FLASH SALE! - "FINANCIAL MODELING COURSE BUNDLE AT 60% OFF" Enroll Now

Investment Management Agreement

Updated on January 5, 2024
Article byNanditha Saravanakumar
Edited byShreya Bansal
Reviewed byDheeraj Vaidya, CFA, FRM

What Is An Investment Management Agreement? 

An investment management agreement (IMA) is a legally binding document that outlines the contractual terms and conditions governing the relationship between an investor and an investment manager. The document is crucial in giving the investment manager the authority to act on the investor’s behalf and in their best interest.

Investment Management Agreement

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Investment Management Agreement (wallstreetmojo.com)

IMA is the proof of a fiduciary relationship between the two parties. The agreement contains important details about the parties, warranties, investor consent, reporting, expenses, fees, etc. There are two types of IMAs – discretionary and non-discretionary or standard agreements, depending on the extent of control.

Key Takeaways

  • An investment management agreement definition states that it is a document that governs the relationship between the investor and their manager. 
  • The manager acts in good faith to secure the investor’s best interests and provide good returns on their investment. The investor compensates the manager for their services, even if they incur losses, as the investor fully understands that investing involves many risks.
  • IMAs come in two main types: discretionary and non-discretionary, offering investors flexibility in choosing their preferred level of control over investment decisions.

Investment Management Agreement Explained 

An investment management agreement is one of the most important documents drafted between an investor and their fund manager. The agreement’s primary purpose is to function as a guideline that describes the responsibilities, liabilities, objectives, etc., to protect the interests of both parties.

Investors look for returns. They need value for their money. The manager has to act in good faith and put the funds to good use in such a way that it maximizes the investor’s gain. However, investing is prone to risk and losses. No matter the type of investment, there might be situations where loss is inevitable. In such cases, the investor must understand this. Also, the investor should agree to compensate the manager in return for these services, regardless of the returns (losses or profits).

Apart from this, many clauses included in the agreement would ensure an understanding between the parties, such as warranties, consent, etc. IMA also contains the investor’s objectives, based on which the manager will act.

Now, there are two types of IMA – discretionary and non-discretionary. Under a discretionary investment management agreement, the manager is not required to contact the investor and seek approval for every transaction or decision about the investments. It is ideal for those investors who do not wish to spend too much time on their assets. It allows the manager to act freely on behalf of the client.

Under non-discretionary or standard IMA, the manager must stay in constant touch with the investor and obtain permission before executing small transactions. Whatever the type of agreement, it is explicitly mentioned.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Requirements 

Let us understand what makes an IMA.

  1. Parties: The details of the parties – investor and investment manager are of utmost importance. The parties’ names, respective addresses, and signatures must be clearly mentioned in the document to be legally valid.
  2. Investor consent: Investor consent transfers the decision-making authority to the investment manager. However, the latter will have to act depending on the extent of authority the former provides. Nevertheless, the manager will contact the investor in case of significant decisions and seek permission.
  3. Investment principles: Investors often want to know how the manager plans to manage their account. The techniques and approaches depend on the investor’s risk tolerance, return expectations, and objectives (growth, income, etc.). There should be open communication regarding this so there aren’t any misunderstandings in the future.
  4. Shared investment vehicles: The investment manager frequently collaborates with other managers to combine the investor’s funds into shared investment vehicles like mutual funds or hedge funds. The agreement must also grant authorization for such activities.
  5. Custody: A custodian refers to the financial institution that holds the investors’ assets. They might be different from the investment manager’s company. The details of the custodian should be present in the agreement, along with the investor’s consent.
  6. Reporting: The IMA also contains information regarding the interval of written or verbal reports that the manager should provide the investor. Investors have the right to know how their funds are used and how their assets perform. The parties can agree on the report interval, reporting method, etc.
  7. Fees: Finally, the manager collects a fee for handling the investor’s account. It is mainly expressed as a percentage of the assets under management. Moreover, other expenses the investor will incur include custodial fees, brokerage fees, etc. 
  8. Confidential information: The manager and their company are entitled to preserve the privacy of the investor’s information that might become available during their relationship. If the manager transfers information to third parties without the investor’s approval, the latter can sue the former.
  9. Liability of manager: It lists the manager’s liability in handling the investor’s account. The manager is professionally obligated to make decisions in the investor’s best interests so that their client will only benefit. Also, the manager will not be liable for any losses incurred due to acts of god or factors beyond the manager’s control.
  10. Acknowledgment of investment risk: This clause is essential as it states that the investor should not have unrealistic expectations from the manager or their assets. The clause further stresses that the investor understands the risk involved in their investments.
  11. Warranties: Warranties are guarantees the company (investment manager) provides, ensuring all the information they display is accurate. In case of willful misrepresentations, investors can take legal action and ensure their interests.
  12. Termination: The termination clause contains: information on the circumstances under which the agreement can be terminated, the period of termination, and the responsibilities of either party in such an event.
  13. Governing law: The agreement is subject to the laws of the United States and the investor’s/manager’s state. 

Examples

Here are a few examples of IMA.

Example #1

Dylan, an investor, recognizes the importance of formalizing his investment arrangements and decides to enter into an IMA with his trusted investment manager, Cara. This legally binding document serves as a comprehensive framework crafted to safeguard the interests of both parties while delineating the parameters of their professional partnership.

The IMA outlines crucial elements that ensure transparency and accountability throughout their collaboration. It includes detailed provisions regarding the appointed custodian, delineating the financial institution responsible for safeguarding Dylan’s assets. Furthermore, the agreement explicitly defines the fee structure, ensuring full disclosure of compensation arrangements between Dylan and Cara.

Dylan and Cara sign the agreement while a witness observes, making it legally valid. This carefully designed investment management agreement template is essential for keeping their working relationship smooth and productive.

Example #2

In a recent development, Delaware Investments National Municipal Income Fund (NYSE: VFL) has taken significant steps to enhance its investment management strategy and governance structure. The fund primarily focuses on municipal bond investments and has announced key changes to its Investment Management AgrIMA) and board of trustees.

The most notable change is the approval of a new IMA with Abrdn Inc., a highly regarded UK-based investment company. Abrdn Inc. brings extensive experience managing US-registered closed-end funds and municipal bond portfolios, signifying a strategic shift in the fund’s asset management approach.

In conjunction with the new IMA, the Fund’s Board of Trustees has nominated four new trustees, all currently trustees of existing abrdn funds. This move is designed to infuse the board with fresh expertise and perspectives from experienced professionals in the investment industry.

Investment Management Agreement vs Investment Advisory Agreement

Investment Management Agreements (IMA) and Investment Advisory Agreements (IAA) govern the relationship between an investor and a financial professional; they differ significantly in their scope and the level of detail they provide.

  • IMA outlines the relationship between the manager and the investor. In contrast, IAA delves deeper into investment guidelines, reinvestment strategies, consultation procedures, transaction execution, capital deployment, service scope, and more.
  • Monthly and annual fees are explicitly defined in the IAA based on the account size, whereas the IMA lacks such specific details.

While both agreements cover various aspects of the investor-manager relationship, IMA provides a comprehensive overview, while IAA offers more detailed insights into specific areas mentioned above.

Frequently Asked Questions (FAQs)

1. What is the difference between an SMA and an IMA?

A Separately Managed Account (SMA) and an Investment Management Agreement (IMA) both involve the management of investment portfolios but differ in their structure. An SMA is a customized portfolio of securities managed on behalf of a single investor, providing individualized control and transparency. In contrast, an IMA is a legal agreement between an investor and an investment manager that outlines the terms and conditions for managing the investor’s assets, allowing for a more standardized approach to portfolio management with the investor entrusting decision-making to the manager.

2. Can an IMA be terminated?

Yes, an Investment Management Agreement (IMA) can typically be terminated. The IMA should specify the conditions under which termination is allowed, including factors like notice periods and the procedures to be followed. The investor and the investment manager have responsibilities and obligations upon termination, as outlined in the agreement.

3. Who enters into an investment management agreement with the AMC?

As per the guidelines set forth by the Securities and Exchange Board of India (SEBI), the trustee within a mutual fund is entrusted with the responsibility of entering into an Investment Management Agreement (IMA) with the asset management company.

This has been a guide to what is an Investment Management Agreement. We compare it with investment advisory agreement, explain examples, and requirements. You can learn more about it from the following articles –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *