An investment management agreement is the written contract between you and an investment adviser that sets out how your money will be managed, what the adviser is allowed to do, how much you’ll pay, and how either side can end the relationship. Federal securities law dictates several of its required provisions, including limits on compensation, a consent requirement before the contract can be assigned to another firm, and notice provisions for partnership changes.1Office of the Law Revision Counsel. 15 U.S. Code 80b-5 – Investment Advisory Contracts Everything else, from the trading style to the fee structure to what happens on termination, is negotiable between you and the firm, and the details matter.
Discretionary or Non-Discretionary Authority
The most consequential choice in the agreement is whether the manager can trade without checking with you first. Discretionary authority lets the manager buy and sell inside your stated strategy and constraints without calling. You gain speed and lose day-to-day control. Non-discretionary authority flips that: the manager recommends, you approve each trade, and nothing happens until you do. You keep control and accept the risk that a time-sensitive opportunity may pass before you can respond.
Either way, the manager operates as a fiduciary under the Investment Advisers Act, with a duty of care and a duty of loyalty that require putting your interests ahead of the firm’s.2Securities and Exchange Commission. Commission Interpretation Regarding Standard of Conduct for Investment Advisers The agreement should state which model applies and what the manager does when you can’t be reached.
Who Actually Holds Your Money
Your investment manager and the institution holding your assets 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, registered broker-dealer, or futures commission merchant.3eCFR. 17 CFR 275.206(4)-2 – Custody of Funds or Securities of Clients by Investment Advisers Your holdings sit in accounts segregated from the adviser’s own assets, so if the advisory firm fails, your securities are still yours.
The agreement should name the custodian, say who pays custodial fees (usually you), and describe how the manager’s trading authority connects to the custodian’s record-keeping. You should get account statements directly from the custodian, independent of anything the manager sends you. Compare the two.
Investment Objectives and Restrictions
The agreement records your investment objectives and the guardrails the manager must stay within. A well-drafted document translates vague labels into concrete limits: a cap on maximum drawdown, a ceiling on volatility, a floor on cash or investment-grade bonds. These are enforceable terms. If the manager breaches them, that’s a potential contract violation and a breach of fiduciary duty.
Specific restrictions belong in writing. Common ones include:
- Bans on short selling, margin trading, or concentrated positions in a single security
- Sector or ESG exclusions, such as tobacco, fossil fuels, or firearms
- Caps on the percentage allocated to alternatives, international equities, or below-investment-grade bonds
The agreement will also name a performance benchmark, usually a broad index, and the benchmark should actually match the strategy. Changing your objectives after signing typically requires a written amendment.
Fees and What They’ll Cost You
Asset-Based Fees
The common model is a percentage of assets under management, generally 0.50% to 2.00% per year, with the rate declining as the portfolio grows. Billing is usually quarterly, on the average daily balance or the end-of-quarter balance. On a $1 million portfolio, a 1% annual fee runs roughly $2,500 per quarter. The agreement should state the calculation method, the billing frequency, and whether the fee is debited from the account or invoiced separately.
Performance-Based Fees
Fees tied to returns are tightly restricted. The Investment Advisers Act generally prohibits registered advisers from charging 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 The SEC adjusts those thresholds for inflation periodically.
If you qualify and agree to a performance fee, the agreement should include two protections. A hurdle rate means the portfolio has to clear a minimum return before any performance fee applies. A high-water mark blocks the manager from charging performance fees on gains that only recover prior losses. Without one, a 20% loss followed by a 15% gain could still trigger a performance fee even though you’re underwater.
Other Charges
Some relationships use flat retainers or hourly billing, more common for planning than for ongoing portfolio management. Whatever the model, the agreement should itemize expenses. You typically pay trading commissions, custodial fees, and fund expense ratios. The manager pays its own overhead.
Disclosures You Should Get Before Signing
Two documents travel with the agreement and often tell you more than the contract itself. The adviser must deliver its current Form ADV Part 2A brochure before or at the time you sign, covering services, fees, disciplinary history, conflicts of interest, and strategies in plain English.5eCFR. 17 CFR 275.204-3 – Delivery of Brochures and Brochure Supplements The firm must then deliver an updated brochure or a summary of changes annually, within 120 days of its fiscal year end, and must update sooner if a change makes the current version materially inaccurate.
If you’re an individual investor rather than an institution, the adviser also has to deliver Form CRS, a shorter relationship summary, before or at the time the advisory contract begins.6eCFR. 17 CFR 275.204-5 – Delivery of Form CRS It’s written for a general audience and designed to make firms comparable. Read it.
What the Manager Owes You, and What You Owe Back
The manager’s fiduciary duty is the spine of the relationship. The duty of care requires advice and decisions informed by a reasonable understanding of your financial situation. The duty of loyalty requires the firm to put your interests first and to disclose conflicts.2Securities and Exchange Commission. Commission Interpretation Regarding Standard of Conduct for Investment Advisers A practical piece of the care duty is “best execution”: when trading for your account, the manager must seek the most favorable terms reasonably available, weighing execution speed and quality alongside cost.7Securities and Exchange Commission. Compliance Issues Related to Best Execution by Investment Advisers
You should expect regular performance reports, typically quarterly, showing holdings, transactions, and results against the benchmark. If the agreement gives the manager authority to vote proxies on the securities in your account, federal rules require written proxy voting policies, disclosure of those procedures to you, and a way for you to find out how your shares were voted.8Reginfo.gov. Supporting Statement Rule 206(4)-6 If you’d rather vote your own shares, say so in the agreement.
Your side is simpler. Give accurate financial information at the start, and update the manager when your situation changes materially. Review the statements and confirmations you get from both the custodian and the manager. Agreements commonly say that if you don’t object to a reported transaction within a set window, you’re deemed to have accepted it. That clause can hurt you if you let a problem sit.
Watch the indemnification language. Standard clauses protect the manager from liability for good-faith errors that don’t involve gross negligence or intentional misconduct, and for losses tied to following your explicit instructions. Language broad enough to waive your right to recover for anything short of fraud is a different matter. The SEC’s fiduciary standard cannot be waived by contract; any clause claiming to eliminate the adviser’s fiduciary duty is unenforceable.
Consent Rights If the Firm Is Sold
Federal law requires every advisory contract to bar 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 a straight handoff. A change in the controlling ownership of the advisory firm counts too. Acquisition of more than 25% of the firm’s voting securities is generally presumed to be an assignment, meaning the firm needs your approval to keep managing your money.
When advisory firms merge or get acquired, they send a consent letter. Don’t treat it as a formality. Look at the new firm’s Form ADV, compare the fee schedule, and decide whether to stay.
How the Agreement Ends
Most agreements run indefinitely until one side terminates. Others set a one-year initial term with automatic renewal unless someone gives advance notice. Either you or the manager can typically end the relationship in writing with 30 or 60 days’ notice, no reason required. “With cause” termination applies when one side materially breaches the agreement, such as a manager repeatedly ignoring your investment restrictions, and can allow immediate termination.
The agreement should spell out what happens to your assets after termination: liquidation, in-kind transfer to a new custodian, or a hold-in-place while you decide. It should also prorate the final fee. 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 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 Any predispute arbitration clause has to be prominently highlighted and preceded by a disclosure explaining that you’re 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 point to a different arbitration forum or allow court litigation, and it will name the governing state law. Know where you’d bring a claim before you sign.
Retirement Accounts Have an Extra Layer
If the assets being managed sit in an ERISA-covered retirement plan, such as a 401(k) or pension plan, additional rules apply on top of the standard agreement. 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, including commissions, revenue-sharing payments, and other incentives.11eCFR. 29 CFR 2550.408b-2 – General Statutory Exemption for Services or Office Space Changes to that fee information generally have to be reported within 60 days, and the arrangement must allow the plan to terminate without penalty on reasonably short notice. Missing or incomplete fee disclosures can turn an otherwise lawful arrangement into a prohibited transaction.
Tax Treatment of the Fees
Investment advisory fees are not deductible on your federal income tax return in 2026. The Tax Cuts and Jobs Act suspended the deduction for miscellaneous itemized deductions, including advisory fees, for tax years 2018 through 2025, and legislation enacted in 2025 made that suspension permanent.12Office of the Law Revision Counsel. 26 U.S. Code 67 – 2-Percent Floor on Miscellaneous Itemized Deductions
IRS rules generally allow advisory fees attributable to a traditional IRA to be paid directly from that IRA without the payment counting as a taxable distribution, which effectively lets the fee come out of pre-tax dollars. Paying fees from a Roth IRA usually isn’t advisable, because it cannibalizes tax-free growth. The agreement should say which account fees will be debited from, and it’s worth thinking through the tax consequence of that choice before signing.