What Is Asset Management?
As the name suggests, asset management is the management of a client’s assets. The process involves understanding the client’s financial goals and then working to accomplish those goals. It involves buying, selling, and managing investments and mitigates risks to increase wealth over time.
An asset management professional is also known as a portfolio manager and financial advisor. While most of the asset managers work independently, many work for an asset management company or other type of financial institution. They make financial decisions on behalf of their clients in good faith. Asset management clients can be individuals, non-profit organizations, and public companies, large or small.
Imagine you are a retiree living on the income from a pension or similar fund. Then, your risk tolerance is low. On the other hand, if you are a young professional seeking ways to enhance your income, then you can make high-risk investments. The duty of an asset manager is to understand your risk tolerance level and, based on it, suggest to clients what investments they can make and what they must avoid. Clients can invest in stocks, mutual funds, real estate, and whatever is best for them.
Why Is Asset Management Important?
A proper asset management has the ability to solve the most cash-related concerns of organizations, allowing businesses to grow. Assets that are in the right place at the right time improve productivity and eliminate any delays in the functioning of your business operation. A thorough record of your assets can help you meet industry and governmental regulations.
- Real-time asset visibility: Asset management not just only helps you in financial gains, but it also offers real-time tracking. This helps businesses to have real-time insights into the location, status, and quantity of your assets.
- Enhanced collaboration: An asset management system can offer centralized information on assets that lets all members of the team access reports on assets instantly.
- Custom insights: You can have custom reports. That is, if you want to see the total amount you spend for a particular investment, it is possible. You can use these reports to make business decisions to upgrade or replace assets.
Types of Asset Managers
Based on the kind of assets they deal with and the level of service they offer, asset managers can be divided into different types.
- Registered Investment Advisers
These are individuals or financial firms that advise clients on security investments and their portfolios.
RIAs are often compensated with annual fees rather than sales commissions. Their fees may vary depending on the client’s assets under management.
RIAs must either register under the US Securities and Exchange Commission or under the State Regulatory Agency based on the value of the assets they are managing.
They must register with SEC if they are managing assets worth more than $100 million.
Their major duties are financial planning, retirement planning, wealth management, budgeting, investment management, debt repayment, etc.
If you are looking forward to selecting an investment advisor, the best source would be the SEC’s Investment Adviser Public Disclosure website. It allows you to research every RIA in the country.
- Investment Brokers
These are either individuals or firms that serve as an intermediary for their clients. They help clients in buying stocks and other securities and also serve as a custodian of customer assets. Unlike RIAs, brokers are often compensated via sales commissions for transaction. There are also online brokers that typically charges you less than working with a person.
- Financial Advisor
They are professionals who have the right to recommend investments to their clients. They can also buy or sell securities on the behalf of their clients. There are possibilities of financial advisors to have a fiduciary and not have a fiduciary. Financial advisors can sometimes specialize in a specific area, such as tax, estate planning, etc.
- Robo-Advisor
This is the most affordable investment manager that you may find, as it isn’t a person. It is basically a software that automatically builds, monitors, and rebalances an investor’s portfolio according to their needs. They can buy and sell investments in accordance with programmed goals and risk tolerances. According to recent research, the robo-advisor market is estimated to grow from $9.5 billion in 2024 to $72 billion in 2032.
How Asset Management Company Works?
An Asset Management Company works by knowing the financial needs of its clients and then providing them with a suitable investment portfolio. They follow a systematic investment approach, which is fitted to the client’s risk tolerance and investment objectives.
- Client Assessment:
Portfolio managers and analysts of an AMC, who are experts in various sectors, develop strategies to achieve the financial goals of the clients. The clients’ investment needs, risk tolerance, and financial goals are assessed to provide a good portfolio.
- Setting a Suitable Portfolio:
A team of AMC researchers and analysts will research the current trends and market scenarios. Based on this research and also understanding the client’s investment needs, risk tolerance, and financial goals, AMC will design a personalized portfolio. This portfolio is a precisely chosen mix of assets to optimize returns and efficiently handle risks.
- Investing Strategy:
- Diversification – AMCs reduce the risk by investing across various asset classes, industries, and geographic regions. With this diversification of assets, clients will be able to save the impact of a poor-performing asset on the entire portfolio.
- Active vs. Passive Management – AMCs may choose an active or passive management approach. In active management, based on market conditions, there is a frequent need to make adjustments to portfolios. This requires active buying and selling to outperform the market, and a portfolio manager decides which assets to buy and sell based on research and market conditions. Passive management of the portfolio is referred to as index fund management. It replicates a specific market index to match their performance and requires less active decision-making.
- Performance Monitoring and Review:
AMCs regularly monitor and analyze the performance of the client’s investments from time to time. They will also update the reports to their clients showing the performance and make any necessary changes to the portfolio to get maximum returns. Providing regular updates to clients helps them stay informed about their investment progress.
Cost of Asset Management
The cost of asset management comprises several fees that are used for managing the client’s investments. There are two types of costs associated with asset management – Direct and Indirect costs.
- Direct Costs
- Management Fees – This is the primary cost of asset management, also known as advisory fees. Usually, only a percentage of the Assets under Management (AUM) comes under management fees. AUM is the total market value of assets managed by an AMC, either from one client or many. This fee is paid to investment advisors or managers for their services in managing assets. Management fees can range from 0.01% to over 2%, depending on the services provided. For instance, aggressive investment portfolios will have higher management fees compared to passive funds. This is because aggressive investment portfolios involve more work due to the higher turnover of securities.
- Transaction Fees – AMCs charge transaction fees for buying and selling of investments within a portfolio. These costs are applied every time a trade happens, so they are very crucial. Transaction fees can vary depending on the trading platform, the type of security traded, transaction size, and transaction frequency. It usually includes brokerage fees, bid-ask spreads, and sometimes market impact costs.
- Performance Fees – This is an additional fee charged by some AMCs. A performance fee is based on the portfolio’s performance over a specific period when the fund returns exceed a predefined benchmark. An AMC gets a performance fee only when the investments perform well. So, a performance fee acts as an incentive for investment managers to perform and deliver high returns.
- Indirect Costs
- Operating Expenses – The costs charged for regular operations are referred to as operating expenses. These can include legal fees, audit fees, administrative costs, and other expenses. Legal fees are charged for regulatory compliance and other legal services, whereas audit fees are paid to make sure financial records are accurate and comply with the relevant accounting standards.
- Taxes – In asset management, taxes can be considered as an indirect cost. Depending on the type of investments and buying and selling time, investors can have significant tax implications. Even though taxes are not a fee charged by the AMC, they can reduce the investor’s net returns. By implementing tax-efficient strategies, some AMCs help to reduce the tax burden.
Overall, asset management is an essential financial service that lets customers achieve their financial goals while minimizing risk. Individual professionals or Asset Management Companies (AMCs) analyze the client’s risk tolerance, create a diversified investment portfolio, and monitor performance to optimize returns. Real-time asset tracking, improved cooperation, and personalized insights made asset management valuable for financial growth and compliance. It has direct costs like management, transaction, and performance fees, as well as indirect costs like operating costs and taxes. Effective asset management is essential to financial planning and wealth management, providing clients with customized solutions for long-term financial stability and growth.