What Is Asset Management?
A Basic Introduction to Asset Management Companies and How They Work
Asset management is the service, usually performed by a firm, of directing a client's wealth or investment portfolio on their behalf. These firms typically have investment minimums, so their clients usually have a high net worth.
Understanding the field of asset management and what role asset management companies play will help you hire the right professional to meet your financial goals. You may even learn about money management options you didn't know were available to you.
The Role of Asset Management Companies
Asset management companies take investor capital and put it to work in different investments, including stocks, bonds, real estate, master limited partnerships, and private equity. These companies handle investments according to an internally formulated investment mandate, or process. Many asset management companies offer their services to wealthy businesses and individuals because it can be difficult to offer services to smaller investors at an appropriate price.
Wealthy investors typically have private accounts with asset management firms. They deposit cash into the account, in some cases with a third-party custodian, and the portfolio managers take care of the portfolio using a limited power of attorney.
How Asset Management Firms Operate
Asset managers work with client portfolios by considering several variables, including the client's unique circumstances, risks, and preferences. Portfolio managers select positions customized for the client's income needs, tax circumstances, and liquidity expectations. They can even base decisions on the client's moral and ethical values as well as personality.
High-end firms may cater to a client's every whim, offering a bespoke experience. It's not unusual for the relationship between investor and asset management firm to span generations as managed assets are transferred to heirs.
Asset Management Costs
Investment fees for asset management can range anywhere from a few basis points to a substantial percentage of the shared profits on performance-agreement accounts. These fees will depend on the specifics of the portfolio. In other cases, firms charge a minimum annual fee, such as $5,000 or $10,000 per year.
Firms for Average Investors
Some asset management firms have re-tooled their businesses to increase their offerings and better serve smaller investors. Many of these companies create pooled structures such as mutual funds, index funds, or exchange-traded funds, which they can manage in a single centralized portfolio. Smaller investors can then invest directly in the fund or through an intermediary such as another investment advisor or financial planner.
Vanguard, one of the largest asset management companies in the world, focuses on lower- and middle-income investors whose asset balances might be too small for other institutions. Vanguard's median account balance was only $22,217 in 2018, meaning half of their clients had more than that, and half had less.
Vanguard's efforts make this service more accessible to clients who likely couldn't cover the minimum fee at most private asset management groups. These clients don't have complex investing needs; they might simply buy $3,000 worth of a Vanguard S&P 500 index fund and hold it for the long term. They don't have enough wealth to worry about things such as asset placement. Neither do they need complex strategies such as exploiting tax-equivalent yield differentials on municipal bonds and corporate bonds.
Robo advisors such as Betterment or Wealthfront, which are low-cost online investing platforms that use algorithms to balance portfolios, are another option for average investors.
Some firms combine service offerings for both wealthy clients and investors with more average-sized portfolios. For example, J.P. Morgan has a private client division for its high-net-worth clients, while also sponsoring mutual funds and other pooled investments for regular investors, who likely invest through a retirement plan at work.
Another company, Northern Trust, has a large asset management business but also owns a bank, trust company, and wealth management practice.
Registered Investment Advisors
Firms legally known as Registered Investment Advisors (RIAs) provide advice to their clients but outsource the actual asset management to a third-party asset management group. They do this either through a negotiated private account or by having the client purchase the asset management company's sponsored mutual funds, ETFs, or index funds.
Many asset management firms also serve as RIAs, therefore functioning as both asset managers and as investment advisors or financial advisors.
In other words, in the same way that all heart surgeons are doctors but not all doctors are heart surgeons, most asset managers are investment advisors, but not all investment advisors are asset managers.
The Asset Allocation Model
Many large asset management firms end up hiring their own financial advisors, who don't manage assets directly. These advisors take on clients and steer them into the asset management division's products and services, perhaps using an asset allocation model from a software package or an internal firm asset allocation guideline.
To use Vanguard as an example again, it's first and foremost an asset management company. However, recently the company's moved into financial planning for investors with smaller capital amounts. The client pays Vanguard's advisors a fee of 0.30% of assets under management for the service.
These advisors invest the client's money into Vanguard's family of mutual funds, on which the asset management division charges its asset management fees. Vanguard also raises money for its asset management business by allowing independent investment advisors to have their clients invest in Vanguard's funds through third-party brokerage and retirement accounts. Furthermore, Vanguard has a trust department that sets up various types of trusts for clients.
Asset Management Companies and Specialization
Each asset management firm has its area of specialization. Some are generalists—usually large companies that design financial services or products they think investors will want and need. Some firms have a narrow focus, concentrating on one or a handful of areas, such as working with fellow long-term investors who believe in a value investing or passive investing approach.
Some firms only cater to wealthy clients through private accounts known as individually managed accounts, or with hedge funds. Some focus exclusively on launching mutual funds, and some build their practice around managing money for institutions or retirement plans, such as corporate pension plans.
Finally, some asset management companies provide their services to specific firms, such as managing assets for a property and casualty insurance company.
Possible Fee Structures
Pay attention to how different asset management companies and their managers receive compensation. Many different business models exist in the asset management world and not all of them are equally beneficial to the client. For example, for a mutual fund with a 5.75% sales load, that price comes right out of the investor's pocket, and it pays the mutual fund salesmen or financial advisor for placing the client in that particular fund.
Meanwhile, the asset management business itself earns its annual management fee, which is taken out of the pooled structure. In cases of integrated firms where asset management is one of the businesses under the financial conglomerate's umbrella, the asset management costs might be lower than you'd otherwise expect, but the firm makes money in other ways, such as charging transaction fees and commissions.
In another fee variation, firms may charge no upfront transaction fees or commissions but, instead, take higher fees on other products or services, which they then split between the advisor and the firm for its asset management services.
Finally, fee-only asset management groups are companies that only make money from management fees charged to the client, rather than commissions or charges related to specific products. Many investors feel this gives the firm more objectivity in choosing investment products and strategies strictly for the client's benefit, rather than choosing products based on the amount of fees or commissions earned for the firm.
Asset Management Accounts
You may have heard of an asset management account, even if your banking institution doesn't call itself an asset management company. These accounts are basically designed to be a hybrid, all-in-one account, combining checking, savings, and brokerage. You can deposit your money, earn interest on it, write checks when needed, buy shares of stock, invest in bonds, and acquire mutual funds and other securities all from one, centralized account. In many, but not all, cases, the account is actually managed by a portfolio manager of the institution.
Fees might run you between 1% and 2.75%, depending on your account balance, but you may receive other advantages that make the price worth your while. For example, some banks offer less-common investing strategies, such as allowing you to create collateralized loans against securities in your asset management account at highly attractive rates. This could be useful if you found an outside investment opportunity that required immediate liquidity.
Sometimes firms will also bundle additional services, such as insurance policies, so you save money by purchasing more products from the same company.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.
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