Asset management is the service, usually performed by a firm, of directing a client’s wealth or investment portfolio on their behalf. These firms typically have investment minimums, so their clients usually have a high net worth.
Understanding the field of asset management and what role asset management companies play will help you hire the right professional to meet your financial goals. You may even learn about money management options you didn’t know were available to you.
The Role of Asset Management Companies
Asset management companies take investor capital and put it to work in different investments, including stocks, bonds, real estate, master limited partnerships, and private equity. These companies handle investments according to an internally formulated investment mandate, or process. Many asset management companies offer their services to wealthy businesses and individuals because it can be difficult to offer services to smaller investors at an appropriate price.1
Wealthy investors typically have private accounts with asset management firms. They deposit cash into the account, in some cases with a third-party custodian, and the portfolio managers take care of the portfolio using a limited power of attorney.2 3
How Asset Management Firms Operate
Asset managers work with client portfolios by considering several variables, including the client’s unique circumstances, risks, and preferences. Portfolio managers select positions customized for the client’s income needs, tax circumstances, and liquidity expectations. They can even base decisions on the client’s moral and ethical values as well as personality.
High-end firms may cater to a client’s every whim, offering a bespoke experience. It’s not unusual for the relationship between investor and asset management firm to span generations as managed assets are transferred to heirs.
Asset Management Costs
Investment fees for asset management can range anywhere from a few basis points to a substantial percentage of the shared profits on performance-agreement accounts. These fees will depend on the specifics of the portfolio.4 5 In other cases, firms charge a minimum annual fee, such as $5,000 or $10,000 per year.
Firms for Average Investors
Some asset management firms have re-tooled their businesses to increase their offerings and better serve smaller investors. Many of these 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 in the fund or through an intermediary such as another investment advisor or financial planner.
Vanguard, one of the largest asset management companies in the world, focuses on lower- and middle-income investors whose asset balances might be too small for other institutions.6 Vanguard’s median account balance was only $22,217 in 2018, meaning half of their clients had more than that, and half had less.7
Vanguard’s efforts make this service more accessible to clients who likely couldn’t cover the minimum fee at most private asset management groups. These clients don’t have complex investing needs; they might simply buy $3,000 worth of a Vanguard S&P 500 index fund and hold it for the long term. They don’t have enough wealth to worry about things such as asset placement. Neither do they need complex strategies such as exploiting tax-equivalent yield differentials on municipal bonds and corporate bonds.
Robo advisors such as Betterment or Wealthfront, which are low-cost online investing platforms that use algorithms to balance portfolios, are another option for average investors.8
Some firms combine service offerings for both wealthy clients and investors with more average-sized portfolios. For example, J.P. Morgan has a private client division for its high-net-worth clients, while also sponsoring mutual funds and other pooled investments for regular investors, who likely invest through a retirement plan at work.9
Another company, Northern Trust, has a large asset management business but also owns a bank, trust company, and wealth management practice.10
Registered Investment Advisors
Firms legally known as Registered Investment Advisors (RIAs) provide advice to their clients but outsource the actual asset management to a third-party asset management group. They do this either through a negotiated private account or by having the client purchase the asset management company’s sponsored mutual funds, ETFs, or index funds.