Investment Management Agreement: Key Terms and Examples

Investment management agreements give investment managers the authority to manage a client’s portfolio while setting expectations and legal guidelines with the client. If this is your first time drafting an investment management agreement, negotiating and drafting one can prove to be challenging. However, clear legal information can help clear up misconceptions while providing insight into the process.

The article below discusses everything you need to know about investment management agreements:

What is an Investment Management Agreement (IMA)?

Investment management agreements (IMAs) are legal documents that give investment managers the authority to manage capital on behalf of investors. They detail the terms and conditions under which a client will invest in a shared vehicle while agreeing to pay investment management service fees and direct expenses. An IMA contains other standard provisions, including monitoring fees, the scope of activities, and managerial indemnification.

You can view a sample of an IMA at this website .

What Do Investment Managers do?

An investment manager is a person or business that manages a client’s investment portfolio. They buy and sell securities on behalf of the client and monitors the portfolio’s overall performance. Investment managers develop an investment strategy to meet a client’s objectives and then use it allocating the client’s asset portfolio, which may include stocks and bonds.

Other activities that an investment manager performs include:

• Conduct economic and market research
• Interpret complex financial information
• Maintain professional training credentials
• Make financial recommendations
• Meeting with analysts to discuss financial matters
• Read financial briefings
• Research investment companies and vehicles

Meet some lawyers on our platform

Lori B.

232 projects on CC

CC verified

View Profile

Adam J.

13 projects on CC

CC verified

View Profile

Ryenne S.

968 projects on CC

CC verified

View Profile

Chris H.

34 projects on CC

CC verified

View Profile

Key Terms of an IMA

Investment management agreements are similar in appearance to standard contracts. You should always get the terms and conditions of the IMA in writing to avoid or resolve future disputes. However, what makes IMAs different from other contracts are the key terms they typically contain.

The key terms of an IMA are as follows:

Key Term 1. Parties

Ensure you correctly identify all investment management agreement parties. They should sign the agreement, including company founders and shareholders. However, it may not be practical to include all minority shareholders if there are many of them.

Key Term 2. Warranties

Warranties are contractual representations that the company’s statements are true and accurate as of the completion date. Although investors conduct due diligence before investing, they are still entitled to sue the company’s founders for willful or negligent misrepresentations. Investors prefer that companies expressly include warranties in the contract.

Key Term 3. Investor Consent

Investors will seek a contractual provision prohibiting managers from making significant decisions without their consent. Consent is highly dependent on the number of investors in the business. If there is only one investor, then they are the sole decision-making body.

Key Term 4. Shared Vehicles

Investment managers frequently invest their clients’ funds entirely in mutual funds, hedge funds, bank funds, and other shared vehicles. They generally manage these vehicles directly or through unaffiliated managers. Additionally, an investment manager may contract with independent managers to invest all or a portion of assets in a separate account, which means the agreement should include these authorizations.

Key Term 5. Custody

The investment management agreement should also specify the custodian who will hold the account’s assets. Custodians are typically reputable financial institutions, such as large banks or brokerage firms, and separate entities from the investment manager.

If the investment manager recommends a specific custodian, they must explain their reasoning. Additionally, the management company should be willing to work with the client’s preferred custodian and name them in the IMA.

Key Term 6. Reporting

An investment management agreement should specify the type and frequency of written or verbal reports. Reports are typically issued each quarter and include general market conditions, account activity, current holdings, and performance. This provision should cover the terms and conditions surrounding your reporting methods, intervals, and limitations.

Key Term 7. Investment Principles

Your investment management agreement should also specify the investment principles used for managing the account. The parties will want to discuss them collectively and transparently. An investment manager should base the initial policies on the client’s current circumstances and risk tolerances and revisit them regularly.

The investment principles are the primary means by which the client can exert control over the investment manager’s activities, so you should ensure that the terms are transparent and comprehensive without infringing upon their ability to perform optimally.

Key Term 8. Expenses and Fees

The investment manager’s fees are typically specified in an appendix. Typically, payments are expressed as a percentage of account assets and are payable quarterly in advance or on invoice receipt. Along with the investment manager’s fees, clients are responsible for brokerage commissions, custodial fees, and any other service providers, except for wrap accounts.

As you can see, there are several unfamiliar and complicated terms surrounding investment management agreements that can result in unintended legal implications if you do not fully understand them. However, investment lawyers can help with negotiating and drafting an appropriate agreement while achieving the intended legal and financial result.

Here is an article that also outlines the key terms of an IMA.

Image via Pexels by Pixabay

What Is a Discretionary Investment Management Agreement?

Discretionary investment management agreements are a legal document that establishes the terms between a client and an investment manager. The investment manager handles buying and selling decisions on behalf of their client. These terms contrast standard investment management agreements where the client has sole decision-making authority.

An investment manager has broad powers under a discretionary investment management agreement. As such, clients must carefully select a provider and have complete faith in an investment manager’s capabilities and resources. The client can monitor progress through quarterly reports.

Examples of Investment Management Agreements

The most important factor to remember about investment management agreements is that they specify how the client and manager will work together. They also clearly place limitations on the types of decisions that a manager can make without their permission. However, these concepts are more abstract in thought than when we examine a hypothetical example.

Here is an example of how investment management agreements work:

• John Spires offer investment management services on private equity funds to consumers
• Prospective clients meet with John for an initial consultation
• If the parties are a good fit, John can agree to take them on as clients
• John will offer new clients an investment management agreement
• The investment management agreement establishes vital terms of the relationship
• John must not make any significant financial decisions without the client’s consent
• The investment management agreement protects John if clients are not forthcoming about their finances

As you can see, investment management agreements are relatively straightforward. However, the contract’s provisions may be more complicated, depending upon the firm, client, instruments used, reporting measures, and more. Get legal help with investment management agreements for the best result.

This web page also offers an example of investment management agreements.

Get Help with an Investment Management Agreement

The most practical approach toward drafting and negotiating an investment management agreement is seeking advice from a licensed professional. If you need help with investment management agreements, investment lawyers have the training, experience, and knowledge to help you forge ahead. They can also ensure that your document is valid for your geographic location and accomplishes your intent when working with clients. Post a project in ContractsCounsel’s marketplace to get free quotes from lawyers for help.