Investment Management Agreement

An Investment Management Agreement in the United States sets out the rights, duties and consideration binding the parties to it.

The Investment Advisers Act of 1940 (15 U.S.C. §§ 80b-1 to 80b-21), administered by the Securities and Exchange Commission (SEC), is the primary federal statute governing investment advisers. Under Section 203 of the Advisers Act, investment advisers with $100 million or more in assets under management (AUM) must register with the SEC and comply with SEC regulations including the Form ADV Part 1 (registration filing) and Form ADV Part 2 (written disclosure brochure provided to clients). Advisers with less than $100 million AUM are generally regulated by their state securities authority — for example, the California Department of Financial Protection and Innovation (DFPI), the New York Department of Financial Services (NYDFS), or the Texas State Securities Board. The SEC adopted Regulation Best Interest (Reg BI) in 2019 under Exchange Act Rule 15l-1, imposing a best-interest standard on broker-dealers when making investment recommendations — distinct from but complementary to the full fiduciary standard applicable to RIAs under the Advisers Act.

For ERISA-governed plans — defined benefit pension plans, 401(k) plans, and other qualified retirement plans — an investment manager who manages plan assets is an ERISA fiduciary under ERISA Section 3(38) if the manager has full discretionary authority to manage plan assets. ERISA Section 404 imposes the prudent expert standard (the manager must act with the care, skill, prudence, and diligence of a prudent person familiar with such matters), the exclusive benefit rule (plan assets must be managed solely in the interest of plan participants and beneficiaries), and diversification requirements. ERISA Section 406 prohibits transactions between the plan and parties in interest (plan fiduciaries, service providers, and their affiliates) unless a specific statutory or administrative exemption applies.

The Uniform Prudent Investor Act (UPIA), adopted in substantially similar form in all 50 states, governs investment advisers managing trust assets. UPIA requires total-return investing using modern portfolio theory, diversification of the trust portfolio, and impartiality between income beneficiaries and remainder beneficiaries.

A US Investment Management Agreement is needed whenever a registered investment adviser is engaged to manage client assets on a discretionary or non-discretionary basis — whether for high-net-worth individuals, institutional investors, pension plans, endowments, or family offices.

Wealth management firms including registered investment advisers such as Merrill Lynch Wealth Management, Morgan Stanley Wealth Management, UBS Financial Services, and independent RIAs managing separately managed accounts for clients with investable assets above $250,000 use Investment Management Agreements as the contractual foundation for the advisory relationship. The IMA documents the scope of the adviser's authority, the agreed investment policy statement (IPS) including asset allocation targets and prohibited securities, the fee schedule and billing methodology, and the client's acknowledgment of the adviser's fiduciary status under the Investment Advisers Act of 1940.

ERISA plan sponsors — corporations, municipalities, and nonprofit organisations sponsoring 401(k) plans, defined benefit pension plans, and profit-sharing plans — engage investment managers as ERISA Section 3(38) investment managers through written Investment Management Agreements that satisfy ERISA's requirements for delegation of investment responsibility. The Department of Labor's regulations under ERISA require that the IMA clearly establish the investment manager's fiduciary status, authority, and accountability.

University endowments, hospital foundations, and community foundations managing long-term investment pools require Investment Management Agreements with external managers for each asset class — domestic equity, international equity, fixed income, private equity, real estate, and hedge funds. These institutional IMAs are typically more detailed than individual client agreements, incorporating custom investment policy statements, benchmark specifications, performance reporting requirements, and compliance representations.

Family offices managing investment assets for ultra-high-net-worth families (above $30 million in investable assets) use Investment Management Agreements with both internal professional managers and external fund managers to document discretionary authority, fee arrangements, and reporting obligations.

The IMA must be executed before the investment manager assumes any discretionary authority over client assets — managing assets without a signed IMA violates the Advisers Act's requirement that investment advisers enter into written contracts with clients (Rule 204-2 under the Advisers Act).

A legally compliant US Investment Management Agreement must contain the following essential provisions to satisfy the Investment Advisers Act of 1940, SEC regulations, ERISA requirements (where applicable), and the Uniform Prudent Investor Act.

The investment authority clause must specify whether the manager's authority is discretionary (full authority to buy and sell without prior client approval) or non-discretionary (recommendations only, requiring client approval before execution). For discretionary accounts, the clause must describe any investment guidelines, sector restrictions, concentration limits, or prohibited securities that constrain the manager's discretion. The IMA should reference the client's written Investment Policy Statement (IPS) as an exhibit.

The client information and suitability section must document the client's investment objectives (growth, income, capital preservation, or a combination), time horizon, liquidity needs, risk tolerance (conservative, moderate, aggressive), tax status, and any other factors material to the manager's duty to provide suitable investment advice under the Advisers Act and Regulation Best Interest.

The fee schedule must specify the management fee as a percentage of AUM calculated on the average daily or monthly account value, the billing frequency (monthly, quarterly, or annually), whether fees are billed in advance or arrears, and whether the manager charges any performance fees subject to the Advisers Act's fulcrum fee requirements (Rule 205-3 for qualified clients). The fee section must disclose any third-party compensation the manager receives (12b-1 fees, soft-dollar arrangements) that may create conflicts of interest.

The Form ADV Part 2 disclosure requirement must be addressed: the agreement must confirm that the client has received and reviewed the manager's Form ADV Part 2 brochure, which contains required disclosures about the manager's services, fees, conflicts of interest, legal and disciplinary history, and code of ethics under Rule 204-3.

The fiduciary acknowledgment clause must state that the manager is a fiduciary under the Investment Advisers Act of 1940 and, where applicable, under ERISA Section 3(38), and that the manager accepts the duties of loyalty and care arising from that status.

The custody and brokerage clause must specify who holds the client's assets (typically an independent qualified custodian such as Charles Schwab, Fidelity Institutional, or Pershing), the brokerage arrangements for executing trades, and the manager's best execution obligation under SEC guidance.

The termination clause must specify the notice period for termination by either party (typically 30 to 90 days), how fees are prorated upon termination, the process for transferring or liquidating assets, and whether any termination fee applies. For ERISA plans, the termination process must comply with ERISA procedural requirements.