Legal Definitions - investment-direction agreement

An investment-direction agreement (IDA) is a specialized contract made between a trustee (the person or entity legally responsible for managing assets in a trust) and a beneficiary (the person or entity who will ultimately benefit from those assets). Typically, a trustee has a legal obligation to diversify the trust's investments to spread risk and protect the assets. However, under an IDA, the beneficiary instructs the trustee to follow a specific investment strategy that often involves *not* diversifying the trust's assets, or keeping them concentrated in particular holdings. In return for the trustee agreeing to this non-diversified approach, the beneficiary promises to protect the trustee from any financial losses that might occur as a direct result of not diversifying the investments.

• Example 1: Family Business Holdings

  Imagine a trust established to hold shares of a privately-owned family manufacturing business. The beneficiary, who plans to take over the business, believes strongly that selling any part of the company to diversify the trust's assets would undermine its future value and control. Through an IDA, the beneficiary directs the trustee to retain all the shares in the family business, even though a typical trustee might be expected to sell some shares to invest in a broader range of stocks, bonds, or other assets. The beneficiary agrees that if the family business's value declines significantly, the trustee will not be held responsible for the losses that resulted from not diversifying.

• Example 2: Concentrated Stock Portfolio

  Consider a trust whose primary asset is a substantial block of stock in a single, well-established pharmaceutical company. The beneficiary, an expert in the biotech industry, is convinced that this particular company is poised for significant growth and wants the trust to maintain its entire position in that stock, rather than diversifying into other industries or asset classes. The trustee, under an IDA, agrees to hold the concentrated stock position as directed by the beneficiary. If the pharmaceutical company's stock underperforms or loses value, the beneficiary has agreed to indemnify the trustee, meaning the trustee is protected from liability for those losses because they were following the beneficiary's specific, non-diversified instruction.

• Example 3: Unique Real Estate Asset

  A trust holds a historic commercial building in a rapidly developing urban area. The beneficiary believes this specific property has unique long-term appreciation potential and also holds significant sentimental value. The beneficiary wants the trust to continue owning this single property, rather than selling it to invest in a diversified portfolio of real estate investment trusts (REITs) or other financial instruments. An IDA is executed where the trustee agrees not to sell the property for diversification purposes. Should the property's value stagnate or decline, or if a diversified portfolio would have yielded better returns, the beneficiary has contractually agreed to hold the trustee harmless for any resulting financial shortfall.