Asset management

DEFINITION

Asset management is the service, most often performed by a firm, of directing a client's wealth or investment portfolio on their behalf. These firms typically have investment minimums. Their clients often have a high net worth.

Key Takeaways

• Asset management is the service, often 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 most often have a high net worth.
• Asset managers work with client portfolios by looking at many factors, such as their clients' circumstances, risks, and preferences.
• Today, some firms have updated their businesses to serve smaller investors as well as high-net-worth clients.

Definition and Examples of Asset Management

Asset management firms take investor capital and put it to work in different investments. These may include stocks , bonds , real estate , master limited partnerships , and private equity . Examples of asset management firms are Vanguard, J.P. Morgan, and Northern Trust.

How Asset Management Works

Asset managers work with client portfolios by taking a look at several factors, such as the client's unique circumstances, risks, and preferences.

Asset management firms handle investments according to an internally formulated investment mandate or process. Many offer their services to wealthy businesses and individuals. It can be difficult to offer services to smaller investors at an appropriate price.

Wealthy investors often have private accounts with these firms. They deposit cash into an account, in some cases with a third-party custodian . The portfolio managers take care of the portfolio by using a limited power of attorney.

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 their personality.

High-end firms may cater to a client's every whim, offering a bespoke experience. It's common for the relationship between investor and asset management firm to span generations; managed assets are often transferred to heirs.

Asset Management Costs

Investment fees for asset management can range anywhere from a few basis points to a large 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 firms have updated their offerings to better serve smaller investors.

Many of these companies create pooled structures such as mutual funds , index funds , or exchange-traded funds , which can then be managed in a single portfolio. Smaller investors can then invest directly in the fund, or they can go through an intermediary, who could be another investment advisor or a financial planner.

Vanguard, one of the largest asset management firms in the world, focuses on lower- and middle-income investors. Its clients' asset balances might be too small for other firms.1 The firm's median account balance was $22,217 in 2018, which means half of its clients had more than that, and half had less.2

Vanguard's efforts make its services 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 , are low-cost online investing platforms that use algorithms to balance portfolios. These are other options that may be suitable for average investors.

Combination Firms

Some firms combine service offerings for both wealthy clients and investors with average-sized portfolios. For example, J.P. Morgan has a private client division for its high-net-worth clients. However, it also sponsors mutual funds and other pooled investments for regular investors, who likely invest through a retirement plan at work.3

Another company, Northern Trust, has a large asset management business, but it also owns a bank, trust company, and wealth management practice .4

Registered Investment Advisors

Firms known as "registered investment advisors " (RIAs) provide advice to their clients, but they outsource the actual asset management to a third-party group. They do that in one of two ways: either through a negotiated private account or by having the client purchase the company's sponsored mutual funds, ETFs, or index funds.

Note

Many asset management firms also serve as RIAs, which means they function as both asset managers and investment or financial advisors.

It's similar to how 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 they use an asset allocation model from a software package or another type of guideline. For example, Vanguard is, first and foremost, an asset management firm, but recently it has moved into financial planning for average investors.

Clients pay Vanguard's advisors a fee of 0.30% of assets under management for the service.5 These advisors invest the client's money into Vanguard's family of mutual funds, on which the asset management division charges its 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. The firm has a trust department that sets up various types of trusts for clients.

Asset Management Companies and Specialization

Each firm has its area of specialization, and some are generalists. These are most often large companies that design financial services or products they think investors will want and need.

Some firms have a narrow focus, concentrating on only one or a handful of areas. For instance, they may focus on working with 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. 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 companies and their managers are compensated. For instance, for a mutual fund with a 5.75% sales load, that price comes right out of the investor's pocket. It pays the mutual fund salesman or 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. The firm makes money in other ways, such as charging transaction fees and commissions.

In another fee variation, firms might charge no upfront transaction fees or commissions; instead, they might take higher fees on other products or services. Then, they might split the revenue 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. They don't make commissions based on specific products. Many investors feel that this gives the firm more objectivity in choosing products and strategies strictly for the client's benefit. They know that their asset manager isn't simply choosing products based on the fees or commissions earned for the firm.

Important

Many different business models exist in the asset management world. Not all of them are equally beneficial to the client.

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 hybrid, all-in-one accounts, combining checking, savings, and brokerage services.

You can deposit your money; earn interest on it; write checks when needed; buy shares of stock; and invest in bonds, mutual funds, and other securities, all from one centralized account. In many cases, the account is actually managed by a portfolio manager of the institution.

Fees might range between 1% and 2.75%, depending on your account balance. You may also receive other advantages that make the cost worth your while.6 For instance, some banks offer less-common investing strategies. They may allow you to create collateralized loans against securities in your asset management account at highly attractive rates, which could be useful if you were to find an outside investment opportunity requiring immediate liquidity.

Sometimes, firms will also bundle other services, such as insurance policies. You could save money by buying more products from the same company.

Asset Management vs. Wealth Management

Asset management is all about investments. It's a service that's performed by a firm for clients who typically have a high net worth.

On the other hand, wealth management takes a closer look at the financial situation of an individual (or family) in order to determine how best to manage their wealth and protect it in the long run.

Depending on your level of wealth, you may only need one of these services. Figuring out which one will serve you best could help you to reach your financial goals.