Advisor Agreement Law in the United States

U.S. law requires investment advisory agreements to include three mandatory clauses—anti-assignment, partnership change notification (if applicable), and performance-based fee limitations—plus fiduciary duties that cannot be waived by contract, all enforced by the Securities and Exchange Commission under the Investment Advisers Act of 1940 (15 U.S.C. §§ 80b-1 through 80b-21).

Does my investment adviser need a written contract with me?

A written investment advisory contract is legally required for advisers registered with the SEC. While oral agreements are theoretically possible, the SEC's delivery rules for Form ADV brochures and other disclosures make a written contract the practical standard for establishing the relationship and its terms.

What must be in my investment advisory contract?

Federal law mandates specific contractual provisions regardless of negotiation.

Anti-Assignment Clause

Every advisory contract must prohibit the adviser from assigning the contract without the client's consent. The clause must use prohibitory language—statements merely permitting assignment with conditions violate the statute. The SEC has enforced this against clauses that permitted assignment without client consent (In the Matter of FamilyWealth Advisers, LLC, File No. 3-22580). "Assignment" includes any direct or indirect transfer of the contract or a controlling block of the adviser's voting securities (15 U.S.C. § 80b-5(a)(2); 15 U.S.C. § 80b-2(a)(1)).

Required formulation: "This Agreement may not be assigned by the Investment Adviser without the prior written consent of the Client."

Partnership Change Notification

For advisers organized as partnerships, contracts must require notification to clients of any change in partnership membership within a reasonable time after the change (15 U.S.C. § 80b-5(a)(3)).

Performance-Based Fee Limitation

Contracts generally cannot provide compensation based on a share of capital gains or capital appreciation. This prohibition may be waived only for "qualified clients" meeting specific dollar thresholds (15 U.S.C. § 80b-5(a)(1), (e); 17 C.F.R. § 275.205-3).

Advisers must maintain procedures to verify qualified client status before contract execution and document their reasonable basis for belief (17 C.F.R. § 275.205-3(d)(1)(ii)(A)(1)-(3)). Contracts entered under prior thresholds remain governed by those historical amounts (17 C.F.R. § 275.205-3(c)(1)).

Can my adviser make me waive their fiduciary duty?

No. The federal fiduciary duty comprises a duty of care and a duty of loyalty that are inseparable and non-waivable regardless of client sophistication (SEC Release No. IA-5248). Any contract provision purporting to waive these duties, waive "all conflicts of interest," or disclaim fiduciary status is void (15 U.S.C. § 80b-15(a)).

Advisers and clients may define the scope of services and monitoring frequency through disclosure and informed consent—but cannot waive the underlying duty. The line between permissible scope definition and prohibited waiver depends on specific facts. Ask Sawyer researches SEC guidance and case law to evaluate whether your contractual limitations comply.

What happens if my investment adviser is acquired or sells their firm?

Your advisory contract cannot be assigned to a new adviser without your consent. The mandatory anti-assignment clause gives you an absolute right to veto any sale or transfer of your advisory relationship. For clients of registered investment companies (like mutual funds), the contract terminates automatically upon assignment (15 U.S.C. § 80a-15(a)(4)). The SEC has not validated "negative consent" or "deemed consent" mechanisms; drafters should assume affirmative, express consent is required.

Can my adviser charge fees based on my investment gains?

Yes, but only if you are a "qualified client." Performance-based fees (a share of capital gains or appreciation) are prohibited unless you meet one of two financial thresholds:

• Assets-under-management test: You have at least $1,400,000 under the adviser's management immediately after signing the contract (17 C.F.R. § 275.205-3(d)(1)(i)).
• Net worth test: Your net worth (jointly with spouse) exceeds $2,700,000, excluding your primary residence's value and related mortgage debt up to the home's fair market value (17 C.F.R. § 275.205-3(d)(1)(ii)(A)).

What contract terms are illegal in an advisor agreement?

Several common contractual provisions violate federal law or SEC rules.

Hedge Clauses and Liability Limitations

Clauses limiting liability to "gross negligence" or "willful misconduct," or requiring waiver of fiduciary duty claims, violate Section 206(2)'s antifraud provisions. For retail clients, the SEC states there are "few (if any) circumstances" where such clauses would be permissible. For institutional clients, hedge clauses may be permissible depending on particular facts and circumstances, provided they do not mislead about non-waivable rights, preserve all rights under securities laws, and do not purport to waive fiduciary duty entirely (In the Matter of ClearPath Capital Partners, LLC, File No. 3-22046; SEC Release No. IA-5248).

Unconditional Assignment Permission

Any clause permitting assignment without client consent violates Section 205(a)(2) and exposes the adviser to enforcement action.

Improper Custody Arrangements

Advisers with custody must maintain assets with a qualified custodian (bank, broker-dealer, or specified institution), ensure direct quarterly statements to clients, and undergo annual surprise examinations by PCAOB-registered accountants. Failures in these areas triggered enforcement actions in 2022–2023, with civil penalties in those actions ranging from $50,000 to $225,000.

Misleading Performance Advertising

The Marketing Rule (17 C.F.R. § 275.206(4)-1) prohibits hypothetical performance presentations without required policies, gross performance without equally prominent net performance, and testimonials without proper disclosures. A September 2023 enforcement sweep resulted in penalties of $20,000–$100,000 per adviser.

Registered Investment Company Requirements

Advisers to mutual funds and other registered investment companies face additional mandatory terms under the Investment Company Act of 1940 (15 U.S.C. §§ 80a-1 through 80a-64):

Note the critical difference: for registered investment companies, assignment triggers automatic termination, whereas for other clients, assignment simply requires client consent.

Can I cancel my advisory contract if my adviser broke the law?

Clients may seek rescission of contracts "made in violation of" the Advisers Act, but not damages (Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11 (1979)). Rescission is available only when the contract requires performance of conduct prohibited by the Act—not when unlawful conduct merely occurs during performance of otherwise lawful duties (NexPoint Diversified Real Estate Trust v. Acis Capital Management, L.P., 80 F.4th 413 (2d Cir. 2023)).

Common Drafting Pitfalls

Where State Law Goes Further

The rules above establish the minimum federal rules. Some states impose additional requirements:

The Federal Arbitration Act may preempt state-level prohibitions on mandatory arbitration clauses, but this preemption question was not confirmed via direct research. Advisers operating in Virginia or Ohio should treat state prohibitions as operative pending resolution.

Proposed Rule Changes

The SEC's Safeguarding Rule (Release No. IA-6240, proposed 2023) would expand custody-related contractual obligations, including written custodian agreements with specified authority levels and indemnification requirements. As of October 2023, this rule remains proposed and has not been finalized—no adoption date, effective date, or final text has been established. Advisers should not rely on proposed requirements as current law.

Whether your agreement needs specific clauses depends on your client type and fee structure. Ask Sawyer researches federal and state law to answer questions about your particular situation.