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 investment banks or other types of financial institutions.
Key Takeaways
- 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 services are generally provided by specialized firms to individuals, government entities, corporations, and institutional investors.
- Asset managers have a fiduciary responsibility to their clients to act in their best interests. They make decisions on behalf of their clients and are required to do so in good faith.
Understanding Asset Management
Asset management has a dual goal: increasing value while mitigating risk. The client’s tolerance for risk is the primary question. A retiree living on the income from a portfolio or a pension fund administrator overseeing retirement funds usually adopts a risk-averse strategy. Conversely, a young investor might seek high-risk, high-reward opportunities.
Most people fall between these extremes, and asset managers strive to identify their clients’ risk tolerance levels. Therefore, an asset manager’s role is to determine what investments to make or avoid, aligned with achieving the client’s financial goals within their risk tolerance limits. Investment options may include stocks, bonds, real estate, commodities, alternative investments, and mutual funds.
Asset managers are expected to conduct rigorous research using both macro and microanalytical tools. This can involve statistical analyses of prevailing market trends, reviews of corporate financial documents, and other methodologies to achieve the client’s asset appreciation goals.
Types of Asset Managers
Various types of asset managers differ by the type of asset and level of service they provide. Each has a differing level of responsibility to the client, so it is crucial to know their obligations before selecting an investment.
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 over $100 million in assets.
Investment Broker
A broker acts as an intermediary for their clients, buying stocks and securities and providing custodial services. Brokers typically do not have a fiduciary duty to their clients, so thorough research is essential before selection.
Financial Advisor
A financial advisor is a professional who can recommend investments to their clients or execute trades on their behalf. Financial advisors may or may not have a fiduciary duty, so it is crucial to verify this initially. Many specialize in particular areas such as tax or estate planning.
Robo-Advisor
A robo-advisor is a computer algorithm that automatically monitors and rebalances an investor’s portfolio based on predetermined goals and risk tolerances. Due to the lack of a human advisor, robo-advisors typically cost less than personalized investment services.
Cost of Asset Management
Asset managers commonly employ various fee structures, with the most prevalent being a percentage of the assets under management, averaging about 1% for up to $1 million. Larger portfolios usually incur lower fees due to their size. Some managers might charge per trade made, while others may earn commission for promoting specific securities. Always ensure your management firm has a fiduciary duty to avoid conflicts of interest.
Operations of Asset Management Companies
Asset management firms compete to fulfill the investment needs of individuals and institutions. Accounts at financial institutions often include check-writing privileges, credit cards, debit cards, margin loans, and brokerage services.
Funds deposited by individuals are usually placed into a money market fund, offering higher returns than regular savings accounts. Account holders can often choose between FDIC-backed and non-FDIC options. The advantage to such accounts is comprehensive service, covering all banking and investing needs.
Example of an Asset Management Institution
Merrill Lynch provides a Cash Management Account (CMA), which integrates banking and investment options. Clients get access to financial advisors offering advice and a range of investment opportunities, including IPOs and foreign currency transactions.
Interest rates for cash deposits are tiered with aggregate eligible funds determining the rate. Securities in the account are safeguarded under the Securities Investor Protection Corporation (SIPC), which protects investor assets from the brokerage’s financial failure.
The account also offers global access to ATMs without transaction fees, bill payment services, fund transfers, and wire transfers. The MyMerrill app allows mobile access to the account for several basic functions.
Accounts holding over $250,000 in eligible assets evade the annual $125 fee and the $25 assessment for each sub-account held.
Differences Between Asset Management Companies and Brokerage Firms
Asset management institutions are fiduciary firms used by people with significant assets. They usually have discretionary trading authority and are legally bound to act in good faith on the client’s behalf. Brokers, on the other hand, facilitate trades without managing clients’ portfolios.
Role of an Asset Manager
An asset manager is responsible for creating, overseeing, and managing a client’s portfolio, adjusting it as needed, and regularly communicating these changes to the client.
Leading Asset Management Firms
As of February 2024, the top five global asset management firms by assets under management (AUM) were BlackRock ($9.46 trillion), Vanguard Group ($7.25 trillion), Fidelity Investments ($3.88 trillion), The Capital Group ($2.5 trillion), and Amundi ($2.10 trillion).
What is Digital Asset Management?
Digital asset management (DAM) stores media assets in a central repository that can be accessed by all authorized members of an organization. This is often used for large files, such as audio or video, that need collaborative efforts.
The Bottom Line
Asset management firms aim to buy and sell assets on behalf of their clients, tailoring services to individuals, family offices, major banks, and institutional investors.
Related Terms: investment banking, portfolio management, investment strategy, fiduciary duty.
References
- Merrill: A Bank of America Company. “Cash Management Account (CMA)”.
- Merrill. “Merrill Schedule of Miscellaneous Account and Service Fees”.
- Soveriegn Wealth Fund Institute. “Rankings by Total Managed AUM”.
