Letters of Engagement

From Planipedia

Thanks to PlanPlus and WEA for sharing their material for this Best Practices Guide.

Engagement agreements should be used for both comprehensive or modular plans. They also can, and should, be used regardless of whether compensation is taken on a fee only, fee-offset, or commission basis. An engagement agreement can take the form of “an agreement” or a “letter of engagement” outlining the terms of the engagement. In any case, the agreement or letter should include the following:

• The names of the parties to the engagement;
• A description of the services to be provided – the more detailed the better;
• The responsibilities and accountability of each party;
• How decisions will be made;
• The term of the agreement;
• The method of compensation for the advisor;
• How the agreement can be dissolved;
• The need to use outside professionals if required – and payment of any associated costs;
• Disclosure of any conflicts of interest; and
• The advisor’s business affiliations.

In addition, it is wise to include these provisions:

• A statement of the advisor’s intention to protect the confidentiality of the client; and
• The method of client redress regarding conduct, service, or product information (please also see the section entitled, Complaints).

Sample Engagement Agreements

On the following pages you’ll find two sample Engagement Agreements, which illustrate a recommended structure. The first is an agreement designed for comprehensive planning engagements and the second is for modular planning engagements. These agreements can, of course, be tailored to the needs of the client, as well as the unique business structure of the advisor.

Engagement Agreement for Comprehensive Advisory Services

The Comprehensive Agreement as illustrated contemplates fee-based services, however you can easily modify it to adjust to the compensation method you use. Here are some points to assist you in this process:

• First you need to review Item #13 in the agreement where the Advisor’s Compensation Disclosure is provided. You’ll note under this point, that there are 6 possible compensation alternatives including:

• Fee Only;
• Fee Plus Commission;
• Fee-offset. Please note that fee-offset only considers fees earned on investment assets outside the realm of the insurance act;
• Commission Only;
• Salary; and
• Salary plus Commission.

(Simply identify the compensation method that applies to your situation and delete the remaining options.)

• Next, if the option you selected above excludes fees, you would remove item #14 “Fees” from the agreement and would also remove the Pre-Authorized Payment section on the bottom on the last page of the agreement.

The fees for this agreement are assumed to include an up-front fee as well as a monthly retainer for ongoing continuous service.

Engagement Agreement for Modular Planning Services

This agreement is for planning services delivered on a modular basis, meaning that perhaps only one or two aspects of a client’s affairs are being reviewed at a time. This agreement allows you to specify, via check boxes, the services currently being contracted. Additional services would be covered by separate agreements.

The same adjustments can be made to this agreement as described above relative to the Advisor Compensation Method. This agreement also contemplates up front fees only. No monthly retainer fees are expected.

Advisors might read the following Engagement Agreements as overly complex and comprehensive. While this might be true, they are designed to address many exogenous variables facing the profession. These agreements are designed to ensure full disclosure of the many aspects of the advisor/client relationship.