Every investment adviser (IA) relationship starts with a contract. The Uniform Securities Act (USA) antifraud provision and the Investment Advisers Act of 1940 (IAA) contract requirements establish what must appear in an advisory contract.
Required Contract Elements
An IA client contract must include all of the following:
| Provision | Requirement |
|---|---|
| Written form | Contract must be in writing |
| Services | Description of advisory services to be provided |
| Term | Duration or term of the contract |
| Fee schedule | Advisory fee amount and formula for computing the fee |
| Prepaid fee refund | Amount of prepaid fee to be returned upon termination or non-performance |
| Discretionary authority | Whether the contract grants discretionary power to the adviser |
| No assignment without consent | The contract may not be assigned by the adviser without consent of the client |
Think of it this way: The contract is the client's roadmap for the entire relationship. It tells them what they are getting, what it costs, who controls their money, and what happens if the firm changes hands. Every required element exists to protect the client from a specific type of harm.
Assignment of the IA Contract (no-assignment-without-consent rule)
An advisory contract must provide that no assignment shall be made by the investment adviser without the consent of the other party.
What counts as assignment:
- Any direct or indirect transfer of the contract
- A change in the majority ownership (controlling block of voting securities) of the adviser
- If an adviser is acquired or merges, this constitutes an assignment and client consent is required
The statute does not specify written consent; the contract itself defines whether consent must be affirmative or negative (failure to object).
Majority vs. Minority Partnership Changes
| Change | Classification | Required Action |
|---|---|---|
| Majority of partnership interests change (>50%) | Assignment | Client consent required |
| Minority of partnership interests change (<=50%) | Not an assignment | Written notification to clients within a reasonable time |
- A majority change fundamentally alters who controls the firm; that is why the law treats it as an assignment
- A minority change does not shift control, so notification (not consent) is sufficient
Exam Tip: Gotchas
- "Assignment" does not just mean physically handing over the contract. A change in majority ownership of the advisory firm is ALSO an assignment. If Firm A buys Firm B (an advisory firm), all of Firm B's client contracts are deemed "assigned" and clients must consent. This is heavily tested.
- "Majority" is the trigger for consent. When the exam describes a partnership scenario, focus on whether the change exceeds 50% of the partnership interests.
Performance-Based Fee Prohibition
Advisers generally may not charge fees based on a share of capital gains or capital appreciation (the performance-fee restriction in the IAA).
Exception for qualified clients (Securities and Exchange Commission (SEC) qualified-client thresholds):
| Qualified Client Test | Threshold |
|---|---|
| Assets under management (AUM) with the adviser | $1,400,000 or more |
| Net worth (excluding primary residence) | More than $2,700,000 |
Also permitted for: qualified purchasers and knowledgeable employees of the adviser.
State-registered advisers must also comply with state performance-based compensation rules.
Note: The SEC adjusts these thresholds for inflation every 5 years. They were raised in 2026 to $1.4 million (AUM) and $2.7 million (net worth).
Exam Tip: Gotchas
- If a question asks whether a performance fee is allowed, check: Is the client a qualified client?
- A client with $900,000 in AUM and $3 million net worth (excluding primary residence) does qualify (meets the net worth test).
Prohibition on Waiver of Client Rights
No advisory contract may require a client to waive any rights under:
- The Uniform Securities Act (USA)
- The Investment Advisers Act of 1940 (IAA)
Any waiver clause is void and unenforceable, regardless of whether the client agreed to it.
- Advisory contracts must not contain exculpatory clauses that waive fiduciary duties
- A client who signs a contract containing a waiver provision does not lose any legal protections
- The waiver clause itself is simply treated as if it does not exist
Exam Tip: Gotchas
- A signed waiver does not waive anything. Even if a client voluntarily agrees to waive their rights under the USA or IAA, that waiver is void. The client retains full legal protection regardless of what the contract says.
Wrap Fee Programs
Contracts for wrap fee programs must disclose additional information about bundled services and fees. A wrap fee bundles advisory services, trade execution, clearing, and custody into a single all-inclusive fee.
Exam Tip: Gotchas
- Wrap fees are not always a good deal. The exam tests whether you recognize that wrap fees can cost more for clients who trade infrequently.