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Understanding Client Engagement Letters for Financial Advisors

Review the Basics to Protect Yourself from Liability

By Dr. David Edward Marcinko MBA CMP™



According to the Professional Liability Agents Network (PLAN), a nonprofit association of insurance agencies specializing in risk management and loss prevention, there are two things that FAs should remember about engagement letters: have them and revise them. In fact, according to iMBA Inc’s Dr. Gary L. Bode CPA MSA – an accountant, financial advisor and board certified doctor – not all financial advisors and financial planners use engagement letters. “And, I think they are making a big mistake.”


Moreover, merely having a standard engagement letter is not enough: The changing scope of client service requires advisors and planners to review and update their engagement letters annually. Engagement letters should be updated to reflect changes in the engagement’s scope or timing. Many attorneys also recommend using a separate engagement letter each year to avoid problems of continuous representation and to establish the date of the statute of limitations before the engagement begins (thereby limiting the time period in which a client can file a claim).

The 10 Essential Elements

Even short, simple engagement letters are binding contracts. When creating or updating your engagement letters, make sure several essential provisions are included. Although additional clauses may be necessary, these basic provisions are the framework of your engagement letter.

1. Scope of Services and Limitations

Many doctors and lay professionals think of financial planning as a comprehensive analysis. If your engagement is limited, you must state that clearly in your engagement letter. Courts have held that it is reasonable for a client to expect a comprehensive analysis unless you state otherwise.

2. Client Responsibilities

The client’s role in an engagement is to provide the advisor or planner with certain data and to verify its accuracy. An engagement letter should contain a provision identifying the assistance you expect from your client in providing information and verifying its accuracy. The engagement letter should also specify any timetables applicable to this information.

3. Fees and Billing Procedures

Fee collection suits by advisors and planners against clients can result in professional liability counter-suits. You can prepare for this problem by specifying fees and billing procedures. An important part of this provision is your right to suspend work in progress until unpaid balances are brought current.

4. SEC Provisions for Investment Advisors

Planners who serve in investment advisory roles are required by the SEC to add several clauses to their engagement letters. First, if you collect any part of your fee in advance, you must explain in your engagement letter how a refund of the advance fee will be calculated if the client decides to stop the relationship before you have finished your work.

Second, you must state that you will not assign your responsibilities as a planner to a third party without the written consent of the client.

Finally, you can avoid regulatory responsibilities resulting from your possessing discretionary authority to act on behalf of your client by including in your engagement letter a disclaimer that says you will not exercise your discretionary authority without the client’s express written consent.

5. IRS Requirements

The IRS requires financial advisors and financial planners to have written consent to use a client’s tax return for purposes other than preparing a tax return. Thus, to protect yourself from liability, it’s important to add a “consent to use tax return information” clause in engagement letters.

6. Sharing of Information

Many financial advisors and planners recommend including in engagement letters a clause that allows the planner to receive information from and share information with their client’s other advisors. But, if you’re going to exchange information about a client, you’d better have the client’s affirmation; much like the HIPAA Statutes [business associates agreement].

7. Dispute Resolution

Include an arbitration clause in every engagement letter – arbitration is much faster and cheaper than taking a case through the court system. This theory is supported by PLAN, which recommends including in every engagement letter details about the type of dispute resolution to be used in the case of a disagreement.

8. Limitation of Liability

PLAN recommends that client service professionals require clients to either indemnify them from certain types of claims or establish a dollar limit on their liability. Although this provision has been used successfully in other professions, the SEC position on such clauses seems unclear. So, before adding a limitation of liability or indemnification clause, then, check with your state and federal regulatory agencies about standard procedure.

9. Good Will

Many firms conclude an engagement letter with a “good will” provision that thanks the client for his or her business and offers to discuss the letter and its provisions if the client has questions. While this provision may appear gratuitous, PLAN believes this can be critically important to a defense if a client claims to not know what he or she was signing.

10. Signature

As mentioned above, your engagement letter becomes your contract for professional service. As such, it is important to have it signed by your client http://www.plan.org


Much like medical and surgical consent forms, or even treatment plans, client engagement letters for financial services professionals now seem the norm.

Note: Julie Schaeffer, a Chicago-based freelance writer, assisted in the original version of this essay.


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