What Is an Investment Management Agreement?

An Investment Management Agreement (IMA) is the bedrock of any professional relationship between an investor and a money manager or investment advisory firm. It’s a legally binding contract that outlines the roles, responsibilities, and expectations of both parties regarding the management of the investor’s assets. Think of it as a detailed roadmap, guiding the investment journey and ensuring everyone is on the same page. It moves beyond just handing over your money; it’s about establishing a well-defined partnership with clear objectives, strategies, and safeguards.

The Anatomy of an Investment Management Agreement

An IMA isn’t a one-size-fits-all document. It’s carefully tailored to reflect the specific needs and circumstances of the investor, the capabilities of the investment manager, and the regulatory environment in which they operate. However, several key components are consistently present:

1. Identification of Parties

This section clearly identifies the investor (the client) and the investment manager (the advisor or firm). It includes legal names, addresses, and contact information, establishing who the agreement applies to. Think of it as the official “introduction” to the agreement.

2. Scope of Services

This is where the agreement gets specific about what the investment manager will actually do. It details the investment strategies to be employed, the types of assets that will be managed (e.g., stocks, bonds, real estate, alternatives), and any restrictions on investment activities. For instance, it might specify a focus on “growth stocks” or prohibit investments in certain industries.

3. Investment Objectives and Guidelines

This section is crucial. It explicitly defines the investor’s investment goals, such as long-term growth, income generation, or capital preservation. It also lays out the risk tolerance of the investor, indicating how much volatility they are willing to accept in pursuit of their objectives. The investment manager is then obligated to manage the assets in a way that aligns with these objectives and guidelines.

4. Discretionary Authority

The agreement specifies whether the investment manager has discretionary authority, meaning they can make investment decisions without prior approval from the investor, or non-discretionary authority, requiring the investor’s approval for each transaction. This is a fundamental difference and significantly impacts the day-to-day management of the portfolio.

5. Compensation

This section clearly outlines how the investment manager will be compensated. Common fee structures include:

• Assets Under Management (AUM) Fee: A percentage of the total value of the assets being managed. This is the most prevalent structure.
• Performance-Based Fee: Also known as an incentive fee, it’s based on the performance of the portfolio, often with a hurdle rate (a minimum return that must be achieved before the fee is applied).
• Flat Fee: A fixed fee, regardless of portfolio size or performance.
• Combination Fee: A hybrid approach, combining elements of the above.

The agreement must transparently disclose all fees and expenses, ensuring the investor understands the costs involved.

6. Reporting and Communication

The agreement specifies the frequency and format of reports the investor will receive, detailing portfolio performance, transactions, and market commentary. It also outlines the communication channels to be used between the investor and the investment manager. Regular and transparent reporting is essential for maintaining trust and accountability.

7. Term and Termination

This section defines the length of the agreement and the conditions under which it can be terminated by either party. It usually includes a notice period required for termination.

8. Confidentiality

The agreement typically includes clauses protecting the confidentiality of the investor’s financial information and the investment manager’s proprietary strategies.

9. Governing Law

This section specifies the jurisdiction whose laws will govern the interpretation and enforcement of the agreement.

10. Dispute Resolution

It outlines the procedures for resolving disputes between the investor and the investment manager, often including mediation or arbitration. This can save time and money compared to traditional litigation.

Why is an Investment Management Agreement So Important?

An IMA provides crucial protection and clarity for both the investor and the investment manager. For the investor, it ensures that their assets are managed according to their specific goals and risk tolerance. For the investment manager, it establishes clear boundaries and responsibilities, mitigating the risk of misunderstandings and potential legal disputes. It fosters a professional, transparent, and accountable relationship.

Frequently Asked Questions (FAQs)

1. What happens if I disagree with a particular investment decision made by my investment manager?

If you have discretionary authority, the manager can make decisions without your prior approval, as long as they are in line with the overall investment objectives and guidelines outlined in the IMA. However, you should still communicate your concerns. If the manager has non-discretionary authority, they need your approval for each transaction. If disagreements are frequent and significant, it may be time to re-evaluate the relationship or consider terminating the agreement.

2. Can an Investment Management Agreement be modified?

Yes, IMAs can be modified, but any changes must be documented in writing and agreed upon by both parties. A formal amendment to the original agreement is the standard procedure.

3. What are the key things I should look for when reviewing an Investment Management Agreement?

Pay close attention to the fee structure, the scope of services, the investment objectives and guidelines, the discretionary authority granted, and the termination provisions. Make sure you fully understand each clause before signing.

4. What is a fiduciary duty, and how does it relate to an Investment Management Agreement?

A fiduciary duty is a legal obligation to act in the best interests of another party. Investment managers typically have a fiduciary duty to their clients, meaning they must prioritize the client’s interests above their own. This duty is implied in an IMA and is reinforced by regulatory requirements.

5. What recourse do I have if my investment manager breaches the Investment Management Agreement?

If your investment manager violates the terms of the IMA or breaches their fiduciary duty, you may have legal recourse. This could include filing a complaint with regulatory agencies, pursuing arbitration, or initiating a lawsuit. Document all communications and evidence of the breach.

6. Are Investment Management Agreements regulated?

Yes, IMAs are subject to regulation by various government agencies, such as the Securities and Exchange Commission (SEC) in the United States. These regulations are designed to protect investors and ensure that investment managers are operating ethically and responsibly.

7. Can I use a standard template for an Investment Management Agreement?

While templates can provide a starting point, it’s highly recommended to have an IMA drafted or reviewed by an attorney specializing in securities law. Standard templates may not adequately address your specific circumstances or comply with all applicable regulations.

8. What is the difference between an Investment Management Agreement and a Financial Planning Agreement?

An Investment Management Agreement focuses specifically on the management of assets. A Financial Planning Agreement, on the other hand, is a broader agreement that covers all aspects of your financial life, including retirement planning, estate planning, and insurance. Investment management may be one component of a financial planning agreement.

9. How often should I review my Investment Management Agreement?

You should review your IMA at least annually, or whenever there are significant changes in your financial situation, investment goals, or the regulatory environment.

10. What happens to my Investment Management Agreement if my investment manager leaves the firm?

The agreement may automatically terminate, or it may be transferred to another investment manager within the firm. The specific provisions for such a scenario should be outlined in the IMA.

11. Should I seek independent legal advice before signing an Investment Management Agreement?

Absolutely. It’s always prudent to consult with an attorney to ensure that the agreement is fair, understandable, and protects your interests. Don’t hesitate to get a second opinion.

12. What role does due diligence play before entering into an Investment Management Agreement?

Due diligence is crucial. Before signing an IMA, thoroughly research the investment manager’s background, experience, track record, and regulatory history. Check for any disciplinary actions or complaints. This will help you make an informed decision about whether to entrust them with your assets.