Performance-based advisory fees may be charged to:

Qualified clients with at least $1.4 million AUM or net worth over $2.7 million. Performance-based fees are restricted to "qualified clients" who meet wealth thresholds. Since June 29, 2026: at least $1.4 million AUM with the adviser OR net worth over $2.7 million (excluding primary residence).

An investment adviser firm is being acquired. This acquisition:

Is a deemed assignment requiring client consent. A change in controlling interest of an investment adviser is deemed an "assignment" of client contracts. Clients must consent to the assignment and have the right to terminate without penalty.

Which contract provision is prohibited?

"Adviser shall not be liable for losses resulting from its negligence". Hedge clauses that attempt to waive liability for an adviser's negligence or violations of fiduciary duty are prohibited. General risk disclaimers are acceptable.

A client pays a $6,000 quarterly fee in advance and terminates after one month. The client is entitled to a refund of:

$4,000. Prepaid fees must be refunded on a pro-rata basis. The client paid for 3 months but only received 1 month of service, so they are entitled to 2/3 of the fee ($4,000).

Advisory Contracts — Free Series 66 Guide 2026

Investment advisory agreements must meet specific requirements under both federal and state law.

Required Contract Provisions

Essential Elements

Provision	Requirement
Services	Detailed description of advisory services
Fees	Fee structure, calculation method, billing frequency
Term	Duration of the agreement
Termination	How either party can end the relationship
Assignment	Consent requirement for assignment
Authority	Discretionary vs. non-discretionary

Additional Disclosures

Contracts should also address:

Investment restrictions or guidelines
Custody arrangements
Proxy voting policies
Conflict of interest disclosure
Risk factors

Fee Arrangements

Common Fee Structures

Type	Description	Typical Range
Assets Under Management (AUM)	Percentage of assets	0.25% - 2.0% annually
Hourly	Billed for time spent	$150 - $500/hour
Fixed/Flat	Set fee for services	Varies by scope
Performance-Based	Based on investment returns	Subject to restrictions
Wrap Fee	All-inclusive fee	1.5% - 3.0% annually

AUM Fee Calculation

Example: 1% annual fee, billed quarterly

Portfolio value: $1,000,000
Annual fee: $10,000
Quarterly fee: $2,500

Fee Billing Methods

Method	Description
Advance billing	Charged at beginning of period
Arrears billing	Charged at end of period
Tiered fees	Lower percentage for higher assets
Breakpoints	Rate reduction at asset thresholds

Performance-Based Fees

General Prohibition

Section 205(a)(1) of the Advisers Act prohibits performance fees for most clients.

Qualified Client Exception

Performance fees ARE permitted for "qualified clients" under Rule 205-3:

Qualification Method	Threshold (effective June 29, 2026)
Assets under management	$1,400,000 with the adviser
Net worth	More than $2,700,000 (excluding primary residence)
Qualified purchaser	As defined in Investment Company Act
Knowledgeable employee	Of the investment adviser

Threshold Adjustments

SEC adjusts thresholds every 5 years for inflation
Clients who qualified under prior thresholds remain qualified
New clients must meet current thresholds

Fulcrum Fee

One type of permitted performance fee:

Fee increases if performance exceeds benchmark
Fee decreases if performance falls below benchmark
Changes must be symmetrical
Permitted under Section 205(b)(2), not Rule 205-3: allowed with registered investment companies and with other clients whose contract covers more than $1 million in assets

Assignment of Contracts

What Constitutes Assignment?

Action	Assignment?
Transfer of contract	Yes - direct assignment
Change in controlling interest	Yes - deemed assignment
Death of sole proprietor	Yes
Sale of substantially all assets	Yes
Change in non-controlling ownership	No

Assignment Requirements

Requirement	Details
Client consent	Must be obtained before assignment
Form of consent	Written preferred; "negative consent" may be acceptable
Notification	Notify client of the change
Right to terminate	Client can terminate without penalty

Negative Consent

Some states allow "negative consent" where:

Client is notified of assignment
Client is given time to object (typically 30 days)
Silence = deemed consent

Prohibited Contract Provisions

Hedge Clauses

Prohibited hedge clauses include provisions that:

Waive adviser's compliance with securities laws
Limit liability for violations of fiduciary duty
Release adviser from negligence liability

Allowed Disclaimers

General disclaimers are acceptable if they:

Do not negate fiduciary duty
Are not misleading
Don't purport to waive securities law compliance

Example of allowed language: "Investment involves risk and past performance does not guarantee future results."

Termination Provisions

Client Rights

Right	Description
Terminate at will	Client can end relationship
No penalty	Cannot penalize early termination
Refund of prepaid fees	Pro-rata refund required

Prepaid Fee Refund

Example: Client pays $4,000 quarterly in advance

Terminates after 1 month
Refund: $4,000 × (2/3) = $2,667

Adviser Termination Rights

Advisers may terminate with:

Reasonable notice
Return of client assets
Orderly transition to new adviser

Wrap Fee Programs

Special contract requirements for wrap fee programs:

Requirement	Description
Separate brochure	Schedule H wrap fee brochure
Disclosure of services	What's included in wrap fee
Conflicts	Trading incentives (less trading = more profit)
Cost comparison	When wrap may cost more than unbundled

Exam Tip: Performance fees are for QUALIFIED CLIENTS only (at least $1.4M AUM or net worth over $2.7M since June 29, 2026). Assignment requires CLIENT CONSENT. Hedge clauses that waive fiduciary duty are PROHIBITED. Prepaid fees must be refunded PRO-RATA.

Series 66

14.2 Advisory Contracts

Key Takeaways