Asset Management

In this lesson, you’re expected to learn:
– what asset management companies do
– the difference between financial advisors and asset management firms

What Is Asset Management and What Do Asset Management Companies Do?

Asset management is the process of taking investor capital and putting it to work in different investments including stocks, bonds, real estate, master limited partnerships, private equity, and more.

Investments are handled according to an investment mandate. A lot of asset management companies restrict their services to wealthy individuals, families, and institutions because it can be extremely difficult to offer meaningful and useful services at a price that is worth the effort to service smaller investors. These wealthy investors have what are known as private accounts.

They deposit cash into the account, in some cases at a third-party custodian, and the portfolio manager(s) run the portfolio for the client using a limited power of attorney based on a number of variables including the client’s unique circumstances, risks, and preferences.

Positions can be selected or modified for income needs, tax circumstances, liquidity expectations, moral and ethical values, personal psychological profiles etc. For this reason, it isn’t unusual for the wealthy to have a relationship with an asset management firm of which you have never heard, relationships frequently lasting for generations as assets are transferred to heirs.

Investment Fees

Investment fees typically range anywhere from a few basis points up to a substantial cut of the shared profits on performance-agreement accounts and will depend upon the specifics of the portfolio.

In many cases, there is a minimum annual fee, such as $5,000 or $10,000 per year, to help make sure smaller investors don’t try to waste the firm’s time. A few companies have minimum annual fees of $100,000 or $1,000,000.

Asset Management for Smaller Investors

That doesn’t mean that asset management firms don’t want to make money by serving smaller investors. Many frequently do.

To achieve that objective and get around the limitations of scale that would make smaller clients prohibitively expensive to service if taken on a one-on-one basis, many asset management 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 or through an intermediary such as another investment advisor or financial planner.

Online Robo-Advisors such as Wealthfront and Betterment, to provide two examples, are effectively putting money into these pooled structures run by third-party asset management companies by recommending asset allocation models made up of their funds.

A perfect example of this is Vanguard. The firm has become the largest asset management company in the world by focusing on the poor and middle class who would be all but non-serviceable at many other institutions.

They’re doing a tremendous service for these people who otherwise could barely cover the minimum fee at most private asset management groups or even regional bank trust departments. They don’t have sophisticated needs, they don’t have enough wealth to worry about the practical consequences of things like asset placement or exploiting tax equivalent yield differentials on bonds by putting one in a certain type of account and the other elsewhere.

Some firms combine both service offerings. 

J.P. Morgan has a private client division for its wealthy clients, who enjoy private accounts, and sponsors mutual funds and other pooled investments for regular investors, who often invest through their financial planner or retirement plan at work.

Northern Trust has a large asset management business but also owns a bank, trust company, and wealth management practice so it can be hard to tell them apart if you aren’t familiar with the actual setup; something that is by design so it appears to be a comprehensive, all-in-one solution.

[Optional] What is asset management?
How Are Asset Management Companies Different From Financial Advisors?

The Financial Industry Regulatory Authority, or FINRA, allows the following investment professionals to refer to themselves as financial advisors even though they do very different things and play very different roles for a client:

– Brokers
– Accountants
– Attorneys
– Financial Planners
– Insurance Agents
– Investment Advisors

Furthermore, that last category – investment advisors – refers to firms that are “Registered Investment Advisors” under the law.

Many RIAs, as they are known, do not handle their asset management in-house but, instead, outsource it to a third-party asset management group, either through a negotiated private account or by having the client acquire the asset management company’s sponsored mutual funds, ETFs, or index funds.

Additionally, many asset management firms are also RIAs. Hence, they are both “investment advisors”, or financial advisors, but are not at all the same type of business model.

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.

What makes this even more confusing is that many large asset management firms end up hiring their own financial advisors, who aren’t managing assets directly. These advisors take on clients and steer those clients into the asset management division’s products and services, perhaps picking an asset allocation model from a software package or some internal firm guideline.

What Differentiates Asset Management Companies from Each Other?

Different asset management firms do different things.
Some are generalists – they are enormous enterprises that design financial services or products they think investors will snap up in the marketplace.

Some are specialists, focusing on one or a handful of areas, while others only cater to the rich through private accounts (aka individually managed accounts) or 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.

Some asset management companies provide their services to specific firms, such as for a property and casualty insurance company.

What Is an Asset Management Account?

If you work with some financial institutions, including certain private banks, you may hear about something called an asset management account. It is basically designed to be an all-in-one account that combines checking, saving, and brokerage.

You can deposit your money, earn interest on it, write checks when needed, buy shares of stock, invest in bonds, acquire mutual funds, and a number of other securities all from this one centralized account.

In many, but not all, cases, the account is actually managed by a portfolio manager of the institution. Typically, fees might run you between 1% and 2.75% depending upon your account balance but, sometimes, other advantages come along with the deal that makes any underperformance relative to a benchmark potentially worth it.

For example, some banks will allow you to create instantly-collateralized loans against your asset management account holdings at highly attractive rates if you want to take advantage of an opportunity that required immediate liquidity. Sometimes, they’ll bundle services, such as insurance policies, so you save money by crossing a certain relationship size threshold.

[Optional] Top Asset Management Firms
Check out this article to learn more:
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