What’s Key Man Clause?
Key man clause is an important clause for an investment firm. It says if certain numbers of executives are absent, the investment firm won’t be able to make any new investments until these key executives are replaced first.
There can be many reasons for which the executives aren’t able to perform their tasks quite well. Since managing investments is a huge task, until the key executives (who are in charge) invest a large chunk of time. When they’re unable to do that, according to the key man clause they should be replaced.
Now, let’s look at the possible causes for which the key executives aren’t able to provide enough time in managing investments.
Possible causes of not managing the investments well
Among …show more content…
Does other tasks more efficiently: If the key executive does another task more efficiently than managing the investments, then it’s high time that she should be removed and replaced by someone more responsible.
The executive is convicted of a crime: This is a serious threat to an organization. What if the clients get to know that the investment manager is a criminal? What would the investment firm do? Key man clause will apply here as well.
Why is key man clause important?
A huge amount of money is at stake: To an investment firm, it’s a huge responsibility to manage investments. And they do not only manage the investments of one or two clients. The number is huge, often more than a million or a billion dollars. In that case, if the executives who are managing the investments aren’t sincere (or have unavoidable issues); then the investment firm must replace them.
The reputation of the investment firm: If the investment firm decides not to replace them, then the efficiency of the investment firm will be questioned. And this is by no means a good thing for that particular investment firm’s future …show more content…
If you’re running an investment firm (or an investor and wants to understand how key man clause works), here’re three things you should keep in mind –
You need to add the “key man clause” to everyone who comes under a contract with the firm: First of all, you need to look at the contract of those who’re making key decisions for clients’ investments. And then you need to add the key man clause in their contract. Later, you need to create a mandate that everyone who joins the investment firm should have the key man clause inserted into their contracts.
You should buy key man insurance: If you’re a small firm and you really can’t take the risk of replacing your limited resources, then buying key man insurance is the right thing to do. If you’re a big firm and have ample resources and budget to replace your key decision makers, you don’t need to buy key man insurance.
Think about the worst-case scenario: Adding the key man clause to the contract of your key decision makers and buying key man insurance are a great starting point. But you also need to prepare for worst case scenarios. If you can write down an emergency plan and adhere to it, you would be prepared for any worst-case