---
title: Reading Between the Lines – Is Your Advisory Agreement Compliant?
description: Is your advisory agreement compliant? Learn what must and must not be included to meet regulatory standards and avoid penalties.
image: https://blog.stpis.com/hubfs/Featured.webp
---

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 Feb 2026

# Reading Between the Lines – Is Your Advisory Agreement Compliant?

[Lori Weston](https://blog.stpis.com/blog/author/lori-weston)

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Reading Between the Lines – Is Your Advisory Agreement Compliant?

5:59

 

The SEC recently fined two affiliated investment advisers more than $150,000 for  
multiple infractions, including the use of “hedge clauses” in their advisory agreements.

While there were numerous versions of the advisory agreement, as they had been  
modified over time, the hedge clause language in question all indicated that the adviser  
would not be liable to the client “for any act, omission, or determination made in  
connections with this Agreement except for \[the Adviser’s\] willful misconduct or gross  
negligence…”

Broadly limiting an adviser’s liability is inconsistent with an adviser’s fiduciary duty  
because it may mislead clients into not exercising non-waivable rights. This is  
considered a violation of the Advisers Act.

This case is a stark reminder to advisers to assess the terms of their contracts and  
ensure they are up to regulatory standards. Even when their advisory agreements have  
been drafted by legal professionals, unless that professional practices in the securities  
industry, it is possible that requirements were missed or prohibited language was  
included.

Below is a list of what must be in your advisory agreements, what must not be in your  
advisory agreements, and some best practice suggestions.

- Written Agreements - believe it or not, the Advisers Act does not require  
  advisers to have written agreements with their clients. However, there are  
  numerous other areas of the advisory relationship that must be in writing, such as  
  the client granting discretionary authority to the adviser. Such authority is almost  
  always found in the advisory agreement. In addition, state-registrants should  
  know that most states DO require written advisory agreements.
- Discretionary Authority – as just mentioned above, advisers who act with  
  discretion in the management of client assets must have written authorization  
  from the client to do so. This includes written authorization to hire/fire third-party  
  managers or sub-advisers, when applicable.
- Proxy Voting Authority – if the adviser will not vote proxies for a client, this  
  must be explicitly stated
- Fees – Ensure the agreed-upon fee to be charged to the client is clearly stated in  
  the agreement between the adviser and the client, and if the adviser’s fee is  
  directly deducted from the client’s account by the custodian, ensure the client  
  has authorized this in writing. To the extent relevant, each of the following should  
  be addressed:
  
    - How the fee is calculated and which accounts will be included in the  
      calculation
    - The value upon which the advisory fee is based (e.g. value of the account  
      at the end of the billing period, average value of the account during the  
      billing period, other)
    - When the fee will be charged
    - Whether the fee is assessed in advance or arrears
    - Proration of fees at the beginning and ending of the advisory relationship
    - How refunds will be determined and paid (most common when an  
      advisory relationship ends and advisory fees were charged in advance)
    - If the adviser has a tiered fee schedule with breakpoints for reduced fees,  
      indicate whether multiple accounts for a client or family may be  
      aggregated to reduce fees payable to the adviser
    - Identify the account(s) from which the advisory fee will be deducted
    - State-registered advisers should note that many states require the adviser  
      to send invoices to the client if the adviser deducts its fees from the client’s  
      account

- Assignment – advisory agreements must explicitly state that the agreement  
  cannot be assigned by the adviser without the consent of the client. While the   
  Advisers Act does not require that client consent be in writing, this is usually a  
  best practice.
- Acknowledgement of Disclosures – since regulations require the adviser to  
  deliver certain disclosure documents (Firm Brochure, Brochure Supplements,  
  Form CRS, Privacy Notice) to clients at the time of, or before, entering into an  
  advisory relationship with the client, a client’s written acknowledgement of receipt  
  of such documents is usually found in the advisory agreement or an exhibit  
  thereto.
- Consent to Electronic Delivery – in order for an investment adviser to deliver  
  required disclosures to the client via email or some other form of electronic  
  delivery, the Advisers Act requires the client to consent to electronic receipt of  
  such disclosures. There are specific requirements that must be contained in this  
  consent, including, but not limited to, identifying the documents covered by the  
  consent as well as permitting the client to rescind the consent at any time.
- Duration – this is especially important for financial planning contracts and other  
  agreements that are non-recurring. Clearly identify if the agreement terminates  
  with the delivery of the service, or whether the client has the right to receive  
  additional services under the contract, and whether a fee will be assessed for  
  those services.
- Partnerships – if the adviser is organized as a partnership, the advisory  
  agreement must state that the adviser will notify the client of any change in the  
  membership of the partnership with a reasonable time after such change.
- Hedge Clause Prohibition – finally, we get to what CANNOT be in an advisory  
  contract. As demonstrated from the case cited above, advisers are prohibited  
  from broadly limiting their liability. This prohibition applies to SEC-registered  
  firms; however, most states have similar restrictions. The state of PA, for  
  example, prohibits an investment adviser from indicating “any condition,  
  stipulation or provision binding any person to waive compliance with any  
  provision” of PA advisory regulations.

In addition to reviewing their advisory agreements, advisers should ensure their  
agreements are consistent with their adopted policies and actual business practices to  
avoid regulatory scrutiny and [mitigate potential compliance risks](https://info.stpis.com/the-biggest-compliance-traps-that-you-dont-even-know-are-happening-at-your-firm).

[![compliance ebook cta_NEW](https://no-cache.hubspot.com/cta/default/20095280/interactive-181920641044.png)](https://blog.stpis.com/hs/cta/wi/redirect?encryptedPayload=AVxigLJaB7pRix%2BlVuNj96poiZguSjgYX9pXxeWbmJrTvV9gPHP97yyjLQbnrMrEXVgL9JcrNA3qtjUu0cPDGSQ07LI1NbRThT8%2B6Yi1wRsJJfcY7joOM9WjYqjPKRLacI03pe4amxAEfqcTcv5VXDvLYrcHm7ZPdu9JEBeK7PcQNKZVXnFiBg8Z4LTt7K6VE8AgB%2FHOYIS7vTJ4I4fQVG2Gwc0hLUeuL3W0VPfUgO5Y0NLtPzQ1vMF2BBmnqp9w1wxgmj6jT%2FKU9tA8pA%3D%3D&webInteractiveContentId=181920641044&portalId=20095280) 

    

 

[Compliance](https://blog.stpis.com/blog/tag/compliance)

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