Assets under management (AUM) measure the total amount of investor funds held and managed by an investment company. There are several investment vehicles through which financial institutions and asset management companies hold cash investors, including hedge funds, mutual funds, exchange-traded funds and others. Often, a portfolio manager is responsible for managing each investment vehicle. The AUM calculates the size of a fund based on the total amount of assets held by the fund. The rate at which investors contribute their assets to a fund determines the amount of assets under management. As more and more investors deposit in a fund, assets under management increase and the reversal occurs when the number of investors investing in a fund decreases. To better understand how assets under management work outside of a financial advisory firm, let`s take a look at a mutual fund with a nice combination of investments. Suppose the fund has a portfolio of $5 billion in stocks, $1 billion in government bonds, $2 billion in cash and $2 billion in corporate bonds. The total value of the fund`s assets under management would be $10 billion.
The following table presents the same information in a more digestible way. In the wealth management industry, some investment managers may have requirements based on assets under management. In other words, an investor may need a minimum amount of personal assets under management in order for them to qualify for a particular type of investment, such as a hedge fund. Asset managers want to ensure that the client can withstand adverse markets without suffering too many financial blows. Individual assets under management of an investor can also be a factor in determining the type of services received from a financial advisor or brokerage firm. In some cases, individual assets under management may also correspond to a person`s net worth. The reasoning behind this statement is easy to understand. If a financial advisory firm has more assets under management than a competitor, then that company will claim that more people trust the company to increase their investments than they trust the competitor.
And if a company`s assets under management have grown over time, that`s proof that the company has gained more customers, that the company has increased the money of its existing customers, or both. New and old fund investors significantly consider assets under management before making an investment decision. Products and companies with higher assets under management have a high volume of investments, the assets of the funds with which they trade on the market, while those with low assets under management trade otherwise. The AUM helps to assess the strengths and weaknesses of a company and an investment. A good understanding of assets under management is important for investors, helping them to have an overview of the overall market and get an idea of how investment products charge different fees. Investors` entire asset management determines the fees that fund managers charge for managing the investment. In addition, investors consider that a portfolio manager is capable when there is a higher investment influx due to the excellent performance of the investment in the market. Where institutions most often differ in the formulation of assets under management is the question of which specific investments should be included in the calculation. As a general rule, assets under management refer only to the values of the funds they directly manage and invest on behalf of their clients. In its instructions to financial advisors to complete the ADV form, the Securities and Exchange Commission (SEC) says it should only include “portfolios of securities for which you provide ongoing and regular regulatory or administrative services.” As of August 15, 2020, SPY managed $300 billion in assets with an average daily trading volume of 51 million shares. The high trading volume means that liquidity is not a factor for investors when they want to buy or sell their shares in the ETF.
Assets under management (AUM) are very popular in the financial industry as a measure of the size and success of an investment management company, compared to its history of assets under management in previous periods and compared to the company`s competitors. [1] The methods used to calculate assets under management vary from company to company. Investment management firms typically charge their clients a fee in proportion to assets under management, so assets under management, combined with the company`s average fee rate, are the key factors that indicate an investment management firm`s income. The fee structure depends on the contract between each client and the company or fund. Used to indicate size or quantity, assets under management can be separated in several ways. This can be the total amount of assets under management for all clients or the total assets under management for a particular client. Assets under management include the capital that the manager can use to make trades for one or all of the clients, usually at its sole discretion. The company`s management will monitor assets under management against investors` investment strategy and product flows to determine the strength of the company.
Investment firms also use assets under management as a marketing tool to attract new investors. Assets under management can help investors get an indication of the size of a company`s operations relative to its competitors. Assets under management can have slightly different meanings depending on the context in which you see them. This can be the value of the total investment in a mutual fund, the market value of the assets a financial advisor controls, or the amount of money you`ve invested in a business. In addition, assets under management can sometimes be useful in determining a financial institution`s reputation. However, it`s best not to use it as the only factor you check. Assets under management can also be an important consideration when calculating fees. Many investment products charge a management fee, which is a fixed percentage of assets under management. In addition, many financial advisors and personal asset managers charge their clients a percentage of their total assets under management. As a general rule, this percentage decreases with the increase in assets under management.
In this way, these financial professionals can attract wealthy investors. The First Trust Dow 30 Equal Weight ETF (EDOW) tracks the 30 stocks of the Dow Jones Industrial Average (DJIA). EDOW manages $37 million in assets and a much lower trading volume compared to SPY, averaging nearly 3,000 shares per day.