What Is Asset Management?
As investors begin to acquire assets — from stocks and bonds to alternative investments and real estate — some may wish they had a bit of help managing them. Asset management is a service provided by an individual or financial institution, in which they direct and invest a client’s financial assets on their behalf in exchange for a fee. For example, you may work with an asset management firm to manage your accounts.
Understanding what financial asset management is and the role it can play in managing your portfolio can help you decide whether it is a service that’s right for you, or whether another type of financial professional is a better fit.
Asset Management Basics
What is asset management? If this is a new concept, here’s a simple asset management definition: It simply means paying a professional to oversee your financial assets. This can include bank accounts as well as investment accounts.
Traditionally, asset management companies screen out smaller investors by requiring high investment minimums. As a result, the clients they tend to work with are what is known as high-net-worth clients. These clients could be individuals, corporations, institutions like universities, or even government agencies.
Asset managers handle investments on their client’s behalf, working to deliver investment returns while aiming to mitigate risk. They choose which investments to buy, sell, or avoid entirely. And they make recommendations based on what they think will help their client’s portfolio grow safely.
In addition to trading traditional and alternative securities, such as stocks, bonds, real estate and private equity, asset managers may also offer services not usually available to private investors such as first access to initial public offerings (IPOs).
Asset managers may also allow their clients to take advantage of other less common investment strategies. For example, they may let an investor borrow against the securities in their portfolio if there are other investment opportunities that require quick cash.
They may also offer their clients other services like bundled insurance, which can be cheaper to buy through them than through another insurance company.
How Does Asset Management Work?
Asset managers often make investments based upon an individual or institutional client’s investment mandate. This mandate is a set of instructions for how the client wants their pool of assets to be managed and how much risk to take on. These mandates may include instructions on a client’s goals and priorities, what benchmarks may be used to measure success, and what types of investments should be prioritized or avoided. For example, an environmental organization might avoid stocks or funds that include petroleum companies, or a human rights organization might target funds that prioritize good corporate governance.
To make managing and monitoring their accounts easier, clients may consolidate all of their accounts — including checking accounts, savings accounts, money market accounts, and investment accounts — into one asset management account. These accounts provide one monthly statement to help clients keep track of their financial activities, and may provide other benefits such as automatic periodic investment.
Asset management accounts are relatively new: The government first allowed them just over 20 years ago. In 1999, the Gramm-Leach-Bliley Act overrode the Glass-Steagall Act of 1933, which banned firms from offering banking and securities services at the same time. The Gramm-Leach-Bliley Act permitted financial services firms to offer brokerage and banking services, and the asset management accounts were born.
How Much Does an Asset Manager Cost?
Investors should pay special attention to how an asset manager gets paid, as their compensation structures can be complicated. Before hiring an asset manager, an investor should feel comfortable asking for a copy of their fee structure. Individual Advisory Representatives (IAR), which most asset managers are, are required by the Securities and Exchange Commission (SEC) to file a Form ADV that includes information such as the manager’s investment style and assets they manage, among other things.
Many asset managers charge an annual fee based on a percentage of the value of an account. These fees may change depending on the size of the portfolio. For example, large portfolios may be charged lower fees than smaller portfolios. Alternatively, some asset managers may offer tiered-fee systems that assign different fees to different asset levels within a portfolio. For example, managers may charge one fee for the first $250,000 in a portfolio and a slightly smaller fee for the next $250,000 to $1 million, and so on.
Asset managers may also earn fees on other products or services they offer, such as insurance policies. Other asset management firms are fee-only, meaning they don’t collect commissions on specific products, and only make money from the management fees they charge their clients. A fee structure like this may make investors feel more confident that their asset manager is choosing investments and products that are appropriate to their investment strategy, rather than choosing products because they carry higher commissions.
Some asset management accounts come with account minimums and related fees. Smaller investors may have trouble meeting the opening balance amount or keeping enough in their account to avoid fees.
Importance of Asset Management
Financial asset management is important on several levels for both individual investors as well as business entities. For example, asset management makes it easier to keep track of assets in a centralized way. If you run a business, maintaining accounts at an asset management bank could help with tracking cash flow. If you’re an individual investor, asset management can help you see at a glance how much you have to invest at any given time or how your investments are performing.
Asset management also plays a part in maximizing financial assets and capitalizing on opportunities. A dedicated asset manager can help develop an investment strategy that’s designed to produce a target level of returns for their client, while still maintaining a risk profile that’s tailored to the client’s needs and preferences.
It’s possible to develop both short- and long-term strategies for financial asset management. The asset manager would establish these strategies based on the risk tolerance, time horizon, and investment goals of the investor they’re working with.
Benefits of Asset Management
Asset management can be attractive to investors, business owners, and other entities that want to benefit from professional financial guidance. For example, your asset manager may be able to review your portfolio and develop a plan for maximizing its tax efficiency. Or if you’re interested in a specific objective, such as generating current income through dividend investments, your asset manager may be able to guide you in your investment decision-making to achieve that goal.
Financial asset management may also yield cost savings. While you may pay a fee to an asset manager for their services, that fee may be justified if they’re able to help you reduce other investment fees. For example, if you’re investing in a mutual fund that has a steep expense ratio and produces average returns at best, an asset manager may be able to help you replace it with a mutual fund that has a lower expense ratio and a stronger return profile.
It’s important to keep in mind that asset management isn’t the same as wealth management. Asset managers typically target specific activities, such as choosing an asset allocation for your portfolio or finding ways to minimize investment taxes. Wealth managers, on the other hand, may take a broader view of your financial situation. For example, in addition to helping you with investment decisions, wealth managers may also be concerned with:
• Estate planning
• Insurance planning
• Tax planning
• Charitable giving
• Retirement planning
• College planning
Asset management is concentrated on specific assets while wealth management is more comprehensive in its approach to building and preserving wealth over time.
Asset Management Accounts
Asset management accounts function like a checking or savings account, but with features of investment accounts. You may find them offered at asset management banks or through traditional and online brokerages. Asset management accounts can also be referred to as “sweep” or “cash” management accounts.
Depending on where you open an asset management account, it may include these features and benefits:
• Ability to link to your brokerage account for convenient transfers
• Automatic “sweeps” (transfers) of funds from your brokerage account to your asset management account
• Interest earned on deposits
• Check-writing abilities
• Access to funds via a debit or ATM card
• Combined statement for brokerage and checking transactions
Asset management accounts may also have fewer fees compared to traditional checking or savings accounts. And they may enjoy enhanced FDIC coverage limits. An asset management account should make it as easy as possible to move funds between your spending account and your investment account.
Developing Asset Management Strategies
If you’re considering working with an asset management bank or firm, it’s important to understand how financial asset management strategies work. While every asset manager is different, they may consider some of the same metrics when developing a plan for managing client assets. Those metrics can include the investor’s:
• Current age
• Risk tolerance
• Time horizon for investing
• Current portfolio allocation
• Goals and objectives
Asset managers may also take into consideration an investor’s values as well. For example, you may be interested in ESG strategies that promote positive environmental, social and governance practices. Your asset manager could help you to develop an asset allocation that includes green companies or companies that support social justice. Or you may want to exclude certain industries or stock market sectors altogether, which is something else an asset manager could discuss with you.
Alternatives to Asset Managers
You don’t have to be a high-net-worth individual to access some form of asset management. Some financial firms may offer asset management to some clients through a private client division while offering other clients access to pooled investments, such as mutual funds.
Smaller investors — and any investors — looking for help with their portfolios do have other options besides asset managers. These are some of the more common ways to get help putting together and monitoring an investment portfolio.
Managed Funds
Actively managed mutual funds, index funds, and exchange-traded funds (ETFs) are structures in which investors’ money is pooled and then managed in a single account by asset managers. While there are some funds that focus on specific ideals or are focused on producing income to an individual’s needs, the managers don’t work for individual investors specifically. The funds do, however, offer some benefits of active management. Any investor can buy shares of these funds through a broker or with the help of a financial advisor.
Actively managed funds are led by a team of well-trained experts who are trying to outperform the market. This expertise can come at a price, and actively managed funds may come with higher fees. When you invest in mutual funds, for example, you can expect to be charged a sales load — a percentage of the dollar amount invested — by brokers and the mutual fund company when you buy or sell the fund. Front-end loads are paid by the investor up front when they purchase shares of a fund. So if a mutual fund has a load fee of 5% and an investor buys $10,000 worth of shares, $500 will be taken out of the account to pay brokers and distributors.
Back-end fees are paid when an investor sells shares. These fees are usually calculated based on the initial investment and not on the final value of the shares at the time of the sale.
Passively managed funds closely mirror a market index, such as the S&P 500. These funds hold the same securities contained in the index and tend to stray very little from that pattern. As a result, the fund is essentially on auto-pilot and requires very little human intervention.
One low-cost option for investors who want to take a hands-off approach to their portfolios are online investment platforms, some of which use algorithms to build and manage client portfolios.
Registered Investment Advisors (RIAs)
A registered investment advisor (RIA) is an individual or firm who gives investment advice, but may outsource asset management to third-party firms.
RIAs must register with the SEC or another state-level authority. They have a fiduciary duty to their clients, which means they are legally obligated to act in their clients’ best interests. In other words, RIAs must provide investment advice because it is best for their client — and not because it’s beneficial or more profitable to them. The advice they give must be as accurate as possible based on the information available, and RIAs must consider cost and efficiency when making investments on their clients’ behalf.
Not all financial professionals are held to this same standard. Stock brokers for example, are held to a suitability standard rather than a fiduciary standard, meaning the recommendations they make to clients must be suitable to their client’s needs. This differs slightly from the fiduciary standard an investment advisory is held to, which means that the advisor is bound to act in the client’s best interest.
RIAs may suggest investments to their clients for which they receive monetary compensation, such as a commission, as long as the product is in the client’s best interest and the RIA discloses the conflict of interest.
When registering as an RIA, advisors must disclose the investment styles and strategies that they use, how much money they manage in total, their fee structure, past disciplinary actions, conflicts with clients, and any potential conflicts of interest.
Broker Dealers
Broker-dealers are individuals or companies who are licenced to sell securities and other investments. In effect, they are middlemen who buy and sell on behalf of clients. They don’t help investors build their portfolios, or develop an allocation and diversification strategy. However, an investor can turn to a broker-dealer when they want to execute a trade.
Other Financial Advisors
Sometimes, an investor might seek general financial advice that doesn’t necessarily have to do with managing their assets. If those instances, a certified financial planner (CFP®) might be someone to consider. CFPs can make recommendations about asset allocation, investment accounts, and tax strategy, for example. And they can help an individual put together long-term investment plans to save for major financial goals, such as retirement or sending kids to college.
CFPs are credentialed by the CFP Board, and to earn their stripes they must meet rigorous training requirements and pass the CFP exam. The CFP board holds its members to a fiduciary standard, so as with RIAs, the advice they give must be in their clients’ best interest.
The Takeaway
Though asset managers typically work with high-net-worth clients, there are a number of different options any investor has — including wealth managers, RIAs, and CFPs — when it comes to finding a professional service or individual to manage their investment portfolio. For any investor, it helps to consider one’s income bracket, specific needs, and tolerance for fees, when deciding where to turn for professional guidance.
SoFi Invest® can help anyone from seasoned investors to eager beginners get started building a diversified portfolio today. Members can trade stocks and ETFs, choosing to take a hands-on, active approach to building their portfolio—or letting SoFi take the reins to build an automated portfolio for you.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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