What are Assets Under Management?

Assets under management (AUM) is the total market value of the investments that a person or entity manages on behalf of clients. Assets under management definitions and formulas vary by company.

In the calculation of AUM, some financial institutions include bank deposits, mutual funds, and cash in their calculations. Others limit it to funds under discretionary management, where the investor assigns authority to the company to trade on his behalf.

Overall, AUM is only one aspect used in evaluating a company or investment. It is also usually considered in conjunction with management performance and management experience. However, generally, investors can consider higher investment inflows and higher AUM comparisons as a positive indicator of quality and management experience.

The Basics of Assets Under Management – AUM

AUM refers to how much client's money a financial company—or financial professional—handles regularly. AUM is the sum of the investments managed by a mutual fund or family of funds, a venture capital firm, brokerage company or an individual registered as an investment advisor or portfolio manager.

Used to indicate the size or amount, AUM can be segregated in many ways. It can refer to the total amount of assets managed for all clients, or it can refer to the total assets managed for a specific client. AUM includes the capital the manager can use to make transactions for one or all clients, usually on a discretionary basis.

For example, if an investor has $50,000 invested in a mutual fund, those funds become part of the total AUM—the pool of funds. The fund manager can buy and sell shares following the fund's investment objective using all of the invested funds without obtaining any additional special permissions.

Within the wealth management industry, some investment managers may have requirements based on AUM. It may be a measure to determine if an investor is qualified for a certain type of investment, like a hedge fund. Wealth managers want to ensure the client can withstand adverse markets without taking too large of a financial hit. An investor’s individual AUM can also be a factor in determining the type of services received from a financial advisor or brokerage company. In some cases, individual assets under management may also coincide with an individual's net worth.

KEY TAKEAWAYS

  • Assets under management (AUM) is the total market value of the investments that a person or entity handles on behalf of investors.
  • AUM fluctuates daily, reflecting the flow of money in and out of a particular fund and the price performance of assets.
  • Funds with greater AUM tend to be more liquid.
  • Fund and manager fees are often calculated as a percentage of AUM.

Calculating Assets Under Management

Fluctuating daily, AUM depends on the flow of investor money in and out of a particular fund. Also, asset performance will impact this daily figure. Increased investor flows, capital appreciation, and reinvested dividends will increase the AUM of a fund.

Adversely, decreased investor flows and market value losses will decrease the AUM of a fund. In the United States, once a firm has more than US$30 million in assets under management, it must register with the Securities and Exchange Commission (SEC).

Methods of calculating assets under management vary among companies. Total firm assets under management will increase when investment performance increases or when new customers and new assets are acquired. Factors causing decreases in AUM include decreases in market value from investment performance losses, fund closures, and client redemptions. Assets under management can be limited to all of the investor capital invested across all of the firm’s products, or it can include capital owned by the investment company executives.

Why AUM Matters

Firm management will monitor AUM as it relates to investment strategy and investor product flows in determining the strength of the company. Investment companies also use assets under management as a marketing tool to attract new investors. AUM can help investors get an indication of the size of a company's operations relative to its competitors.

AUM may also be an important consideration for the calculation of fees. Many investment products charge management fees that are a fixed percentage of assets under management. Also, many financial advisors and personal money managers charge clients a percentage of their total assets under management. Typically, this percentage decreases as the AUM increases; in this way, these financial professionals can attract high-wealth investors.

Real Life Example of Assets Under Management

When evaluating a specific fund, investors often look at its AUM. Similar to the market capitalization of a company, assets under management functions an indication of the size of the fund. Those investment products with high AUMs have higher market trading volumes making them are more liquid, and easier to trade.

For example, the SPDR S&P 500 ETF (SPY) is one of the largest equity exchange-traded funds on the market. As of April 4, 2019, it had assets under management of US$264 billion with an average daily trading volume of 80.8 million shares. The high trading volume means liquidity is not a factor for investors when seeking to buy or sell their shares of the ETF.

In comparison, the First Trust Dow 30 Equal Weight ETF (EDOW) has assets under management of $14.2 million and much lower trading volume, averaging 2,795 shares per day. Liquidity for this fund could be a consideration for investors.