Category: Investing

An Investment Management Agreement (IMA) is a legally binding contract between an investor (or client) and an investment manager (or firm) that outlines the terms, responsibilities, and expectations for managing the client’s assets. This agreement is critical for establishing trust, clarifying roles, and mitigating risks. Below is a detailed breakdown of its components, along with a sample template framework:

Key Components of an Investment Management Agreement

1. Parties Involved
   • Client: Name, contact details, and account type (individual, trust, corporate).
   • Manager: Firm name, registration details (e.g., SEC-registered, FINRA membership), and fiduciary status.
2. Scope of Services
   • Investment objectives: Growth, income, capital preservation, ESG goals.
   • Asset classes: Stocks, bonds, alternatives (private equity, real estate), or sector-specific mandates.
   • Discretionary vs. Non-Discretionary:
     • Discretionary: Manager has authority to buy/sell assets without client approval.
     • Non-Discretionary: Client retains final decision-making power.
3. Compensation and Fees
   • Fee Structure:
     • Percentage of Assets Under Management (AUM) (e.g., 1% annually).
     • Performance-based fees (e.g., 20% of gains above a benchmark).
     • Flat/hybrid fees.
   • Payment Terms: Billing frequency (quarterly, annually) and payment method.
   • Expenses: Clarify if transaction costs, custodial fees, or third-party expenses are charged separately.
4. Term and Termination
   • Initial Term: Duration of the agreement (e.g., 1 year).
   • Termination Clauses: Conditions for ending the agreement (e.g., written notice, breach of contract, underperformance).
   • Post-Termination: Handling of asset transfers or final fees.
5. Roles and Responsibilities
   • Manager’s Duties:
     • Fiduciary duty to act in the client’s best interest.
     • Regular reporting (quarterly statements, performance updates).
     • Compliance with laws and client’s investment policy statement (IPS).
   • Client’s Duties:
     • Provide accurate financial information.
     • Fund the account promptly.
6. Risk Disclosure
   • Acknowledgment of market risks, liquidity risks, and potential losses.
   • Conflicts of interest (e.g., the manager invests in proprietary products).
7. Liability and Indemnification
   • Limitation of Liability: Manager not liable for losses due to market conditions, provided they acted prudently.
   • Indemnification: Client agrees not to hold the manager liable for third-party claims arising from the client’s actions.
8. Governing Law and Dispute Resolution
   • Jurisdiction (e.g., state laws governing the agreement).
   • Mediation/arbitration clauses to resolve conflicts.
9. Miscellaneous
   • Amendments: Process for modifying the agreement.
   • Entire Agreement: Supersedes prior verbal or written understandings.
   • Severability: Invalid clauses don’t void the entire agreement.

Sample Investment Management Agreement Template

**INVESTMENT MANAGEMENT AGREEMENT**  

**This Agreement** is made on [Date] between:  
**Client**: [Name/Entity], Address: [Address]  
**Manager**: [Firm Name], SEC CRD #: [Number], Address: [Address]  

**1. Scope of Services**  
The Manager will provide discretionary/non-discretionary investment management services for the Client’s account(s), aiming to achieve the following objectives:  
- Primary Goal: [Growth/Income/Preservation]  
- Asset Allocation: [E.g., 60% equities, 30% bonds, 10% alternatives]  
- Restrictions: [E.g., No tobacco stocks; ESG compliance]  

**2. Compensation**  
- Fees: [1.0%] of AUM, billed quarterly in arrears.  
- Performance Fees: [None/20% of returns exceeding S&P 500].  
- Expenses: Client agrees to reimburse [custodial/transaction] fees.  

**3. Term and Termination**  
- Initial Term: [12 months], automatically renewing unless terminated.  
- Termination: Either party may terminate with [30 days] written notice.  

**4. Reporting**  
The Manager will provide:  
- Quarterly performance reports.  
- Annual review meetings.  

**5. Governing Law**  
This Agreement is governed by the laws of [State/Country]. Disputes will be resolved via arbitration in [Location].  

**Signatures**:  
_________________________  
[Client Name]  
Date:  

_________________________  
[Manager Name/Title]  
Date:  

Critical Considerations

1. Fiduciary Duty
   • Ensure the manager is legally obligated to prioritize your interests (avoid non-fiduciary brokers).
2. Fee Transparency
   • Watch for hidden fees (e.g., 12b-1 fees, wrap fees).
3. Benchmarks
   • Define performance benchmarks (e.g., S&P 500, Barclays Aggregate Bond Index).
4. Customization
   • Tailor the agreement for unique needs (e.g., impact investing, concentrated stock positions).

Red Flags in an IMA

• Vague language about fees or strategies.
• No clear termination process.
• Excessive discretion without client oversight.
• Failure to disclose conflicts of interest (e.g., selling in-house products).

Regulatory Compliance

• SEC-Registered Advisors: Must provide Form ADV Part 2 (disclosing fees, conflicts, and disciplinary history).
• State-Registered Advisors: Verify compliance with local regulations.

Why a Strong IMA Matters

• Clarity: Prevents misunderstandings about goals and fees.
• Legal Protection: Outlines recourse for breaches of duty.
• Alignment: Ensures both parties work toward the same objectives.

Before signing, consult a financial attorney to review the agreement. A well-drafted IMA is the foundation of a successful, long-term partnership with your investment manager.