Investment Management: More Than Just Buying and Selling Stocks

What Is Investment Management?

Investment management refers to the handling of financial assets and other investments—not only buying and selling them. Management includes devising a short- or long-term strategy for acquiring and disposing of portfolio holdings. It can also include banking, budgeting, and tax services and duties, as well.

The term most often refers to managing the holdings within an investment portfolio, and the trading of them to achieve a specific investment objective. Investment management is also known as money management, portfolio management, or wealth management.

The Basics of Investment Management

Professional investment management aims to meet particular investment goals for the benefit of clients whose money they have the responsibility of overseeing. These clients may be individual investors or institutional investors such as pension funds, retirement plans, governments, educational institutions, and insurance companies.

Investment management services include asset allocation, financial statement analysis, stock selection, monitoring of existing investments, and portfolio strategy and implementation. Investment management may also include financial planning and advising services, not only overseeing a client's portfolio but coordinating it with other assets and life goals. Professional managers deal with a variety of different securities and financial assets, including bonds, equities, commodities, and real estate. The manager may also manage real assets such as precious metals, commodities, and artwork. Managers can help align investment to match retirement and estate planning as well as asset distribution.

In corporate finance, investment management includes ensuring a company's tangible and intangible assets are maintained, accounted for, and well-utilized.

According to an annual study by research and advisory firm Willis Towers Watson and the financial newspaper Pensions & Investments, the investment management industry is growing. When based on the combined holdings of the 500 biggest investment managers, the global industry had approximately US$93.8 trillion assets under management (AUM) in 2018. This figure was over US $100 Trillion by year end 2019.

Key Takeaways

  • Investment management refers to the handling of financial assets and other investments by professionals for clients
  • Clients of investment managers can be either individual or institutional investors.
  • Investment management includes devising strategies and executing trades within a financial portfolio.
  • Investment management firms handling over $25 million in assets must register with the SEC and accept fiduciary responsibility toward clients.

Running an Investment Management Firm

Running an investment management business involves many responsibilities. The firm must hire professional managers to deal, market, settle, and prepare reports for clients. Other duties include conducting internal audits and researching individual assets—or asset classes and industrial sectors.

Aside from hiring marketers and training managers who direct the flow of investments, those who head investment management firms must ensure they move within legislative and regulatory constraints, examine internal systems and controls, account for cash flow and properly track record transactions and fund valuations.

In general, investment managers who have at least $25 million in assets under management (AUM) or who provide advice to investment companies offering mutual funds are required to be registered investment advisors (RIA). As a registered advisor, they must register with the Securities and Exchange Commission (SEC) and state securities administrators. It also means they accept the fiduciary duty to their clients. As a fiduciary, these advisors promise to act in their client's best interests or face criminal liability. Firms or advisors managing less than $25 million in assets typically register only in their states of operation.

Investment managers are usually compensated via a management fee, usually a percentage of the value of the portfolio held for a client. Management fees range from 0.35% to 2% annually. Also, fees are typically on a sliding scale—the more assets a client has, the lower the fee they can negotiate. The average management fee is around 1%.

Pluses and Minuses of Investment Management

Though the investment management industry may provide lucrative returns, there are also key problems that come with running such a firm. The revenues of investment management firms are directly linked to the market's behavior. This direct connection means that the company's profits depend on market valuations. A major decline in asset prices can cause a decline in the firm's revenue, especially if the price reduction is great compared to the ongoing and steady company costs of operation. Also, clients may be impatient during hard times and bear markets, and even above-average fund performance may not be able to sustain a client's portfolio.

  • Professional analysis

  • Full-time diligence

  • Ability to time or outperform market

  • Ability to protect portfolio in down times

  • Sizeable fees

  • Profits fluctuate with market

  • Challenges from passively managed vehicles, robo-advisors

Since the mid-2000s, the industry has also faced challenges from two other sources.

  1. The increase of robo-advisors—digital platforms that provide automated, algorithm-driven investment strategies and asset allocation
  2. The availability of exchange-traded funds, whose portfolios mirror that of a benchmark index

The latter hinderance exemplifies passive management since few investment decisions have to be made by human fund managers. The former challenge does not use human beings at all—other than the programmer writing the algorithm. As a result, both can charge far lower fees than human fund managers can charge. However, according to some surveys, these lower-cost alternatives will often outperform actively managed funds—either outright or in terms of overall return—primarily due to them not having heavy fees dragging them down.

The pressure from this dual competition is why investment management firms must hire talented, intelligent professionals. Though some clients look at the performance of individual investment managers, others check out the overall performance of the firm. One key sign of an investment management company's ability is not just how much money their clients make in good times—but how little they lose in the bad.

Real World Example of Investment Management

The top 20 investment management firms control a record 43% of all the global assets under management, according to the Willis Towers Watson report mentioned earlier—some $40.6 trillion worth. In the U.S., the five leading firms include, in descending order:

  1. Bank of America Global Wealth & Investment Management which, as of 2008, includes Merrill Lynch ($1.25 trillion in AUM)
  2. Morgan Stanley Wealth Management ($1.1 trillion in AUM)
  3. J.P. Morgan Private Bank ($677 billion in AUM)
  4. UBS Wealth Management ($579 billion in AUM)
  5. Wells Fargo ($564 billion in AUM)
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