Client Contracts

Lesson

Client contracts are essential for establishing a clear understanding of the services an investment adviser provides and the client's expectations.

Practice Question #1

Which of the following is NOT a required element of a client contract?

A) Investment objectives

B) Fees and expenses

C) The client's favorite color

D) Disclosure of potential conflicts of interest

Select an option above to see an explanation here.

A) Investment objectives are a required element of a client contract. B) Fees and expenses are a required element of a client contract. C) The client's favorite color is irrelevant to the investment advisory relationship and not a required element of a client contract. D) Disclosure of potential conflicts of interest is required for a client contract.

Terms

Client Contract:: A written agreement between an investment adviser and a client outlining the terms and conditions of their professional relationship.
Investment Objectives:: A client's financial goals and risk tolerance, which guide the investment adviser's recommendations and portfolio management.
Fees:: The compensation a client pays to an investment adviser for their services.

Practice Question #2

What is the primary difference between an investment adviser and a broker-dealer?

A) Investment advisers provide advice, while broker-dealers execute trades.

B) Investment advisers execute trades, while broker-dealers provide advice.

C) Investment advisers are always fiduciaries, while broker-dealers are not.

D) Investment advisers are not regulated, while broker-dealers are.

Select an option above to see an explanation here.

A) Investment advisers primarily provide investment advice and portfolio management, while broker-dealers primarily execute trades on behalf of clients. B) This statement is incorrect; investment advisers advise, while broker-dealers execute trades. C) While investment advisers are fiduciaries, some broker-dealers may also have fiduciary obligations depending on their specific activities and relationships with clients. D) Both investment advisers and broker-dealers are regulated under securities laws and regulations.

Historical Example

In the 1990s, a large investment advisory firm was found to have entered into client contracts that did not clearly disclose the fees and expenses associated with their services. This led to a regulatory crackdown on investment advisers, resulting in stricter client contract requirements and increased disclosure rules enforcement.

Practice Question #3

What is the purpose of written supervisory procedures for an investment adviser?

A) To ensure compliance with securities laws and regulations

B) To guarantee that clients will achieve their investment objectives

C) To establish a dress code for employees

D) To outline the investment adviser's marketing strategy

Select an option above to see an explanation here.

A) Written supervisory procedures are designed to help investment advisers maintain compliance with applicable securities laws and regulations. B) While investment advisers strive to help clients achieve their objectives, written supervisory procedures focus on compliance, not investment performance. C) A dress code may be part of an investment adviser's internal policies, but it is not the primary purpose of written supervisory procedures. D) Marketing strategy may be part of an investment adviser's business plan, but it is not the primary purpose of written supervisory procedures.

Real-World Example

An investment adviser meets with a new client to discuss their financial goals and risk tolerance. They then draft a client contract that outlines the services they will provide, the fees they will charge, and the investment objectives they will follow. The client reviews the contract, asks questions to clarify unclear terms, and signs the agreement.