What is an investment management agreement? An investment management agreement is a legal contract between an investment manager and a client that outlines the terms of their relationship. It specifies the investment objectives, investment strategies, fees, and other important details.

Editor’s Note: Investment management agreements are essential for both investment managers and clients. They help to ensure that both parties are clear on the expectations and responsibilities of the relationship.

We’ve done the analysis, dug into the details, and put together this investment management agreement guide to help you make the right decision.

Key Differences:

Main Article Topics:

• What is an investment management agreement?
• Why is an investment management agreement important?
• What are the key terms of an investment management agreement?
• How do I negotiate an investment management agreement?
• What are the benefits of using an investment management agreement?

Investment Management Agreement

An investment management agreement is a legal contract that outlines the terms of the relationship between an investment manager and a client. It is an essential document that helps to ensure that both parties are clear on the expectations and responsibilities of the relationship.

• Objective: The investment objectives that the manager will seek to achieve.
• Strategy: The investment strategies that the manager will use to achieve the objectives.
• Fees: The fees that the manager will charge for their services.
• Authority: The level of authority that the manager will have over the investment decisions.
• Reporting: The frequency and content of the reports that the manager will provide to the client.
• Termination: The terms under which the agreement can be terminated.
• Dispute Resolution: The process for resolving any disputes that may arise between the parties.
• Governing Law: The jurisdiction that will govern the agreement.
• Amendments: The process for amending the agreement.

These are just some of the key aspects that should be included in an investment management agreement. By carefully considering each of these aspects, investors can help to ensure that they have a clear understanding of the relationship they are entering into.

Objective

The investment objectives are one of the most important aspects of an investment management agreement. They define the goals that the investment manager will seek to achieve on behalf of the client. These objectives should be specific, measurable, achievable, relevant, and time-bound (SMART). Without clear investment objectives, it will be difficult for the investment manager to make informed investment decisions and for the client to assess the performance of the manager.

There are a number of factors that should be considered when setting investment objectives, including the client’s risk tolerance, investment horizon, and financial goals. The investment manager should work closely with the client to develop investment objectives that are appropriate for their individual circumstances.

Once the investment objectives have been established, they should be clearly documented in the investment management agreement. This will help to ensure that both the investment manager and the client are clear on the goals of the relationship.

Here is an example of a well-defined investment objective:

“The investment objective is to achieve a long-term rate of return of 8% per year, with a maximum drawdown of 20%.”

This objective is specific, measurable, achievable, relevant, and time-bound. It also takes into account the client’s risk tolerance and investment horizon.

By carefully considering the investment objectives, investors can help to ensure that they have a clear understanding of the relationship they are entering into with their investment manager.

Strategy

The investment strategy is a critical component of an investment management agreement. It outlines the specific methods that the investment manager will use to achieve the investment objectives. The strategy should be tailored to the client’s individual circumstances, including their risk tolerance, investment horizon, and financial goals.

There are a wide range of investment strategies that can be used, including:

• Active management: This involves the investment manager making decisions about which investments to buy and sell in order to outperform a benchmark index.
• Passive management: This involves the investment manager tracking a benchmark index, such as the S&P 500. This approach is typically less expensive than active management, but it also has the potential to generate lower returns.
• Value investing: This involves investing in stocks that are trading at a discount to their intrinsic value.
• Growth investing: This involves investing in stocks of companies that are expected to experience above-average growth.
• Income investing: This involves investing in stocks or bonds that pay regular dividends or interest payments.

The investment manager should clearly outline the investment strategy in the investment management agreement. This will help to ensure that the client is comfortable with the approach that the manager will be taking.

Here is an example of a well-defined investment strategy:

“The investment manager will use a value investing strategy to achieve the investment objectives. The manager will invest in stocks that are trading at a discount to their intrinsic value. The manager will hold these stocks for the long term, with the goal of generating capital appreciation.”

This strategy is appropriate for a client who has a long investment horizon and a moderate risk tolerance.

By carefully considering the investment strategy, investors can help to ensure that they have a clear understanding of the relationship they are entering into with their investment manager.

Fees

The fees that the investment manager charges are an important consideration for any investor. These fees can vary widely, depending on the type of investment management services being provided, the size of the investment portfolio, and the investment manager’s track record. It is important to understand the fee structure before entering into an investment management agreement so that you can make an informed decision about whether the fees are reasonable and appropriate for your circumstances.

There are a number of different types of investment management fees, including:

• Asset-based fees: These fees are charged as a percentage of the assets under management. The fee is typically calculated on a quarterly or annual basis.
• Performance-based fees: These fees are charged based on the investment manager’s performance. The fee is typically calculated as a percentage of the investment gains.
• Fixed fees: These fees are charged as a flat rate, regardless of the size of the investment portfolio or the investment manager’s performance.

The type of fee structure that is appropriate for you will depend on your individual circumstances. If you are investing for the long term, you may be willing to pay a higher asset-based fee in exchange for the potential for higher returns. If you are investing for the short term, you may prefer to pay a fixed fee.

It is important to compare the fees of different investment managers before making a decision. You should also make sure that you understand the fee structure and how it will impact your investment returns.

Here is an example of a fee structure for an investment management agreement:

This fee structure is appropriate for a client who is investing for the long term and is willing to pay a higher fee in exchange for the potential for higher returns.

By carefully considering the fees, investors can help to ensure that they have a clear understanding of the relationship they are entering into with their investment manager.

Authority

The level of authority that the investment manager has over the investment decisions is an important consideration for any investor. This authority can range from complete discretion to limited authority, and it is important to understand the implications of each level of authority before entering into an investment management agreement.

• Discretionary authority: This gives the investment manager the authority to make all investment decisions on behalf of the client. The client has no say in the investment decisions, and the investment manager is not required to consult with the client before making any changes to the portfolio.
• Limited authority: This gives the investment manager the authority to make investment decisions within certain parameters. The client may have some input into the investment decisions, and the investment manager may be required to consult with the client before making any major changes to the portfolio.

The level of authority that is appropriate for you will depend on your individual circumstances. If you are comfortable with the investment manager making all of the investment decisions, then you may want to grant them discretionary authority. However, if you want to have more control over the investment decisions, then you may want to grant them limited authority.

It is important to discuss the level of authority with the investment manager before entering into an investment management agreement. This will help to ensure that both parties are clear on the expectations and responsibilities of the relationship.

Reporting

Reporting is an essential aspect of any investment management agreement. It allows the client to monitor the performance of their investment portfolio and to make informed decisions about their investments. The frequency and content of the reports should be clearly defined in the investment management agreement.

• Frequency of reporting: The frequency of reporting can vary depending on the client’s needs and preferences. Some clients may want to receive reports on a monthly basis, while others may prefer to receive reports on a quarterly or annual basis.
• Content of reports: The content of the reports should include information on the performance of the investment portfolio, as well as any changes that have been made to the portfolio. The reports should also include information on the investment manager’s investment strategy and any risks that are associated with the portfolio.

Clear and regular reporting is essential for maintaining a strong relationship between the investment manager and the client. It allows the client to stay informed about the performance of their investment portfolio and to make informed decisions about their investments.

Termination

The termination clause in an investment management agreement outlines the terms under which either party can terminate the agreement. This is an important clause as it provides clarity and certainty for both parties in the event that the relationship breaks down.

• Mutual termination: Both the investment manager and the client can agree to terminate the agreement at any time. This is typically done in writing.
• Termination for cause: Either party can terminate the agreement for cause. This is typically done if the other party has breached a material term of the agreement.
• Termination without cause: The investment manager or the client can terminate the agreement without cause. This is typically done by providing written notice to the other party.

The termination clause should also specify the process for winding down the investment portfolio and distributing the assets to the client.

It is important to have a well-drafted termination clause in place to protect the interests of both parties. This clause should be reviewed by an attorney before it is signed.

Dispute Resolution

A well-drafted dispute resolution clause is an essential component of any investment management agreement. It provides a clear and efficient process for resolving any disputes that may arise between the investment manager and the client. This can help to avoid costly and time-consuming litigation.

There are a number of different dispute resolution mechanisms that can be included in an investment management agreement, including:

• Negotiation: This is the most informal and least adversarial method of dispute resolution. The parties simply attempt to reach an agreement through direct communication.
• Mediation: This involves using a neutral third party to help the parties reach an agreement. The mediator does not make a decision, but rather helps the parties to communicate and negotiate.
• Arbitration: This is a more formal process than mediation, and involves using a neutral third party to make a binding decision. Arbitration is typically faster and less expensive than litigation.
• Litigation: This is the most formal and adversarial method of dispute resolution. It involves filing a lawsuit in court and having a judge or jury make a decision.

The choice of dispute resolution mechanism will depend on a number of factors, including the nature of the dispute, the size of the investment portfolio, and the relationship between the investment manager and the client.

It is important to note that having a well-drafted dispute resolution clause in place does not guarantee that disputes will not arise. However, it can help to ensure that disputes are resolved quickly and efficiently, which can protect the interests of both parties.

Governing Law

The governing law clause in an investment management agreement specifies the jurisdiction that will govern the agreement and any disputes that may arise under it. This is an important clause as it determines which country’s laws will apply to the agreement and the rights and obligations of the parties.

There are a number of factors to consider when choosing the governing law for an investment management agreement, including:

• The domicile of the parties
• The location of the assets
• The governing law of any underlying investments
• The parties’ preferences

Once the governing law has been chosen, it is important to make sure that it is clearly stated in the investment management agreement. This will help to avoid any confusion or disputes down the road.

The governing law clause is an important part of any investment management agreement. It helps to ensure that the agreement is interpreted and enforced in accordance with the parties’ intentions.

Here is an example of a governing law clause:

Amendments

Amendments to an investment management agreement are changes to the original agreement that are made after the agreement has been signed. These amendments can be used to modify the terms of the agreement, add new provisions, or delete existing provisions. Amendments must be made in writing and signed by both the investment manager and the client.

• Purpose of Amendments

  Amendments can be used to make a variety of changes to an investment management agreement. Some common reasons for amending an agreement include:

  • To change the investment objectives
  • To change the investment strategy
  • To change the fees
  • To add or remove parties to the agreement
  • To correct errors or omissions
• Process for Amending an Agreement

  The process for amending an investment management agreement is typically outlined in the agreement itself. In general, the process involves the following steps:

  1. One party proposes an amendment to the other party.
  2. The parties negotiate the terms of the amendment.
  3. The parties sign the amendment.
  4. The amendment is attached to the original agreement and becomes part of the agreement.
• Importance of Amendments

  Amendments can be an important tool for keeping an investment management agreement up to date and relevant. As circumstances change, it may be necessary to amend the agreement to reflect those changes. Amendments can also be used to correct errors or omissions in the original agreement.

It is important to note that amendments to an investment management agreement can have legal implications. Therefore, it is important to consult with an attorney before making any amendments to an agreement.

FAQs on Investment Management Agreements

Investment management agreements are legal contracts that outline the terms of the relationship between an investment manager and a client. They are essential for ensuring that both parties are clear on the expectations and responsibilities of the relationship.

Question 1: What are the key terms of an investment management agreement?

Answer: The key terms of an investment management agreement include the investment objectives, investment strategy, fees, authority, reporting, termination, dispute resolution, governing law, and amendments.

Question 2: Why is it important to have a well-drafted investment management agreement?

Answer: A well-drafted investment management agreement can help to avoid disputes, protect the interests of both parties, and ensure that the relationship between the investment manager and the client is clear and well-defined.

Question 3: What should I do if I have a dispute with my investment manager?

Answer: If you have a dispute with your investment manager, you should first try to resolve the dispute through negotiation. If negotiation is not successful, you may need to consider mediation, arbitration, or litigation.

Question 4: How can I terminate my investment management agreement?

Answer: The terms for terminating an investment management agreement are typically outlined in the agreement itself. In general, you can terminate the agreement by providing written notice to the other party.

Question 5: What is the governing law of my investment management agreement?

Answer: The governing law of your investment management agreement is the jurisdiction that will govern the agreement and any disputes that may arise under it. The governing law is typically specified in the agreement itself.

Question 6: How can I amend my investment management agreement?

Answer: Amendments to an investment management agreement must be made in writing and signed by both the investment manager and the client. The process for amending an agreement is typically outlined in the agreement itself.

Summary: Investment management agreements are important legal documents that should be carefully reviewed before signing. By understanding the key terms of an investment management agreement, you can help to ensure that your relationship with your investment manager is clear and well-defined.

Transition to the next article section: For more information on investment management agreements, please consult with an attorney.

Investment Management Agreement Tips

An investment management agreement (IMA) is a legal contract that outlines the terms of the relationship between an investment manager and a client. It is important to have a well-drafted IMA in place to protect the interests of both parties. Here are a few tips for negotiating an IMA:

Tip 1: Understand the key terms of an IMA.

Before you sign an IMA, it is important to understand the key terms, including the investment objectives, investment strategy, fees, authority, reporting, termination, dispute resolution, governing law, and amendments.

Tip 2: Get legal advice.

It is advisable to consult with an attorney before signing an IMA. An attorney can help you to understand the terms of the agreement and ensure that your interests are protected.

Tip 3: Negotiate the terms of the agreement.

The terms of an IMA are negotiable. You should not be afraid to negotiate the terms of the agreement to ensure that they are fair and reasonable.

Tip 4: Make sure the agreement is clear and concise.

The IMA should be clear and concise so that both parties can easily understand the terms of the agreement.

Tip 5: Keep a copy of the agreement.

Once the IMA is signed, you should keep a copy of the agreement for your records.

Summary: By following these tips, you can help to ensure that you have a well-drafted IMA that protects your interests.

Transition to the article’s conclusion: For more information on investment management agreements, please consult with an attorney.

Conclusion

Investment management agreements (IMAs) are essential for any investor who wants to delegate the management of their investment portfolio to a professional. IMAs outline the terms of the relationship between the investment manager and the client, and they help to ensure that both parties are clear on the expectations and responsibilities of the relationship.

The key terms of an IMA include the investment objectives, investment strategy, fees, authority, reporting, termination, dispute resolution, governing law, and amendments. It is important to understand these terms before signing an IMA, and it is advisable to consult with an attorney to ensure that your interests are protected.

By having a well-drafted IMA in place, you can help to avoid disputes, protect your interests, and ensure that your relationship with your investment manager is clear and well-defined.

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