Client Service Agreement

(Investment Policy Statement)


A client service agreement is not a document that is required by regulators (at least not yet) but it can help form the basis of a strong relationship between an investor and their advisor.

It establishes formal guidelines for managing a portfolio. The investor and advisor agree to the terms of the client service agreement and both sign the document.

It can be a simple or detailed document. It can include asset mix guidelines, income requirements, parameters for choosing individual investments, commission structure, the review process, the preferred method of communication and so on.

It can help the advisor narrow down suggestions for a client portfolio and it can also make the final decision less agonizing for the client. Investors can more easily see where everything fits, they know what the commission charges will be and they can have a lot more confidence that they are on the right track.

The great majority of investors probably don’t have client service agreements but introducing a simplified document is a good first step. Some investors may eventually move to a more detailed agreement, while others may find a basic client service agreement to be sufficient.

Institutional accounts, such as pension plans and charitable organizations, use client service agreements or investment policy statements.

These agreements can be an important reference document in the event of a misunderstanding. The client and advisor can go back to the client service agreement and see what was agreed on by both parties. It becomes easier to resolve any disagreement.

It can also help clients keep their portfolios on track. Between the hype of the media and hot tips from colleagues, clients are often bombarded by investment ideas, each one seemingly better than the last. In this case, a client service agreement can provide discipline. If an investment doesn’t fit within the guidelines agreed to by both parties it can be immediately eliminated, and if it does fit, the client service agreement can help clarify where it fits and how much is appropriate.

It may seem like a lot of work to develop such an agreement for your account; however, a foundation is being laid for a successful relationship between the client and the advisor. The golden rule of the financial services industry is “know your client” and the client service agreement is another tool which helps the advisor to know how the client wants his account to be managed.

The following is an example of information that might be included in a ‘client service agreement’.

These guidelines help to ensure that the advisor and the client are on the same page. It improves the level of knowledge that each party has with regard to the other and improved knowledge increases your chances of success and reduces the chances for a misunderstanding to occur.

Account Management Guidelines

Purpose - The purpose of this document is to provide information on documenting, implementing, monitoring and evaluating your investment portfolio.

Time Horizon - Your time horizon is an important consideration and cyclical market fluctuations will be viewed with that perspective. Investors with short time horizons will have different needs than those with longer time horizons.

Risk Tolerance - Achieving your investment objectives will require that some risk be incurred. Historical data suggests that the risk of principal loss over a holding period of three years or longer can be reduced by the long term investment mix employed by the portfolio. You choose a risk level that you are comfortable with and this is listed in the client service agreement.

Asset Allocation - You and your advisor will select an asset allocation strategy designed to match your tolerance to risk and investments will be selected with that asset allocation as a guideline. Over time, your financial situation, objectives and tolerance to risk may change, so the appropriateness of the asset allocation strategy will be reviewed at least once every two years.

Mutual Fund Selection Process – Outline a process for selecting mutual funds. An example may be as follows: Mutual funds considered for the portfolio(s) will have a track record of at least three years. Track record of performance and volatility as compared to peers will be considered with written comments outlining the reasons for any such suggestions.

Equity and ETF Selection Process – Outline a process for selecting individual equities and ETFs. An example may be as follows: Individual equities and ETFs (exchange traded funds) considered for the portfolio will trade for above five dollars per share.

Fixed Income Selection Process - Outline a process for selecting individual bonds. An example may be as follows: Individual bonds considered for the portfolio will preferably have a credit rating of BBB or higher.

GIC Selection Process - Outline a process for selecting GICs. An example may be as follows: Investments with a single GIC issuer will be kept below $100,000 whenever possible. If the amount for investment exceeds $100,000 the use of GICs from multiple suppliers will be encouraged to maintain maximum CDIC coverage.

Portfolio Reviews – Outline the frequency of reviews (quarterly, semi-annually, annually) that you will have with your advisor and the topics that will be covered in the reviews.

Fees and Commissions – Outline any fees and commissions involved in managing your account. These fees include:

  • Trading commissions for buying and/or selling equities and exchange traded funds.
  • Mutual fund commissions, whether they are no load, front load, or back load; and what the redemption schedule might be, if applicable.
  • Commissions charged for the purchase and/or sale of bonds.
  • Transfer fees that might be charged for transferring your accounts to a new institution.
  • Annual administration fees.
  • Other applicable fees and commissions.

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