An investment management agreement is the written contract between you and an investment adviser that defines how your money will be managed, what the adviser is authorized to do, what you pay, and how either side can end the relationship. Federal securities law shapes what has to be in it: registered advisers cannot operate under one without provisions covering compensation, restrictions on assignment, and notice of partnership changes.1Office of the Law Revision Counsel. 15 U.S. Code 80b-5 – Investment Advisory Contracts Beyond those mandatory pieces, the document locks in your investment goals, the manager’s trading authority, fee arrangements, and what happens if things go wrong. The terms you agree to at the outset govern everything that follows.
Who Decides Trades: Discretionary vs. Non-Discretionary Authority
The single most consequential choice in the agreement is whether you grant the manager discretionary or non-discretionary authority.
Discretionary authority lets the manager buy and sell in your account without calling you first. You set the strategy and constraints up front; the manager executes inside them. It works when you trust the firm’s judgment and don’t want to be involved day to day, but it demands a high level of confidence, because every trade is happening without your sign-off. The manager still operates as a fiduciary under the Investment Advisers Act, so each decision must serve your interests ahead of the firm’s.2Securities and Exchange Commission. Commission Interpretation Regarding Standard of Conduct for Investment Advisers
Non-discretionary authority keeps you in the driver’s seat. The manager recommends, but nothing trades until you approve. You get maximum control at the cost of speed. If a market window opens and closes in an afternoon, waiting to reach you can mean a missed opportunity. Whichever model applies, the agreement should say so plainly and should address what happens if the manager cannot reach you during a time-sensitive situation.
Where Your Money Actually Sits
Your investment manager and the institution holding your money should not be the same entity. SEC rules require advisers with custody of client assets to keep those assets with a “qualified custodian,” typically a bank, a registered broker-dealer, or a futures commission merchant.3eCFR. 17 CFR 275.206(4)-2 – Custody of Funds or Securities of Clients by Investment Advisers The custodian holds your securities and cash in accounts segregated from the adviser’s own assets.
That separation is a real safeguard. If the advisory firm hits financial trouble, your assets at the custodian remain yours. Your agreement should name the custodian, state who pays custodial fees (usually you), and describe how the manager’s authority interfaces with the custodian’s records. You should receive account statements directly from the custodian in addition to any reports from the manager, so you have an independent way to verify that your holdings match what the adviser reports.
Investment Objectives and Restrictions
The agreement documents your investment objectives and the guardrails the manager must stay inside. Objectives can range from aggressive growth to capital preservation, and the manager’s trades must remain consistent with what you’ve agreed to. Changing your objectives later normally requires a written amendment.
Risk tolerance is more useful when written in concrete terms than in vague ones like “moderate.” A well-drafted agreement might cap the portfolio’s maximum drawdown, limit volatility, or set a floor on cash or investment-grade bonds. Those constraints are enforceable. If the manager blows through them, that is a potential breach of contract and a violation of fiduciary duty.
Specific restrictions belong in the document too. Common ones include:
- Bans on short selling, margin trading, or concentrated positions in a single security.
- Exclusions of particular industries, such as tobacco, fossil fuels, or firearms, based on your values.
- Caps on the percentage allocated to alternatives, international equities, or below-investment-grade bonds.
The agreement also usually names a performance benchmark, often a broad market index, as the yardstick for evaluating results. The benchmark should match the strategy. A high-quality bond mandate shouldn’t be measured against a stock index.
How Fees Work
Fee arrangements come in several forms, and the differences compound over time.
Asset-Based Fees
The most common model is a percentage of assets under management, generally ranging from about 0.50% to 2.00% per year, with rates typically declining as your portfolio grows. Fees are usually calculated on the average daily balance or the end-of-quarter balance and billed quarterly. The agreement should spell out exactly how the fee is calculated, when it is charged, and whether it is deducted from the account or invoiced separately.
Performance-Based Fees
Some managers want a slice of the returns they generate, but federal law limits who can be charged this way. The Investment Advisers Act generally prohibits registered advisers from collecting compensation based on a share of capital gains or capital appreciation.1Office of the Law Revision Counsel. 15 U.S. Code 80b-5 – Investment Advisory Contracts The SEC allows an exception for “qualified clients,” currently defined as individuals with at least $1,100,000 under management with the adviser or a net worth over $2,200,000, excluding a primary residence.4eCFR. 17 CFR 275.205-3 – Exemption From the Compensation Prohibition These thresholds are adjusted for inflation periodically.
If you qualify and agree to a performance fee, look for two protections. A hurdle rate means the portfolio must beat a minimum return before any performance fee kicks in. A high-water mark prevents the manager from charging performance fees on gains that only recover past losses. Without a high-water mark, a manager could lose 20% one year, recover 15% the next, and still collect on that recovery while you remain underwater. Both provisions should appear in any performance-fee arrangement.
Other Fees and Expenses
Some relationships use flat retainers or hourly billing, particularly for financial planning rather than ongoing portfolio management. Whatever the model, the agreement should itemize which expenses fall on you and which are the manager’s. You typically cover trading commissions, custodial fees, and fund expense ratios. The manager covers its own operating costs.
The Disclosures That Come With the Agreement
The agreement doesn’t stand alone. Federal rules require the adviser to deliver two disclosure documents alongside it, and these documents often contain information more useful to you than the contract itself.
Before or at the time you sign, the adviser must deliver its current Form ADV Part 2A brochure, covering services, fee schedules, disciplinary history, conflicts of interest, and investment strategies in plain English.5eCFR. 17 CFR 275.204-3 – Delivery of Brochures and Brochure Supplements After that, the adviser has to deliver an updated brochure or a summary of changes annually, within 120 days of its fiscal year end. Interim changes that make the brochure materially inaccurate also trigger an update obligation.
If you are an individual investor, the adviser must also deliver Form CRS, a shorter relationship summary, before or at the time the contract begins.6eCFR. 17 CFR 275.204-5 – Delivery of Form CRS Form CRS is designed to help you compare the adviser’s services, fees, and conflicts against other firms. Read it. It is one of the few documents in the process written for a general audience.
What the Manager Owes You
The adviser’s fiduciary duty is the backbone of the relationship. The SEC has stated that this duty, rooted in the Investment Advisers Act, has two components: a duty of care and a duty of loyalty.2Securities and Exchange Commission. Commission Interpretation Regarding Standard of Conduct for Investment Advisers The duty of care requires advice and decisions that are in your best interest, informed by a reasonable understanding of your financial situation. The duty of loyalty requires the manager not to put its own interests ahead of yours and to fully disclose conflicts of interest.
A practical extension of the duty of care is “best execution.” When executing trades, the manager must seek the most favorable terms reasonably available, considering the speed and likelihood of execution and overall quality of the transaction, not just commission cost.7Securities and Exchange Commission. Compliance Issues Related to Best Execution by Investment Advisers The cheapest trade isn’t always the best one.
You should also receive regular performance reports, usually quarterly, showing holdings, transactions, and returns against the agreed benchmark.
Proxy Voting
If the agreement gives the manager authority to vote proxies on the securities in your account, federal rules require the firm to adopt written policies designed to make sure those votes serve your interests. The manager must describe its proxy voting procedures to you and tell you how to find out how your shares were voted.8Reginfo.gov. Supporting Statement Rule 206(4)-6 If you want to keep voting authority yourself, say so clearly in the agreement. Many investors don’t think about proxy voting until a controversial shareholder proposal surfaces, and by then the manager may have already voted.
Indemnification Language
Most agreements protect the manager from liability for losses that follow your explicit instructions or good-faith errors that don’t involve gross negligence or intentional misconduct. That is standard. What to watch for is indemnification language so broad it effectively waives your right to recover for anything short of outright fraud. The SEC’s fiduciary standard cannot be waived by contract, so any clause purporting to eliminate the adviser’s fiduciary duty is unenforceable regardless of what the agreement says.
What You Owe the Manager
Your obligations are simpler but genuinely important. Provide accurate financial information at the outset, because the manager’s entire strategy depends on understanding your income, assets, debts, liquidity needs, and risk tolerance. If your financial situation changes materially after signing, tell the manager promptly. A job loss, an inheritance, or a major new expense can all shift what the right portfolio looks like.
Review the statements and trade confirmations you receive from the custodian and the manager, and raise problems quickly. Agreements often include a clause stating that failure to object within a specified window is treated as acceptance of the reported transactions. That clause can work against you if you sit on a problem for months.
Assignment and Change of Control
Federal law requires every investment advisory contract to include a provision preventing the adviser from assigning the agreement to another firm without your consent.1Office of the Law Revision Counsel. 15 U.S. Code 80b-5 – Investment Advisory Contracts “Assignment” is broader than it sounds. It covers not just a direct transfer of your contract, but also a change in the controlling ownership of the advisory firm itself. If someone acquires more than 25% of the firm’s voting securities, that ownership change is generally presumed to be an assignment, and the firm needs your approval to keep managing your money.
The protection exists because you chose this particular manager for a reason. If the firm gets bought out, the people, strategy, and culture may change, and you have the right to walk away. When advisory firms merge or get acquired, they send a consent letter. Don’t treat it as a formality. Review the new firm’s Form ADV, compare fee structures, and make a deliberate decision about whether to stay.
Duration, Termination, and Disputes
Most investment management agreements run indefinitely until one side ends them. Some set an initial term of one year with automatic renewal unless either party gives advance notice.
Either you or the manager can typically terminate by giving written notice, with most agreements requiring 30 or 60 days. You don’t need a reason. “Without cause” termination lets either side walk away by following the notice procedure. “With cause” termination applies when one party materially breaches the agreement — for example, the manager repeatedly violating your investment restrictions — and may allow immediate termination without a waiting period.
Pay attention to what happens to your assets after termination. The agreement should say whether the manager liquidates the portfolio, transfers holdings in kind to a new custodian, or simply stops managing while the assets remain in place. It should also address how the final fee is prorated. A manager billing quarterly shouldn’t keep three months of fees for two weeks of work.
Many agreements include a mandatory arbitration clause. When the adviser is associated with a FINRA member firm, customer disputes must be arbitrated through FINRA’s process if the customer requests it or the agreement requires it.9Financial Industry Regulatory Authority. FINRA Rule 12200 – Arbitration Under an Arbitration Agreement or the Rules of FINRA FINRA rules also require that any predispute arbitration clause be prominently highlighted and preceded by a disclosure explaining that you are giving up the right to sue in court and that arbitration awards are generally final.10Financial Industry Regulatory Authority. FINRA Rule 2268 – Requirements When Using Predispute Arbitration Agreements for Customer Accounts
For advisers not affiliated with a FINRA member, the agreement may specify arbitration through another forum, such as the American Arbitration Association, or may allow litigation in a designated court. The agreement will also name the governing state law. Before signing, know where and how you would pursue a claim. Arbitration is faster and cheaper than litigation, but your ability to appeal an unfavorable result is extremely limited.
Tax Treatment of Advisory Fees
Investment advisory fees are not deductible on your federal income tax return in 2026. The Tax Cuts and Jobs Act suspended the miscellaneous itemized deduction (which included advisory fees) for tax years 2018 through 2025, and legislation enacted in 2025 made that suspension permanent.11Office of the Law Revision Counsel. 26 U.S. Code 67 – 2-Percent Floor on Miscellaneous Itemized Deductions
One planning point worth raising with your adviser: IRS rules generally allow advisory fees to be paid directly from a traditional IRA without treating the payment as a taxable distribution. Because the money never hits your bank account, the fee is effectively paid with pre-tax dollars. Paying fees from a Roth IRA usually isn’t advisable, because it eats into tax-free growth. The agreement should say which account or accounts fees will be debited from, and you should think through the tax implications of that choice before signing.
If the Assets Are in an ERISA Retirement Plan
If the assets being managed sit in a retirement plan covered by ERISA, such as a 401(k) or pension plan, additional disclosure rules apply on top of the standard requirements. A service provider managing ERISA-covered assets must deliver a written fee notice to the plan fiduciary before entering into the arrangement, disclosing all direct and indirect compensation the provider expects to receive, including commissions, revenue-sharing payments, and other incentive arrangements.12eCFR. 29 CFR 2550.408b-2 – General Statutory Exemption for Services or Office Space
Changes to previously disclosed fee information generally must be reported within 60 days, and the service arrangement must let the plan terminate without penalty on reasonably short notice. If you are a plan sponsor selecting a manager, or an individual whose retirement assets are managed under an ERISA-covered plan, confirm that the agreement and disclosures satisfy these requirements. Missing or incomplete fee disclosures can turn an otherwise lawful service arrangement into a prohibited transaction.