How to Draft an Investment Management Service Agreement

Investment Management Service refers to the process of controlling investment on behalf of others. It is carried out by an investment management firm or by a person i.e. an investment manager. They decide which financial goods are to be invested in and which are to be excluded in order to derive income while at the same time reducing the risks involved.

How to Draft an Investment Management Service Agreement

How to Draft an Investment Management Service Agreement

Introduction

Investment Management Service refers to the process of controlling investment on behalf of others. It is carried out by an investment management firm or by a person i.e. an investment manager. They decide which financial goods are to be invested in and which are to be excluded in order to derive income while at the same time reducing the risks involved. Simply placed, the main duties of an investment manager when delivering those services include:

  • Evaluation of Client's Financial Priorities and Risk-Taking Skills – In order to build a portfolio, the advisor first has to compile details such as how much the client needs to spend, how much effort, how much return they expect, and how much they are able to risk losing.

  • Develop Investment Strategies- After gathering the above details, they create an investment strategy that meets the priorities of their clients. A diverse portfolio of stocks spread across a wide variety of securities, such as shares, equity, government bonds, treasury bills, mutual funds, etc., lowers risk – it's a case of not having all the eggs in one basket. The key goal is to achieve an optimum return by risk diversification.

  • Track Investment and Submit Updates – They need to monitor their client's investment on a continuous basis and send a report of the same to the client in order to keep him aware of the state of his investment.


What is the Arrangement on Wealth Advisory Services?

The Investment Management Services Agreement is a structured contract regulating the relationship between a company/individual (investment manager) offering investment management services and a client (client). It lays out the terms and the degree to which the investment manager may operate on the particular assets alluded to in the arrangement.


Key provisions in the deal on Investment Management Services – While the investment manager will usually tender his own form of arrangement, the investor will have to make certain decisions and discuss certain conditions. If you are a customer, some of the main words that you can keep in mind are as follows:

  • Definitions, Groups, Appointments, Beginnings- Frequently used words in the agreement should be specified at the outset in order to prevent duplication in the agreement and to minimize the possibility of distortion in interpretation based on the context in which the word is used. The parties to this arrangement are people who aim to invest (often referred to as the 'client' or 'investor') and the fund advisor. It is customary to state specifically that the client appoints the investment manager to serve as an investment manager and that the arrangement shall specify the effective date on which the manager assumes this role, which is normally started at the beginning of the agreement.

  • Office of the Fund Advisor- The arrangement would provide the manager with either a discretionary or non-discretionary power. With discretionary power, the boss would be able to spend the money of the customer and without direct consulting with you. Whereas for a non-discretionary jurisdiction, the manager would have to receive prior approval from the customer for each purchase.

  • Powers and Roles of Investment Advisor- This provision usually provides a list of the duties that the manager is supposed to conduct, including buying, selling, and dealing with shares, making deposits, and instructing the custodian or administrator on behalf of the client. It also notes that the consultant shall be obliged to behave in good faith and with sound ability and caution to ensure that any action on behalf of the investor is acceptable for the client on the grounds of his financial position and investment goals.

  • Compensation for the Fund Advisor- Compensation owed to the manager should be laid out in the arrangement or in the Timetable to the agreement. Compensation is generally listed as a percentage of the assets of the account (e.g. 3% per year which is due on a quarterly basis in advance or arrears. While managers may have regular pay schedules, these can be negotiated. In addition to the remuneration of the manager, you will also be responsible for broker commissions, stamp duty, and licensing fees.

  • Representations and Promises- The scope of representations and warranties is critical and clients can take legal counsel before any representations or warranties are approved. In this provision, both the investor and the investment manager shall make such promises and assurances, such as their willingness to enter into an arrangement, the integrity of the details and documentation given by them, etc.

  • Danger Acknowledgment – This provision should specify that the client deals with the volatility inherent in dealing with investment securities. As we know, investment is subject to market risk, including inflation risk and foreign exchange risk. And if the manager operates in the best interests of the investor, no risk and the highest rate of return on any transaction can be assured.

  • Responsibility and Accountability- The manager would generally try to remove responsibility for indirect or cumulative damages, while the trustees would prefer the widest possible definition of losses. This is a topic of the consultation. Usually, the manager should be responsible for damages suffered by the customer as a result of a breach of contract, neglect, deliberate default, or fraud on the part of the manager or his staff. On the other hand, the customer would usually have to pay the manager for any damages, injuries, lawsuits, and expenditures arising out of any action taken reasonably by the manager.

  • Reports and Statements – The manager is expected to provide the investor with investment reports showing some activity in the portfolio, the existing holdings in the account, and the output of the account against the applicable benchmarks. The report shall usually be issued on a quarterly basis or as agreed by the parties. In a fair request, the customer and its auditors should be given access to those documents (and supply copies).

  • Word and Cessation of Operation- The exit powers of the manager and the customer should ideally not be the same. Generally, the client would have a versatile and automatic right to termination so that they can transfer investments easily as they desire. However, if the deal is broken by the trustee, the customer would have to make further plans. As a consequence, a minimum of three-month notice is typically expected to be given to the customer by the manager to cancel the arrangement. In addition to the clauses listed above, some common conditions known as boilerplate clauses should also be included in the arrangement. The key boilerplate clause is as follows:

  • Entire Agreement – This provision guarantees that the agreement supersedes all previous agreements between the parties relating to the subject matter of the agreement, whether formal or oral, and that they do not depend on any statements not provided for in the agreement.

  • Service of Notices – This provision should explicitly specify how the formal notices under the arrangement are to be served, e.g. in writing, via phone, via e-mail, by hand delivery, etc.

  • Waiver – This makes it clear that any pause or inability by the parties to exercise any right or remedy in relation to the agreement does not imply a waiver of that right or remedy and that no waiver of the agreement shall be valid until it is articulated in writing.

  • Severability – This clause guarantees that the rest of the arrangement is not compromised if any provision of the agreement is determined to be unconstitutional, null, or unenforceable, in full or in part.

  • Force Majeure – This provision requires a party to be excused from fulfilling the duties under the Arrangement for incidents outside its fair control, such as floods, earthquakes, and other natural disasters, attacks, political actions, etc.

  • Finally, you must therefore ensure that the document has been properly ratified by all sides.


Advantages of Wealth Banking Outsourcing Partnership

The key benefits of getting an Investment Management Services Arrangement in operation are:

  • Getting wealth managers to take care of your savings would save you time and money.

  • As asset managers have a particular part to play, they carry with them professional expertise. This helps them serve their customers to the best of their ability.

 

Disadvantages with Wealth Banking Outsourcing Partnership

One of the main drawbacks of this deal is that the client provides more leverage to the fund manager. While the investor will discuss the terms of the arrangement and set parameters under which the manager can act, the investment manager will take the final decision.

And if the Deal had been Violated?

As in every other arrangement, this agreement is broken when a party defaults. The defaulting party could be asked to compensate the other party by paying an amount equal to the damage incurred by the aggrieved party as a result of the violation. The parties should agree on a form of conflict settlement. It is usually recommended that conflicts be settled by polite talks. However, if the talks fail, the arbitration shall be favored.

Conclusion

Investment management services partnership will streamline your investment by building a diverse portfolio that satisfies your investment priorities and risk-taking capability. However, when enforcing this arrangement, it is necessary to include the provisions referred to above in effect in order to prevent any future conflicts, such as the controlling clause and the consideration clause. While pre-designed templates save time, they cannot cover all terms from a negotiating perspective. It is also very important to change certain models according to needs and circumstances. To quote Mr. Warren Buffet, "An investor should act as if he had a lifetime decision card with only 20 hits on it."


BY

Kosha Doshi