Representations of adviser: Overview, definition, and example
What are representations of adviser?
Representations of adviser refer to statements, assurances, or guarantees made by an investment adviser, financial consultant, or fiduciary regarding their qualifications, compliance, and obligations under a contract. These representations help establish trust, accountability, and legal protections between the adviser and their client.
For example, a registered investment adviser (RIA) may represent that they hold the required licenses, comply with SEC regulations, and act in the best interest of their clients.
Why are representations of adviser important?
Representations of adviser clauses are crucial because they ensure transparency, regulatory compliance, and accountability in financial advisory relationships. Clients rely on these representations to verify the adviser’s expertise, integrity, and adherence to laws such as the Investment Advisers Act of 1940.
For businesses and investors, these representations protect against misrepresentation, fraud, and conflicts of interest while ensuring that the adviser fulfills their fiduciary duties.
Understanding representations of adviser through an example
Imagine a wealth management firm hires an investment adviser to manage client portfolios. The adviser represents in the contract that:
- They are properly licensed and registered under federal and state securities laws.
- They do not have conflicts of interest that would affect their recommendations.
- They will act in a fiduciary capacity, prioritizing the best interests of clients.
If the adviser later engages in undisclosed self-dealing, the firm may have legal grounds to terminate the agreement or seek damages based on the breach of representations.
In another scenario, a hedge fund hires a sub-adviser who represents that they have never been subject to SEC enforcement actions. If it is later discovered that the sub-adviser had previous regulatory violations, the hedge fund could void the agreement based on misrepresentation.
An example of a representations of adviser clause
Here’s how a representations of adviser clause might appear in an investment advisory agreement:
“The Adviser represents and warrants that it is duly registered as an investment adviser under applicable securities laws, possesses the necessary expertise and qualifications to perform the services outlined in this Agreement, and will act in compliance with all federal and state regulations. The Adviser further represents that it has disclosed all material conflicts of interest and will act in the best interests of the Client.”
Conclusion
Representations of adviser ensure that financial and investment advisers meet legal, ethical, and professional standards when providing advisory services. These representations protect clients, establish trust, and create enforceable obligations in advisory agreements.
By including a representations of adviser clause, businesses and investors can verify an adviser’s credentials, ensure compliance, and safeguard against misrepresentation or unethical practices.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.