Legal Definitions - IDA

An IDA, which stands for Investment-Direction Agreement, is a formal contract between two parties where one party provides specific instructions or guidelines to the other party regarding the management, allocation, or investment of assets. This agreement ensures that the party holding or managing the assets follows the precise directives of the asset owner, rather than having full discretionary control. It outlines the scope of investment activities, acceptable risk levels, and any specific preferences or restrictions the asset owner wishes to impose.

Here are some examples to illustrate how an Investment-Direction Agreement works:

• Example 1: Managing a Family Trust

  Imagine a grandparent setting up a trust fund for their grandchildren's future education. They appoint a professional trustee to manage the funds. Through an Investment-Direction Agreement, the grandparent stipulates that the trust's assets must be invested primarily in low-risk government bonds and diversified index funds, with a specific portion allocated to a socially responsible investment portfolio. The agreement also prohibits investments in certain volatile sectors until the grandchildren reach college age.

  This illustrates an IDA because the grandparent, as the asset owner, is providing clear, binding instructions to the trustee on *how* to invest the trust's assets, limiting the trustee's discretion and ensuring the investments align with the grandparent's goals and values for the beneficiaries.

• Example 2: Corporate Pension Fund Management

  A large corporation hires an external fund management firm to oversee its employee pension fund. The corporation's finance committee enters into an Investment-Direction Agreement with the fund management firm. This agreement specifies that the pension fund must maintain a certain asset allocation (e.g., 60% equities, 30% fixed income, 10% real estate), prohibits investment in certain industries (e.g., tobacco, firearms), and sets performance benchmarks that the firm must strive to meet.

  Here, the corporation uses an IDA to direct the fund management firm on the precise investment strategy and restrictions for the pension assets. This ensures the firm adheres to the company's risk tolerance, ethical guidelines, and fiduciary responsibilities to its employees, rather than making all investment decisions independently.

• Example 3: Individual Wealth Management with Specific Criteria

  An individual with a significant inheritance wants their financial advisor to manage their wealth but has very specific ethical investment criteria. The individual signs an Investment-Direction Agreement with their wealth management firm, instructing them to invest only in companies that meet specific environmental, social, and governance (ESG) criteria, and explicitly forbidding investments in companies involved in gambling or controversial resource extraction. The agreement also sets a maximum percentage of the portfolio that can be allocated to any single stock or sector.

  This demonstrates an IDA because the individual is providing clear, non-negotiable directions to their financial advisor about the types of investments to pursue and avoid. This directs the management of their wealth according to their personal values and risk parameters, rather than allowing the advisor full discretion over the portfolio's composition.