What Is Asset Management?
Asset management is the practice of increasing total wealth over time by acquiring, maintaining, and trading investments that have the potential to grow in value.
Asset management professionals perform this service for others. They may also be called portfolio managers or financial advisors. Many work independently while others work for an investment bank or other financial institution.
- The goal of asset management is to maximize the value of an investment portfolio over time while maintaining an acceptable level of risk.
- Asset management as a service is offered by financial institutions catering to high-net-worth individuals, government entities, corporations, and institutional investors like colleges and pension funds.
- Asset managers have fiduciary responsibilities. They make decisions on behalf of their clients and are required to do so in good faith.
Understanding Asset Management
Asset management has a double-barreled goal: increasing value while mitigating risk. That is, the client's tolerance for risk is the first question to be posed. A retiree living on the income from a portfolio, or a pension fund administrator overseeing retirement funds, is (or should be) risk-averse. A young person, or any adventurous person, might want to dabble in high-risk investments.
Most of us are somewhere in the middle, and asset managers try to identify just where that is for a client.
The asset manager's role is to determine what investments to make, or avoid, to realize the client's financial goals within the limits of the client's risk tolerance. The investments may include stocks, bonds, real estate, commodities, alternative investments, and mutual funds, among the better-known choices.
The asset manager is expected to conduct rigorous research using both macro and microanalytical tools. This includes statistical analysis of prevailing market trends, reviews of corporate financial documents, and anything else that would aid in achieving the stated goal of client asset appreciation.
Types of Asset Managers
There are several different types of asset managers, distinguished by the type of asset and level of service that they provide. Each type of asset manager has a different level of responsibility to the client, so it is important to understand a manager's obligations before deciding to invest.
Registered Investment Advisers
A registered investment adviser (RIA) is a firm that advises clients on securities trades or even manages their portfolios. RIAs are closely regulated and are required to register with the SEC if they manage more than $100 million in assets.
A broker is an individual or firm that acts as an intermediary for their clients, buying stocks and securities and providing custody over customer assets. Brokers generally do not have a fiduciary duty to their clients, so it is always important to thoroughly research before buying.
A financial advisor is a professional who can recommend investments to their clients, or buy and sell securities on their behalf. Financial advisors may or may not have a fiduciary duty to their clients, so it is always important to ask first. Many financial advisors specialize in a specific area, such as tax law or estate planning.
The most affordable type of investment manager isn't a person at all. A robo-advisor is a computer algorithm that automatically monitors and rebalances an investor's portfolio according, selling and buying investments according to programmed goals and risk tolerances. Because there is no person involved, robo-advisors cost much less than a personalized investment service.
How Much Does Asset Management Cost?
Asset managers have a variety of fee structures. The most common model charges a percentage of the assets under management, with the industry average at about 1% for up to $1 million, and lower for larger portfolios. Others may charge a fee for each trade they execute. Some may even receive a commission to upsell securities to their clients.
Because these incentives can work against the client's interests, it is important to know if your management firm has a fiduciary duty to serve the client's interests. Otherwise, they may recommend investments or trades that do not serve the client's interests.
How Asset Management Companies Work
Asset management companies compete to serve the investment needs of high-net-worth individuals and institutions.
Accounts held by financial institutions often include check-writing privileges, credit cards, debit cards, margin loans, and brokerage services.
When individuals deposit money into their accounts, it is typically placed into a money market fund that offers a greater return than a regular savings account. Account-holders can choose between Federal Deposit Insurance Company-backed (FDIC) funds and non-FDIC funds.
The added benefit to account holders is all of their banking and investing needs can be met by the same institution.
These types of accounts have only been possible since the passage of the Gramm-Leach-Bliley Act in 1999, which replaced the Glass-Steagall Act. The Glass-Steagall Act of 1933, passed during the Great Depression, forced a separation between banking and investing services. Now, they have only to maintain a "Chinese wall" between divisions.
Example of an Asset Management Institution
Merrill Lynch offers a Cash Management Account (CMA) to fulfill the needs of clients who wish to pursue banking and investment options with one vehicle, under one roof.
The account gives investors access to a personal financial advisor. This advisor offers advice and a range of investment options that include initial public offerings (IPO) in which Merrill Lynch may participate, as well as foreign currency transactions.
Interest rates for cash deposits are tiered. Deposit accounts can be linked together so that all eligible funds aggregate to receive the appropriate rate. Securities held in the account fall under the protective umbrella of the Securities Investor Protection Corporation (SIPC). SIPC does not shield investor assets from inherent risk but rather protects those assets from the financial failure of the brokerage firm itself.
Along with typical check writing services, the account offers worldwide access to Bank of America automated teller machines (ATM) without transaction fees. Bill payment services, fund transfers, and wire transfers are available. The MyMerrill app allows users to access the account and perform a number of basic functions via a mobile device.
Accounts with more than $250,000 in eligible assets sidestep both the annual $125 fee and the $25 assessment applied to each sub-account held.
Frequently Asked Questions
How Does an Asset Management Company Differ From a Brokerage?
Asset management institutions are fiduciary firms. That is, their clients give them discretionary trading authority over their accounts, and they are legally bound to act in good faith on the client's behalf.
Brokers must get the client's permission before executing a trade. (Online brokers let their clients make their own decisions and initiate their own trades.)
Asset management firms cater to the wealthy. They usually have higher minimum investment thresholds than brokerages do, and they charge fees rather than commissions.
Brokerage houses are open to any investor. The companies have a legal standard to manage the fund to the best of their ability and in line with their clients' stated goals.
What Does an Asset Manager Do?
An asset manager initially meets with a client to determine what the client's long-term financial objectives are and how much risk the client is willing to accept to get there.
From there, the manager will propose a mix of investments that matches the objectives.
The manager is responsible for creating the client's portfolio, overseeing it from day to day, making changes to it as needed, and communicating regularly with the client about those changes.
What Are the Top Asset Management Institutions?
As of 2022, the five largest asset management institutions, based on global assets under management (AUM), were BlackRock ($8.5 trillion), Vanguard Group ($7.3 trillion), UBS Group ($3.5 trillion), Fidelity Investments ($3.7trillion), and State Street Global Advisors ($4.0 trillion).
What Is Digital Asset Management?
Digital asset management, or DAM, is a process of storing media assets in a central repository where they can be accessed as necessary by all members of an organization. This is usually used for large audio or video files that need to be worked on by many teams of employees at once.
What Is Assets Under Management?
Assets under management, or AUM, refers to the total value of the securities in the portfolio of a brokerage or investment firm.
The Bottom Line
Asset management firms provide the service of buying and selling assets on behalf of their clients. There are many types of asset managers, with some working for family offices and wealthy individuals and others working on behalf of major banks and institutional investors.