This article is written by Shivani Varade, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.com.

Introduction

Let’s assume that you have Rs.1,00,000 and you are interested in investing it for one year. Like any rational investor, you expect two basic outcomes: (a) the final amount in a year to be higher than Rs. 1,00,000 (b) not lose the amount you started your investment with. You begin to research for a variety of investment opportunities that will earn you highest return, with minimum risk factor. However, before investing in such opportunities, every investor must have an adequate knowledge about investment management. Since, not every investor possesses such knowledge, it is better to seek advice from a professional, i.e. investment manager/advisor before investing your money.

This article aims to provide a thorough overview of the investment management services and the essential clauses to be kept in mind while drafting the investment management services agreement that is entered into between the investors and investment managers to avail their services. 

What are investment management services?

Investment Management Service refers to the practice of managing investments on behalf of others. It is carried out by an investment management company or an individual, i.e. an investment manager. They determine which financial products to invest in and which to avoid for deriving profits while also reducing the risks involved. 

Put simply, the key tasks of an investment manager while providing such services include:

1. Assessment of client’s financial goals and risk-taking ability- For creating a portfolio, a manager first needs to collect information such as how much amount the client has to invest, for how much time period, how much return they expect, and how much they’re willing to risk losing.
2. Create investment strategies- After collecting the above-mentioned information, they create an investment portfolio that suits their client’s goals. A diverse portfolio with investments spread across many different assets such as shares, debentures, government bonds, treasury bills, mutual funds, etc., reduces risk – it’s a case of not putting all your eggs in one basket. The main aim is to achieve maximum return by diversifying risk.
3. Monitor investments and send reports- They need to monitor their client’s investments on an ongoing basis and send a report about the same to the client to keep him informed about the status of his investment. 

What is an investment management services agreement?

An Investment Management Services Agreement is a formal document that governs the arrangement between a company/individual (investment manager) providing investment management services and the investor (client). It lists out the conditions and the extent to which the investment manager can act about the specific investments mentioned in the agreement. 

Essential clauses in an investment management services agreement

While the investment manager will normally tender its own form of agreement, the client will need to make certain decisions and negotiate certain terms. If you are a client, some of the essential terms you should bear in mind are as follows:

• Definitions, parties, appointment, commencement-

Frequently used terms in the agreement should be defined at the beginning to avoid repetition throughout the agreement, and to reduce the risk of ambiguity of meaning depending on the context in which the term is used. 

The parties to this agreement are the individuals who aim to invest (often referred to as the “client” or “investor”) and the investment manager. 

It is usual to state expressly that the client appoints the investment manager to act as an investment manager and the agreement needs to specify an effective date from which the manager takes on this role, which is typically mentioned in the beginning of the agreement. 

• Authority of the investment manager- 

The agreement will grant the manager either discretionary or non-discretionary authority. With discretionary authority, the manager will be able to invest client’s money even without prior consultation with you. Whereas, with non-discretionary authority, the manager will have to obtain client’s prior consent for each transaction.

• Powers and duties of the investment manager-

This clause typically includes a list of the tasks the manager is expected to carry out, including buying, selling and dealing in investments, making deposits, and instructing the custodian or administrator on behalf of the client. It also states that the manager should be obliged to act in good faith and with reasonable skill and care to ensure that any decision on behalf of a client is suitable for the client, based on his financial situation and investment objectives. 

Sample Clause- 

Powers and duties of the investment manager-

• The Client hereby appoints the Manager as an Investment Manager to perform the services hereinafter described, and the Manager accepts such appointment. The Manager shall be responsible for the investment and reinvestment of the Assets in accordance with the Client’s investment needs, goals and objectives. 

• Subject to prior consultation with the Client, the Manager has all powers with regard to the investment and reinvestment of the assets and trading authority over the Client’s account to buy, sell, or effect investment transactions involving the Assets in the Client’s name;

• The Client agrees to provide information and/or documentation requested by Manager in furtherance of this Agreement as pertains to Client’s investment objectives, needs and goals, and to keep Manager informed of any changes regarding the same. 

• Compensation to the investment manager- 

The compensation payable to the manager should be set forth in the agreement or in a Schedule to the agreement. Commonly, the compensation is stated as a percentage of the account assets (e.g. 3% per annum) and is payable in advance or arrears on a quarterly basis. Although managers will have standard compensation schedules, it can be negotiated. In addition to the manager compensation, you will also be liable for broker commissions, stamp duty and registration fees. 

Sample Clause-

Compensation to the investment manager-

• The Client will pay to the Investment Manager, as compensation for the services rendered, and facilities furnished by the Investment Manager hereunder, a service fee (“Service Fee”). 

• The Service Fee is calculated at the annual rate of 3% of the Client’s average daily net assets and is accrued daily and payable quarterly. 

• In the event the Investment Manager is not acting as such for an entire calendar quarter, the Service Fee payable by the Client for the calendar quarter shall be prorated to reflect the portion of the calendar quarter in which the Investment Manager is acting as such under this Agreement. 

• Representations and warranties- 

The scope of the representations and warranties is important and the clients should take legal advice before accepting any representations or warranties. In this clause, both the client and the investment manager make certain representations and warranties such as their ability to enter into the agreement, credibility of the information and documents provided by them, etc. 

Sample Clause- 

Representations and warranties- 

• The Client hereby represents and warrants to the Manager the following: 

• The Client has full legal power, authority and capacity to enter into this Investment Management Services Agreement. 

• The Client agrees that the Manager may, and will, render investment management service to others. The Manager may take the same, similar, or different positions in specific investments for the Manager’s other clients, as it does for the Client. The Client acknowledges and agrees that the Manager has no obligation to purchase or sell, or to recommend for purchase or sale, any security which the Manager may purchase or sell for its other clients. 

• The Manager hereby represents and warrants to the Client that:

• the manager is fully authorized and capable to enter into this agreement and regulated by the SEBI (Investment Advisor) Regulations, 2013. 

• Acknowledgement of risk– 

This clause should state that the client agrees to the uncertainty involved in dealing with the investment assets. As we know that investments are subject to market risk, including inflation risk and foreign exchange risk. Even though the manager works in the best interest of the client, it is not possible to guarantee no risk and highest rate of return on any investment.  

Sample Clause-

Acknowledgement of risk- 

• The Manager does not guarantee the future performance of the Assets or any specific level of performance, the success of any investment decision or strategy that Manager may use, or the success of Manager’s overall management of the Assets. 

• Client understands that investment decisions made by the Manager are subject to various markets, currency, economic, political and business risks, and that those investment decisions may not always be profitable.

• Liability and indemnity- 

Usually, the manager will want to exclude liability for indirect or consequential losses, while the trustees will want the widest possible definition of loss. This comes down to a matter of negotiation. The manager should typically bear liability for losses suffered by the client as a result of the breach of agreement, negligence, willful default or fraud of the Manager or its employees. On the other hand, the client will typically agree to indemnify the manager against all costs, losses, claims and expenses arising out of any action properly taken by the manager in accordance with the agreement or in case of breach of the agreement by the client. 

Sample Clause-

Limitation of liability-

• The Client understand that except as otherwise provided by law, neither the Manager nor any (a) of its officers, partners, directors (or persons performing similar functions); (b) of our employees and representatives; will be liable for:

• any obligations, costs, fees, losses, liabilities, claims, judgements, actions, damages and expenses, including but not limited to lawyer’s fees, and court expenses, incurred or arising from any investment decision made or other action taken or omitted in good faith by us with the degree of care, skill, prudence and diligence that a person acting in a fiduciary capacity would use under similar circumstances; 
• any Losses arising from adhering to the instructions of the Client.

Indemnity- 

• Each party shall defend, indemnify and hold all of the Indemnified Persons harmless from any and all Losses sustained by any Indemnified Party arising out of or in connection with any misrepresentations, omissions or breach made by the defaulting party with respect to this Agreement, any inaccuracies in the information that you provide to the Manager.

• Reports and statements-

The manager is required to provide to the client, investment reports stating any activity in the account, current holdings in the account, and the performance of the account against relevant benchmarks. The report is generally provided quarterly or as decided mutually by the parties. The client and its auditors should be allowed access to such records (and provide copies) upon reasonable request. 

Sample Clause-

Reports and statements-

• The Investment Manager agrees to furnish to the Client, current prospectuses, annual statements, investment reports, and such other information with respect to their affairs within 7 days of the end of the quarter.

• The Investment Manager further agrees to furnish to the Client or its auditor the same such documents and information pertaining to the Invested Assets under the Investment Plan for scrutiny. 

• Term and termination- 

The termination rights of the manager and the client should preferably not be similar. Generally, the client will have a flexible and immediate right of termination so that they can move investments quickly as per their discretion. However, if the agreement is terminated by the manager, the client will have to make other arrangements. Therefore, a minimum of three-month notice is usually required to be given by the manager to the client to terminate the agreement. 

Sample Clause- 

Termination-

• It is agreed that the Client may terminate this Agreement at any time and such termination will be effective upon receipt of notice of such termination.
• Subject to three months written notice provided to the Client, the Manager may terminate the Client’s account at any time, for any reason or no reason, in its sole discretion. 
• Termination of this Agreement will not affect (a) the validity of any action previously taken under this Agreement; (b) liabilities or obligations from transactions initiated before termination of this Agreement; or (c) Client’s obligation to pay fees to the Manager that have already been earned under this Agreement. 
• Further, Client’s death, disability or incompetence shall not automatically terminate or change the terms of this Agreement. However, Client’s executor, guardian, attorney-in-fact or other authorized representative may terminate this Agreement by giving written notice to the Manager. 

In addition to the clauses mentioned above, the agreement should also contain certain standard provisions known as boilerplate clauses. The main boilerplate clauses are as follows:

1. Entire agreement – This clause ensures that the agreement supersedes any prior arrangements between the parties relating to the subject matter of the agreement, whether written or oral, and that they are not relying on any representations not set out in the agreement. 
2. Service of notices – This clause should clearly state how any written notices under the agreement will be served, i.e. in writing, by post, by email, by hand delivery etc.
3. Waiver – This makes clear that any delay by the parties in exercising, or failure to exercise, any right or remedy in relation to the agreement does not mean a waiver of that right or remedy and that no waiver in respect of the agreement shall be effective unless it is expressed in writing. 
4. Severability – This clause ensures that if a provision of the agreement is held to be illegal, invalid or unenforceable, in whole or in part, the remainder of the agreement shall not be affected. 
5. Force majeure – This clause allows a party to be excused from performing its obligations under the agreement for certain events outside its reasonable control such as hurricanes, earthquakes and other natural disasters, terrorism, government acts, etc. 

Lastly, you must also ensure that both the parties have duly signed the agreement. 

Advantages of investment management services agreement

The major advantages of having an Investment Management Services Agreement in place are:

1. Having asset managers to take care of your investments saves your time and resources. 
2. Since asset managers are tasked with one specific function, they bring in expert knowledge with them. This helps them to serve their clients to the best of their abilities.

Disadvantages of investment management service agreement

One major disadvantage of this agreement is that the client gives away some control to the investment manager. Though the client can negotiate the terms of the agreement and set out limits within which the manager will function, the final decision is taken by the investment manager. 

What if the agreement is violated?

Just like in any other agreement, when a party defaults, this agreement is terminated. The defaulting party can be asked to compensate the other party by paying an amount equivalent to the loss suffered by the aggrieved party due to the breach. The mode of dispute resolution should be mutually agreed upon by the parties. It is generally preferred that the disputes be resolved by the way of amicable negotiations. However, if the negotiations fail, arbitration is preferred. 

Conclusion

Investment management services agreement can streamline your investments by creating a diverse portfolio that suits your investment goals and risk-taking ability. However, while executing this agreement it is important to have the above-mentioned clauses in place so as to avoid any subsequent disputes, for example, the authority of the manager clause and consideration clause. Though the pre-designed templates save time, they may not cover all terms from an angle of negotiation. Therefore, it is very crucial to modify such templates according to the needs and circumstances. To quote Mr. Warren Buffet “An investor should act as though he had a lifetime decision card with just twenty punches on it”. 

References

• Discretionary Investment Management Agreement
• http://vulcaninvestments.com/wp-content/uploads/Discretionary-Advisory-Contract.pdf
• https://www.investmentmanagementuk.co.uk/investment-management/
• https://www.sec.gov/Archives/edgar/data/1557794/000119312513277535/d526548dex99d4.htm

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