Investment advisory agreements are legal documents that establish a working relationship between investors and their investment advisors. The agreement outlines the scope of services offered by the advisor, the fees that will be charged for those services, and the responsibilities of both parties. There are different types of investment advisory agreements, but in this article, we will be focusing on non-discretionary investment advisory agreements.
A non-discretionary investment advisory agreement is an agreement that gives the investment advisor the authority to make investment recommendations to the client, but does not give the advisor the authority to make investment decisions on behalf of the client. In simpler terms, the advisor acts as a consultant, offering advice and recommendations to the client, but the final investment decision rests entirely with the client.
So, why would a client opt for a non-discretionary investment advisory agreement? There are several reasons, but most often, it is because the client wants to retain control over their investment decisions. The client may have a specific investment strategy in mind that they want to follow, or they may want to be more involved in the investment process. Whatever the reason, a non-discretionary agreement allows the client to have the final say on their investments.
One of the most important aspects of a non-discretionary investment advisory agreement is the fee structure. Typically, the advisor charges a fee based on a percentage of assets under management, but in a non-discretionary agreement, the fee may be higher since the advisor is not making investment decisions. The fee may also be structured differently depending on the services being provided. For example, the advisor may charge a flat fee for investment recommendations, but charge an additional fee for other services like financial planning or tax advice.
It is important to note that even though the investment decisions rest with the client, the advisor still has a fiduciary duty to act in the best interests of the client. This means that the advisor must offer advice that is in line with the client`s investment goals and risk tolerance. If the advisor fails to act in the best interests of the client, they could be held liable for any losses incurred.
In conclusion, a non-discretionary investment advisory agreement is an option for clients who want to retain control over their investment decisions while still receiving expert advice and recommendations. The fee structure may be higher than other types of investment advisory agreements, but the client has the final say on their investments. As with any investment agreement, it is important to fully understand the terms and services being offered before signing on the dotted line.
