- Assets under management, known as AUM, refer to the amount of money a financial institution manages on behalf of its clients.
- Investors can use AUM to judge the size and strength of a firm or a particular mutual fund or family of funds.
- We can use AUM as a benchmark, particularly when coupled with inflows and outflows of cash, to gauge market sentiment and the health of money management firms.
- AUM forms the basis of compensation and expenses in certain types of funds and investment advisory relationship
Definition and Examples of Assets Under Management (AUM)
Assets under management (AUM) quantify how much money or securities a financial institution manages for its clients. In the case of a mutual fund, for example, the fund will add up the value of all of its holdings (e.g., stocks, bonds, cash) and report that number as its assets under management.
Banks and other financial firms report this data each quarter, in part because assets under management tend to fluctuate regularly.
Using simple, hypothetical numbers, if 10 people each invest $1,000 in a mutual fund, the fund has assets under management of $10,000. If 10 people invest $1,000 each in 10 different mutual funds at the same firm, the firm has assets under management of $100,000.
For instance, as investors put money into (called “inflows”) or withdraw money from a mutual fund (called “outflows”), the fund’s assets under management will increase or decrease. When the value of a firm or fund’s holdings increases, so do its assets under management.
Why AUM Matters to Investors
Barometer of Investor Sentiment
While assets under management ebb and flow with the currents of the stock market, they are also a useful tool for market analysis.
Individuals and institutions who analyze fund performance and inflows and outflows of capital can use AUM as a sort of benchmark of investor sentiment and behavior.
For example, eVestment (a branch of the company that operates the Nasdaq stock exchange) tracks this type of data. In its research it noted that due to the COVID-19 crisis, hedge funds in April 2020 witnessed redemptions that were three times larger than any other April since April 2009. This reduced AUM reflects investor anxiety in the face of the pandemic.
By monitoring a significant portion of the billions of dollars invested in this way, we can gauge the state of the market.
Stability of Financial Institution or Advisor
AUM also can give investors a good sense of the financial stability of an investment firm. Firms with AUM of more than $100 million must register with the U.S. Securities and Exchange Commission (SEC) and file regular reports, which include their AUM amount. These filings help regulators oversee the financial institutions that handle our money.
For instance, when you can see how a firm’s overall AUM is spread across multiple funds, you can better understand how diversified the fund family is. You can see where the money manager concentrates its assets, allowing you to make any number of assumptions, including what might happen if a massive outflow occurred in one or more funds in a large fund family.
The Investment Advisers Act of 1940 spells out a broad range of rules that govern large financial institutions and money management firms, including AUM reporting requirements.
Investors can use AUM as one way to measure the success of an asset management firm. Firms with larger AUM tend to be more prestigious, with higher-profile fund managers and advisors. For example, BlackRock, the largest asset management firm in the world, had $8.677 trillion in assets under management as of Dec. 31, 2020.
Client Assets, Compensation, and Expenses
Assets under management basically start as a pool of money collected from investors. Each investor’s individual contribution also plays a big role in understanding some of the other facets associated with AUM.
Compensation of investment managers and advisors is dependent on assets under management. For example, hedge funds usually operate on a “two and twenty” fee structure. They charge 2% of AUM as annual management fees and retain 20% of profit as a “performance fee” on gains over a certain threshold.
Financial advisors also often charge 0.5%-2% of a client’s assets as their annual fee.
Mutual funds also charge certain fees and expenses based on total assets under management, in fact some, like 12b-1 fees are deducted directly from the total assets of the fund.
Not all investment products are suitable for all investors, and not all investment managers prefer to work with clients who do not have a sizable amount of assets to manage, in part because of these fee structures. For example, an investor would need to have at least $10 million in investable assets to be able to open an account with Goldman Sachs Private Wealth Management.
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