INVESTMENT ADVISER CONTRACTS
Table of Contents:
All investment adviser contracts must be in writing and must contain disclosures of:
• Services to be provided.
• Fees to be charged and how they are assessed.
• The amount of any prepaid fees to be returned upon cancellation of the contract.
• A statement prohibiting the investment adviser from assigning the contract without the customer's consent.
• A notification of any changes in the adviser's management.
• Limits on the adviser's discretionary authority over the customer's account, if any.
If an investment adviser uses an outside solicitor to refer business, such as an accounting firm, the client must get both the advisory's brochure and the solicitor's disclosure document or brochure.
ADDITIONAL ROLES OF INVESTMENT ADVISERS
As the business services offered by various professionals have expanded, so has the definition of who must register as an investment adviser. Sports and entertainment representatives now often advise their clients on how or with whom to invest their earnings. As a result, the representative is considered an investment adviser, even if investment advice is only a small part of the services they perform. Individuals who advise pension funds on the merits of portfolio managers or who act as pension consultants must also register as investment advisers.
PRIVATE INVESTMENT COMPANIES/HEDGE FUNDS
Private investment companies and 3c7 funds may charge performance-based compensation to clients provided that the clients have a minimum of $1,000,000 of assets under the adviser's management or have a net worth of $2,000,000. Corporations with $25 million in assets and individuals with at least $5 million in investments may also participate.
Advisers who manage accounts for investment companies or accounts with a value greater than $1 million, if those accounts are not for trusts or retirement plans, may charge fulcrum fees. A fulcrum fee provides the adviser with additional compensation for outperforming a broad-based index such as the S&P 500 and less compensation for underperforming the index. The amount of the additional compensation received for outperforming the index must be equal to the amount of compensation that would be lost for underperformance. The index used as the basis to determine the adviser's performance must contain similar securities and risks.
A wrap account is an account that charges one fee for both the advice received as well as the cost of the transaction. All clients who open wrap accounts must be given the wrap account brochure that will provide all of the information that is found on Form ADV Part 2.
Brokerage firms will oftentimes provide investment advisers with services to assist them in their business that go beyond execution and research. These services are provided in exchange for commission business and are known as soft dollars. The services received should normally be research related. However, in some instances the services received are used for other purposes. Investment advisers must ensure that the services received are for the benefit of the client and pay careful attention to the disclosure requirements relating to soft dollars. The SEC has divided soft-dollar consideration into the following categories:
• Accounting fees
• Association membership fees
• Cable television
• Commission rebates
• Computer hardware
• Computer software
• Consulting services
• Courier/postage/express mail
• Custodial fees
• Electronic databases
• Employee salary/benefits
• Execution assistance
• Industry publications
• Legal fees
• Management fees
• Miscellaneous expenses
• Office equipment/supplies
• Online quotation and news services
• Portfolio management software . Rent
• Research/analysis reports
• Telephone expenses
• Travel expenses
• Tuition/training costs
• Utilities expenses
Not all of the above items are for the research benefit of clients.