Whether you are getting married, buying a house, or starting a new job, there is always some paperwork involved. It might feel like an extra task, but it is there for a reason, which is to protect you. Putting things in writing creates a clear, legally binding record of what has been agreed upon, so if things ever go sideways, you have something to fall back on.

The same logic applies when you hire a financial advisor. Since the professional is involved in your goals, investments, debt, and, essentially, your future, having a financial advisor-client agreement can be helpful.

So, what is a letter of engagement, and why is it such an important part of financial planning? Let’s break it down step by step so you know what to look for before signing one.

What is a letter of engagement?

A letter of engagement is essentially a financial advisor-client agreement. It is a simple, written, legally binding contract that clearly defines your working relationship with your financial advisor. It lays out the key details of your association in plain language. So, it will mention:

What your financial advisor will do for you, such as investment management, tax planning, and debt management.
What is expected from you as a client, such as what information you need to provide to the advisor about your income, goals, etc.
How and how much they will be compensated, and how often you will pay the fees.
What both of you are agreeing to as you start this professional journey together, such as the number and frequency of meetings, the mode of communication, and similar details.

The letter of engagement is drafted after you meet with your financial advisor and discuss your goals. Say you are looking to hire a financial advisor for retirement planning and investment advice. In this case, you may discuss your likely retirement age, your goals for making your golden years comfortable, your preferred investments, your risk appetite, and more. The financial advisor will then share their input and strategies to help you reach your goals.

Once your meeting is over and you decide to hire the advisor, the professional will put everything you discussed in writing. This document will then become the foundation of your association. It is where you will find details such as what the advisor will handle, the service timeline, the expected number of meetings per year, and how fees will be charged, among many other things. The letter can be roughly eight pages long, but the exact length will depend on the firm or advisor you hire and the scope of services you need.

It is not just financial advisors who use this kind of agreement. Letters of engagement are common across professions. Lawyers, accountants, consultants, and even architects use them. In each case, the idea is the same – to ensure both parties understand the terms before any work begins.

For financial advisors, though, the financial advisor-client agreement is especially important because the relationship involves personal finances, which can be sensitive. Once both you and your advisor sign the document, it becomes a binding agreement. It protects both sides. For you, it ensures you are getting the services you asked for and agreed to pay for. For your financial advisor, it lays out what they are working for within a clearly defined framework. So, it keeps everyone accountable.

What are the components of a letter of engagement?

No two letters of engagement are ever exactly alike. Each one reflects the unique relationship between a client and their financial advisor. Still, there are some core elements you will find in almost every letter. Let’s walk through the broad components of a letter of engagement:

1. Your name

This one is obvious. Since you are entering the agreement, your name will be on the letter. The letter will include your full legal name because it establishes your identity as a client and defines who is a party to the agreement. If services are being provided to a company, trust, or partnership, the letter will mention those names as well. This will ensure that there is no confusion about who the advisor is working for.

2. Point of contact

The advisor-client agreement will also specify a point of contact. This is usually the person the financial advisor will communicate with directly. This might be you, your spouse, or any other family member, depending on the situation. Having a single point of contact avoids crossed wires and conflicting instructions. For example, you and your spouse may not be on the same page sometimes. In such a situation, if your spouse gives an order that contradicts what you have agreed upon, the financial advisor will know exactly whose directions to follow. If you are the point of contact, the advisor will not consider your spouse’s order.

3. Your personal information

Your advisor-client agreement will usually include some details about your financial life. For instance, the letter can contain information about your income, profession, existing investment portfolio, debt situation, credit profile, and more. It may also specify if you are married.

You do not have to worry about sharing this information. It is the financial advisor’s responsibility to protect it. The letter of engagement often includes a confidentiality or privacy section that explains how your data will be handled. It should clearly state that your personal details will not be shared with anyone without your permission. Financial advisors and firms may also attach their privacy policy here.

4. The financial advisor’s or firm’s name

The letter will also clearly identify the financial advisor or firm. It may include their official address, contact information, certifications, registration information, and more. This can help you ensure you are hiring a legitimate, dependable professional.

5. Scope of services

This is one of the most important components of a letter of engagement. The scope of services section clearly outlines what the advisor will do for you. The services listed here can vary depending on your needs. It may include wealth management, estate planning, retirement planning, tax-efficient investing, and more. The letter should describe these services in clear, straightforward terms. The letter will also specify what falls outside the scope of services. For instance, the financial advisor may help you with investment management but not tax planning when it comes to selling your holdings.

It is essential to talk through this section in detail before signing. Ask your advisor to explain what’s included and what is not.

6. Length of the association

The letter would contain the length of the association. For instance, it may state that engagement will continue for a specific term, such as 6 months or 1 year.

7. Financial advisor or firm’s responsibilities

The financial advisor or firm’s responsibilities are not just limited to the services identified in the engagement letter. This section will also underline the financial advisor’s duties in the event of a dispute. It ensures both parties are clear about the expectations regarding the financial advisor’s role. The financial advisor-client agreement should also include limitations on the engagement and explicitly state what the financial advisor will not be responsible for.

Outlining these boundaries in the letter of engagement can prevent misunderstandings and help you know exactly what level of support to expect from your financial advisor.

8. Your responsibilities

You also have an important role to play in this relationship. The engagement letter will explain what is expected from you as a client. You may need to share details about your income, expenses, investments, and goals. You may also be expected to provide documents and keep your financial advisor updated on any significant life changes that could affect your financial plan.

9. Termination

The letter of engagement will mention how either party can end the arrangement. You may choose to terminate the engagement if you feel your needs are not being met, or if your financial needs change and the advisor is not able to deliver. On the other hand, a financial advisor may end the relationship if you have not paid for services.

The advisor-client agreement specifies the termination process and the reasons for termination, so both parties know the procedure. Usually, it just involves giving written notice and settling any outstanding dues.

10. Fees

Advisors usually charge a flat fee, an hourly rate, or a commission. All of this is clearly outlined in the letter. The document would have information about how your financial advisor is paid and how much you can expect to pay. The letter should also mention when payments are due, such as weekly, quarterly, or annually. Additionally, it would include additional charges if the work expands or new services are added.

What are some considerations while signing a letter of engagement that you should be careful to follow?

You can start by reading every line and carefully understanding all the components of a letter of engagement. Look closely at details such as the scope of services, fee structure, and the duration of the engagement. If anything feels unclear or too technical, stop and ask questions.
Next, talk things out before signing. Have an open discussion with your financial advisor to catch any misunderstandings. In case of gaps, you can clarify now rather than argue later.
Do not be afraid to bring in a second pair of eyes, such as a lawyer. Having a lawyer review the components of a letter of engagement can save you from being taken advantage of. They can spot terminology that might not be in your favor and help ensure the terms and conditions are fair.
Another thing to check is the contact points. The letter should clearly identify your main contact, especially for firms. Bigger firms may have multiple advisors working on your account. Make sure you know who you can reach out to when you have questions or requests.
Pay special attention to termination clauses as well. You should know what happens if you want to end the engagement or if there is a disagreement. How much notice is required? Are there fees for early termination?
Finally, do not sign the financial advisor-client agreement during the first meeting. Make sure you have multiple discussions if needed. Also, take the letter home. Read it a few times and think about the terms and conditions. Consider any changes you may want to propose. Once you are certain, go ahead and sign it.

Before you sign: Read it, question it, and understand it

Having a legally binding financial-advisor client agreement is essential. This document sets the stage for your relationship and clearly outlines what you can expect from the financial advisor. Before you sign anything, take the time to understand it fully. Discuss the terms with your financial advisor, have your doubts cleared, and make sure you are comfortable with every detail. Do not hesitate to voice any concerns you have.

If you are still looking for the right financial advisor, browse our financial advisor directory to find a professional who fits your needs and style.

Frequently Asked Questions (FAQs) about financial advisor-client agreement

1. What are the components of a letter of engagement?

A letter of engagement usually includes the scope of services, fees or compensation structure, duration of the engagement, termination clauses, and identification information for both you and the financial advisor. It may also include confidentiality agreements.

2. Who prepares the letter of engagement?

The letter is typically prepared by the financial advisor or the advisory firm you are hiring.

3. Should you sign a letter of engagement every time you hire a financial advisor?

Yes. Signing a letter of engagement is important every time you start a relationship with a financial advisor. It is also helpful to review and sign a new financial advisor-client agreement whenever you renew contracts or change services.

4. Do I need a lawyer to review the letter?

It is not mandatory to have a lawyer review your engagement letter, but it can be a smart step, especially for high-net-worth clients.

What Is a Letter of Engagement in Financial Planning?