the investment program.

Custody, Brokerage, and Execution Arrangements

Establish clear parameters regarding the custody of client assets and the execution of investment transactions. Specify that the client's assets will be held by a qualified custodian as defined under SEC Rule 206(4)-2, and name the specific custodian if already determined, or describe the process for selecting an appropriate custodian if the choice remains open. Confirm that the adviser does not take physical custody of client funds or securities, and that all assets remain in the client's name at the custodial institution, providing an important safeguard against fraud and misappropriation.

Describe the brokerage and trade execution arrangements, including whether the adviser has negotiated specific commission rates or execution terms with broker-dealers, and how these arrangements benefit the client through reduced transaction costs or enhanced execution quality. If the adviser participates in soft dollar arrangements where research or other services are received in exchange for directing client transactions to particular broker-dealers, provide full disclosure of this practice, explain the potential conflict of interest it creates, and describe how the adviser ensures that clients receive best execution despite this conflict. Address whether the adviser has any revenue-sharing arrangements, referral fee agreements, or other economic benefits resulting from recommending particular custodians or service providers, and explain how these conflicts are managed in accordance with fiduciary duties.

Confirm that the client will receive account statements directly from the qualified custodian at least quarterly, and emphasize the client's responsibility to carefully review these statements and compare them with any performance reports provided by the adviser. Include language encouraging clients to promptly report any discrepancies or concerns regarding their account statements.

Client Acknowledgements and Informed Consent

Comprehensive Risk Disclosure and Acceptance

Draft a thorough risk disclosure section that satisfies regulatory requirements for informed consent while remaining accessible and understandable to clients who may not have sophisticated financial knowledge. Begin with the fundamental principle that all investments involve risk, including the potential for loss of principal, and that past performance—whether of the adviser's strategies, specific securities, or market indices—provides no guarantee of future results. Explain that market values fluctuate based on numerous factors beyond the adviser's control, including economic conditions, interest rate changes, geopolitical events, and company-specific developments.

Address the specific categories of investment risk relevant to the adviser's typical strategies and the client's proposed portfolio. Describe market risk as the possibility that the overall market or specific market segments may decline, affecting portfolio values regardless of individual security selection. Explain interest rate risk, particularly relevant for fixed-income investments, where rising rates typically cause bond values to decline. Address credit risk, the possibility that bond issuers may default on their obligations, and liquidity risk, where certain investments may be difficult to sell quickly without significant price concessions. If the adviser's strategies involve concentrated positions, international investments, alternative assets, or derivatives, provide specific disclosures about the heightened risks associated with these approaches.

Include clear acknowledgement language confirming that the client understands these risks, has had the opportunity to ask questions and seek independent advice, and accepts these risks as inherent to pursuing their investment objectives. Emphasize that the adviser cannot guarantee any specific level of performance, that investment objectives may not be achieved, and that the client may experience losses. The language should be sufficiently clear and prominent to demonstrate informed consent without being so alarmist as to undermine the advisory relationship or suggest the adviser lacks confidence in their strategies.

Form ADV Receipt and Regulatory Disclosure Compliance

Create a specific acknowledgement section confirming the client's receipt and review of the adviser's Form ADV Part 2A (Firm Brochure) and Part 2B (Brochure Supplement) as required by SEC Rule 204-3. State explicitly that the client received these disclosure documents at least 48 hours before entering into this agreement, thereby satisfying the advance delivery requirement, or alternatively, that the client acknowledges their right to terminate this agreement without penalty within five business days of execution if the documents were not provided in advance. This "two-day free look" provision provides important consumer protection and regulatory compliance.

Confirm that the client has been informed of their ongoing right to request and receive updated Form ADV disclosures annually, typically within 120 days of the adviser's fiscal year end, and whenever material changes occur to the information contained in the brochure. Include acknowledgement that the Form ADV contains critical information about the adviser's business practices, services, fee schedules, conflicts of interest, disciplinary history, and other material facts necessary for informed decision-making. State that the client has had adequate opportunity to review these disclosures, discuss any questions or concerns with the adviser, and consider the information before entering into the advisory relationship.

Governance Provisions and Operational Procedures

Proxy Voting Authority and Corporate Action Responsibility

Establish clear and unambiguous guidelines regarding the authority and responsibility for voting proxies and responding to corporate actions affecting securities held in the client's account. Specify whether the adviser will accept authority to vote proxies on the client's behalf, which requires the adviser to maintain written proxy voting policies and procedures and to vote proxies in the client's best interest, or whether the client retains this responsibility and will receive proxy materials directly from the custodian or transfer agent.

If the adviser accepts proxy voting authority, reference the adviser's proxy voting policies and procedures, confirm that a copy has been provided to the client or is available upon request, and explain how the client can obtain information about how their proxies were voted, typically through an annual report or upon specific request. Describe the adviser's general approach to proxy voting, whether following recommendations of a proxy advisory service, conducting independent analysis, or using another methodology. Address how the adviser handles potential conflicts of interest in proxy voting, such as when voting proxies of companies that are also advisory clients or have business relationships with the adviser.

If the client retains proxy voting authority, clearly state this decision and confirm that the adviser has no obligation or authority to advise on proxy voting matters, recommend how proxies should be voted, or take any action regarding proxy materials. Similarly, address responsibility for responding to class action notifications, tender offers, rights offerings, and other corporate actions, clarifying whether the adviser will monitor for such events and provide recommendations, or whether the client assumes full responsibility for these decisions. This clarity prevents misunderstandings about the scope of services and potential liability for missed opportunities or deadlines.

Term, Termination, and Amendment Procedures

Define the term of the agreement, typically stating that it becomes effective upon execution and continues until terminated by either party. Establish clear termination procedures that comply with regulatory requirements, generally providing that either party may terminate the agreement upon written notice, with termination effective upon receipt or after a specified notice period such as 30 days. Address the financial implications of termination, including how fees will be calculated and refunded for any prepaid but unearned advisory fees, and confirm that the client remains responsible for any fees earned through the termination date.

Include provisions addressing how the agreement may be amended, typically requiring written consent of both parties for any material modifications. Specify that the adviser may update administrative provisions, fee schedules, or service descriptions by providing advance written notice to the client, with the client's continued retention of the adviser's services constituting acceptance of such changes. Alternatively, require affirmative client consent for any fee increases or material service changes, providing stronger client protection.

Address assignment and succession provisions, confirming that the agreement may not be assigned to another adviser without client consent as required by Section 205(a)(2) of the Investment Advisers Act. Define what constitutes an assignment under the Act, which includes any transfer of a controlling interest in the advisory firm, and explain the client's rights if such an assignment is proposed. Include standard contract provisions such as severability, stating that if any provision is found unenforceable, the remaining provisions continue in effect; governing law, specifying which state's laws govern the agreement; and integration, confirming that the written agreement constitutes the entire understanding between the parties and supersedes any prior oral or written agreements.

Execution Requirements and Signature Protocols

Provide comprehensive instructions for proper execution of the agreement to ensure legal enforceability and regulatory compliance. Include signature blocks for the client or clients, requiring full legal names exactly as they appear on the account registration, along with the date of signature. For joint accounts, require signatures from all account holders, confirming that each has received the required disclosures and agrees to the terms. For entity clients such as trusts, corporations, limited liability companies, or partnerships, require signature by an authorized representative along with their title, and include a representation that the signatory has authority to bind the entity to this agreement.

Include a dated acknowledgement section where the client confirms that they have received, carefully read, and fully understand the terms of this Investment Advisory Agreement and all referenced disclosure documents including Form ADV Part 2A and 2B. This acknowledgement provides evidence of informed consent and helps protect against future claims that the client was not adequately informed of material terms or risks. If the agreement will be executed electronically rather than with traditional ink signatures, include appropriate language confirming that electronic signatures are legally valid and binding under the Electronic Signatures in Global and National Commerce Act (ESIGN Act) or applicable state equivalents such as the Uniform Electronic Transactions Act (UETA), and that the client consents to conducting business electronically.

Document Formatting and Professional Standards

The final Investment Advisory Agreement must be formatted as a professional legal document with a logical structure that facilitates understanding and reference. Use numbered sections and subsections with descriptive headings that clearly identify the content of each provision. Include a cover page displaying the agreement title "Investment Advisory Agreement," the client's full legal name, the adviser's legal entity name, and the effective date of the agreement. Consider including a table of contents for agreements exceeding five pages to enhance usability.

Incorporate standard contract provisions that may not be explicitly addressed above but are essential for a complete agreement, including provisions regarding confidentiality of client information, the adviser's compliance with privacy regulations, limitations on the adviser's liability to the extent permitted by law, indemnification provisions if appropriate, and dispute resolution procedures such as mandatory arbitration clauses if the adviser's policies include such requirements. Ensure all regulatory cross-references cite current rule numbers and statutory provisions, and verify that all disclosures reflect current regulatory requirements.

The completed document should be comprehensive yet readable, typically ranging from eight to fifteen pages depending on the complexity of services, fee arrangements, and any special provisions required for the particular client relationship. Use clear, professional language that is accessible to clients while maintaining appropriate legal precision. Before finalizing, verify that all client-specific information has been accurately incorporated, all required disclosures have been included, and the document accurately reflects the agreed-upon terms of the advisory relationship.