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Everything you need to know about asset management

Many people don’t have an in-depth understanding of the asset management business or the investment industry as a whole. There is also frequently an enormous divide in knowledge, net worth, and experience between well-heeled and average investors, who many times don’t even realize all of the potentially-beneficial money management alternatives that are available to them.

Understanding the field of asset management, why it’s important, and what makes some asset management companies different from others can aid you in making better, more informed decisions about which companies to choose for your own personal assets.

Understanding the industry can also help you understand the role asset management companies play as compared to financial planners and other advisors.

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, private equity, and more. They handle investments according to an internally-formulated investment mandate, or process. Many asset management companies restrict their services to wealthy individuals, families, and institutions because it can be difficult to offer meaningful and useful services at a price that adequately offsets the cost to service smaller investors.

Wealthy investors typically have private accounts with asset management firms. They deposit cash into the account, in some cases at a third-party custodian, such as a firm that manages an Individual Retirement Account (IRA) for them, and the portfolio managers take care of the portfolio for the client using a limited power of attorney.

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, liquidity expectations, moral and ethical values, and personal psychological profiles.

Higher-end firms cater to clients’ every whim, typically offering a bespoke experience. It’s not unusual for wealthy investors to work with an asset management firm of which you have never heard, with relationships often lasting for generations as managed assets are transferred to heirs. A number of asset management firms the typical American has never heard of are immediately recognizable to those in the top 1 percent in terms of wealth.

Investment fees often range anywhere from a few basis points up to a substantial percentage of the shared profits on performance-agreement accounts, and depend on the specifics of the portfolio. In many cases, firms charge a minimum annual fee, such as $5,000 or $10,000 per year, to help filter out smaller investors that won’t be best served by the firm. A few asset management companies have minimum annual fees ranging from $100,000 up to $1,000,000.

Managed Assets for Everyone

Many asset management firms have been re-tooling 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 or through an intermediary such as another investment advisor or financial planner.

For example, online Robo-Advisors such as Wealthfront and Betterment channel money into these pooled structures run by third-party asset management companies, by recommending asset allocation models made up of their funds.

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. Vanguard’s median participating balance for a retirement account was only $26,331 in 2017, meaning half of their clients with a retirement account had more than that, and half had less.

From an asset management perspective, these are very small accounts, and Vanguard makes this service more accessible to clients who wouldn’t likely cover the minimum fee at most private asset management groups or even at regional bank trust departments.

These clients don’t have complex investing needs or enough wealth to worry about things like asset placement or strategies such as exploiting tax-equivalent yield differentials on municipal bonds and corporate bonds by putting one in a certain type of account and the other elsewhere.

Instead, these smaller investors might simply buy $3,000 worth of a Vanguard S&P 500 index fund. The fund follows the rules set by the S&P 500 committee, picking up shares of individual stocks like Apple, Microsoft, General Electric, and Chevron for the fund to hold indirectly. There’s no real flexibility, but it allows clients in this bracket to invest in an index without a large amount of capital.

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 often invest through their financial planner or retirement plan at work.

Another company, Northern Trust, has a large asset management business but also owns a bank, trust company, and wealth management practice. It’s challenging to tell the divisions apart if you aren’t familiar with the actual company set up. This is by design so that the company appears to offer clients a comprehensive, all-in-one solution.

Asset Management Companies vs. Financial Advisors

The Financial Industry Regulatory Authority (FINRA) allows the following investment professionals to call themselves 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, the last category, investment advisors, refers to firms legally known as “Registered Investment Advisors.” Many RIAs, as they are known, provide advice to their clients but outsource the actual asset management to a third-party asset management group, either through a negotiated private account or by having the client purchase the asset management company’s sponsored mutual funds, ETFs, or index funds.

Additionally, many asset management firms also serve as RIAs. Hence, they function as both asset managers and “investment advisors,” or financial advisors, as FINRA allows them to be called, 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.

Many large asset management firms end up hiring their own financial advisors, who don’t manage assets directly. These advisors take on clients and steer them into the asset management division’s products and services, perhaps using an asset allocation model from a software package or an internal firm asset allocation guideline.

Using Vanguard again, it’s first and foremost an asset management company. However, recently the company’s moved into financial planning for investors with smaller capital amounts (the minimum is presently $50,000). The client pays Vanguard’s advisors a fee of 0.30 percent for the service.

These advisors invest the client’s money into Vanguard’s family of mutual funds, on which the asset management division charges its asset management fees. Vanguard also raises a lot of money for its asset management business by getting independent investment advisors to have their clients invest in Vanguard’s funds through third-party brokerage and retirement accounts. Furthermore, Vanguard has a trust department that sets up various types of trusts for clients.

Asset Management Companies and Specialization

Each asset management firm has its area of specialization. Some are generalists, usually large companies that design financial services or products they think investors will want and need. Some firms have a narrow focus, concentrating on one or a handful of areas such as working with fellow long-term investors who believe in a value investing or passive investing approach.

Some firms only cater to wealthy clients through private accounts, known as 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. Finally, some asset management companies provide their services to specific firms, such as managing assets for a property and casualty insurance company.

Different Fee Structures

Pay attention to how different asset management companies and the men and women who distribute the products and services on its behalf, receive compensation. Many different business models exist in the asset management world and not all of them are equally beneficial to the client. For example, a mutual fund might have a 5.75 percent sales load, which comes right out of the investor’s pocket, and which pays the mutual fund salesmen or financial advisor for placing the client in that particular fund.

Meanwhile, the asset management business itself earns its annual management fee, which is taken out of the pooled structure. In cases of integrated firms where asset management is one of the businesses under the financial conglomerate’s umbrella, the asset management costs might be lower than you’d otherwise expect but the firm makes money in other ways, like charging transaction fees and commissions.

In another fee variation, firms may charge no upfront transaction fees or commissions but, instead, take higher fees on other products or services, that they split between the advisor and the firm for its asset management services.

Finally, fee-only asset management groups are companies that only make money from management fees charged to the client, rather than commissions or charges related to specific products. Many investors feel this gives the firm more objectivity in choosing investment products and strategies strictly for the client’s benefit, rather than choosing products based on the amount of fees or commissions earned for the firm.

Understanding Asset Management Accounts

If you work with some financial institutions, including certain private banks, you may hear about an asset management account, even if the institution doesn’t call itself an asset management company. It is basically designed to be an all-in-one account, combining checking, savings, 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 1.00 percent and 2.75 percent, depending upon your account balance but you may receive other advantages with the account that make any underperformance relative to a benchmark potentially worth your while.

Some banks offer less-common investing strategies such as allowing you to create collateralized loans against securities in your asset management account at highly attractive rates, in case you found an outside investment opportunity that required immediate liquidity. Sometimes firms will also bundle additional services, such as insurance policies, so you save money by purchasing more products from the same company. does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

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