When it comes to investing in the stock market, it`s crucial to understand the different types of agreements that are available to investors. The two most common agreements are the investment advisory agreement and the investment management agreement. Here`s what you need to know about each of these agreements and how they differ.
Investment Advisory Agreement
An investment advisory agreement is a contract between an investor and an investment advisor. This agreement stipulates that the advisor will provide advice and guidance to the investor on how to manage their investments. The advisor may also be responsible for creating an investment plan that is customized to the investor`s needs and goals.
One of the critical features of an investment advisory agreement is that the advisor acts in the investor`s best interest. This commitment is referred to as a fiduciary duty, which means that the advisor must put the investor`s interests ahead of their own.
Investment advisors typically charge a fee for their services, which is often a percentage of the investor`s assets under management. This fee structure incentivizes the advisor to grow the investor`s assets, as their compensation is tied to the size of the portfolio.
Investment Management Agreement
An investment management agreement is similar to an investment advisory agreement, but there is one key difference. In an investment management agreement, the investment manager has the authority to make investment decisions on behalf of the investor. This authority allows the manager to buy and sell securities without first seeking the investor`s approval.
Because of this additional responsibility, investment managers typically charge a higher fee than investment advisors. In addition to a percentage of assets under management, investment managers may also charge a performance fee, which is a percentage of any gains made on the investor`s portfolio.
Which Agreement is Right for You?
The answer to this question depends on your investment goals and preferences. If you prefer to have more control over your investments and want to make investment decisions yourself, an investment advisory agreement may be the right choice for you. However, if you`re looking for a more hands-off approach and want someone else to manage your investments for you, an investment management agreement may be a better fit.
It`s also essential to consider fees when choosing between these two types of agreements. Investment advisory fees are typically lower than investment management fees, but this is because investment advisors are not making investment decisions on behalf of the investor. If you want someone else to make investment decisions for you, you should expect to pay a higher fee.
Understanding the differences between investment advisory agreements and investment management agreements is crucial to making informed decisions about your investments. By understanding what each of these agreements entails, you can choose the one that best suits your needs and goals. Whether you choose an investment advisory agreement or an investment management agreement, be sure to work with a reputable advisor or manager who has your best interests in mind.