Financial Advisor Agreements: Understanding Your Contract

Signing a contract with a financial advisor isn’t like signing up for a gym membership. It’s a legal relationship that can affect your entire financial future. If you’ve ever looked at your advisor’s agreement and felt like you’re reading a legal textbook written in invisible ink, you’re not alone. Most people don’t realize how much is hidden in plain sight - until something goes wrong.

What Exactly Is a Financial Advisor Agreement?

A financial advisor agreement, also called an Investment Advisory Agreement, is the official contract between you and your registered investment advisor (RIA). It’s not just a formality. It’s required by federal law under the Investment Advisers Act of 1940. This law was created after the Great Depression to protect investors from shady practices. Today, over 14,700 RIA firms in the U.S. manage more than $100 trillion in assets - and every single one of them must have a written agreement with each client.

This document tells you exactly what services you’re paying for, how much you’re paying, and what happens if things change. It also protects the advisor by setting clear boundaries. Without this agreement, neither side has legal standing if a dispute arises.

The Core Sections You Must Read

Most agreements are 8 to 12 pages long. You don’t need to memorize every clause, but you must understand these five key sections:

1. Parties Involved - This identifies who you’re contracting with. Is it an individual advisor or a firm? Are they registered with the SEC or your state? Check the name against the SEC’s IAPD website. If it doesn’t match, walk away.
2. Scope of Services - This is the most important part. Does the advisor manage your investments only? Or do they also help with tax planning, estate documents, insurance, and retirement income? Many clients assume they’re getting full financial planning - only to find out later that the agreement only covers portfolio management. One client in Ohio discovered this after paying $12,000 in fees for a year, only to realize their advisor never reviewed their life insurance policy or estate plan.
3. Fee Structure - Most RIAs charge a percentage of assets under management (AUM). About 78% use this model. Common rates are 1% on the first $1 million, then 0.85% on the next $1 million, and 0.75% beyond that. But how is it calculated? Is it based on your balance at the end of the quarter? Or an average over the month? Some firms charge fees in advance; others bill after. And don’t forget: is there a minimum account size? Some advisors require $500,000 or more. If you have less, you might be paying more per dollar.
4. Termination Terms - How do you end the relationship? Most agreements require 30 days’ written notice. But some charge early termination fees - up to three months of fees. One client in Florida found out too late that their agreement had a 90-day notice period and a 3-month fee penalty. They lost $8,200 just to switch advisors.
5. Third-Party Fees - Does your advisor use sub-advisors or mutual funds with hidden expenses? Some firms earn revenue sharing from fund companies without telling clients. The SEC fined a Boston RIA $1.2 million for failing to disclose a 0.25% fee paid to a third-party manager. That fee came out of your returns - and you never saw it on your statement.

Performance Fees: Rare, But Dangerous

Only about 12% of RIAs charge performance-based fees. These are fees tied to how well your portfolio performs - like getting 20% of any return above a benchmark. They’re allowed only if you’re a “qualified client” - meaning you have at least $1.1 million in assets with that advisor, or $200,000 in annual income. Even then, they’re risky. If the market drops, you still pay the base fee. If it surges, the advisor gets a big cut. Most advisors avoid them because they create misaligned incentives. If you see one in your agreement, ask why it’s there - and get a second opinion.

What’s Not Covered? That’s the Real Question

One of the biggest mistakes clients make is assuming the agreement includes everything. It rarely does. Advisors are required to list what services are not included. Look for phrases like “does not include,” “excludes,” or “beyond the scope.”

Common exclusions:

• Tax preparation or filing
• Estate planning documents (wills, trusts)
• Insurance policy reviews
• Debt management or budgeting
• Business succession planning

A client in Colorado paid $15,000 a year for “comprehensive financial planning” - only to learn later that the agreement explicitly excluded tax advice. She had to hire a CPA separately, doubling her costs. If your advisor doesn’t clearly say what’s not included, ask them to write it down. Put it in an email. Get it confirmed.

How Fees Are Calculated During Market Swings

Market volatility can change your fee dramatically - without you noticing. If your portfolio drops from $1 million to $800,000, and your fee is 1% of AUM, your annual fee drops from $10,000 to $8,000. That sounds fair. But what if your advisor charges fees based on the highest balance during the quarter? That’s called a “high-water mark” fee. You could pay $10,000 even if your account is now worth $700,000.

Some firms use average balances over the quarter. Others use the balance on the last day. Ask your advisor: “When exactly is my fee calculated?” Then check your quarterly statements. If you don’t see the calculation method explained, demand clarity. The SEC requires full disclosure.

Red Flags in Your Agreement

Here’s what to watch out for:

• Vague language - Phrases like “financial planning services as needed” or “investment management as appropriate” are warning signs. They give the advisor too much room to interpret.
• Automatic renewal - Most agreements renew automatically unless you cancel. But if the notice period is buried in fine print, you might miss it.
• Assignment clause - Can the advisor sell your account to another firm without your consent? Under federal law, they can’t - but some agreements try to sneak this in. If you see “the advisor may assign this agreement,” it’s a violation of the Investment Advisers Act.
• Confidentiality clauses that go too far - Some agreements prevent you from discussing your relationship with family, accountants, or other advisors. That’s not legal. You have the right to share your financial information with trusted professionals.

How to Review Your Agreement - Step by Step

You don’t need a lawyer to understand this - but you do need time and focus. Here’s how to do it right:

1. Set aside 60 minutes - No distractions. Print it out or open it on a second screen.
2. Find the fee section - Circle the exact percentage. Write down how often it’s billed. Multiply it by your account balance. Do you get the number on your statement?
3. Look for “excludes” or “not included” - Highlight every service that’s missing.
4. Check termination - How many days’ notice? Is there a penalty? Is it written in plain English?
5. Compare to your expectations - Did you think you were getting tax help? Retirement income planning? Write down what you expected. Does the agreement match?
6. Ask for a plain-language summary - Many states, including New York, require advisors to provide one. Even if yours doesn’t, ask anyway. A good advisor will be happy to explain it.

What Happens If You Skip This Step?

People who don’t read their agreements often regret it. The CFP Board found that clients who reviewed their contract before signing reported 68% higher satisfaction than those who didn’t. One client in Michigan signed without reading and later discovered her advisor was charging $150/hour for “administrative services” - things like printing statements or answering emails. She paid $18,000 in hidden fees over two years.

Another client in California thought her advisor managed her 401(k) - but the agreement only covered her brokerage account. She didn’t realize her 401(k) was being ignored until she retired and found her balance hadn’t been adjusted for risk.

These aren’t rare cases. They’re common. And they’re avoidable.

What’s Changing in 2025?

The SEC has listed advisory agreements as a top enforcement priority for three years in a row. New rules are coming. In 2023, the SEC proposed requiring digital disclosures - meaning advisors must make key terms easier to find online. By 2025, you’ll likely see shorter, more visual agreements, especially from digital advisors.

Also, the Department of Labor’s new fiduciary rule (expected in 2024) will force advisors to disclose conflicts of interest more clearly. That means more transparency about commissions, referral fees, and internal fund preferences.

Technology is helping too. Over half of RIAs now use e-signature platforms with pop-up explanations. Click “What does AUM mean?” and a short video pops up. That’s a big step forward.

Final Checklist Before You Sign

Use this before you sign anything:

• ✅ The advisor’s name matches their SEC registration
• ✅ Fees are clearly stated with calculation method
• ✅ Services included are listed in detail
• ✅ Services excluded are clearly noted
• ✅ Termination requires 30 days’ notice with no penalty
• ✅ No assignment clause without your written consent
• ✅ No hidden third-party fees
• ✅ You have a plain-language summary

If even one item is missing, ask for a revision. A good advisor will welcome your questions. A bad one will make you feel silly for asking. Don’t let that stop you. Your money deserves better.