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.
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.
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.
Let us understand what makes an IMA.
Here are a few examples of IMA.
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.
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 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.
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.
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 –
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