Asset Management

Refers to maintaining, trading, and maximizing the value and return on investments on behalf of its clients or investors.

Asset management refers to maintaining, trading, and maximizing the value and returns on investments on behalf of its clients or investors.

This financial service aims to increase the value or return on the investor's portfolio while mitigating the risk. It helps manage financial portfolios to ensure that the investment strategy used for individuals and entities is aligned with their long-term goals.

Examples of these services would be managing assets from a pension fund or identifying investment opportunities for clients.

Note that asset management can have different meanings depending on the sector. In the general sector, it has a different meaning where it can be referred to as the tracking, controlling, and developing of assets or inventory in a company. 

In the financial sector, It refers to managing investments and portfolios for other people. This article focuses on the latter. 

Key elements

There are many companies, firms, and individuals who hold lots of liquid assets, such as cash idle in their accounts. Keeping a lot of unused cash is not in the best interest since there are various opportunities to get a higher return by investing in the financial markets.

However, managing financial assets can be a bit of a complicated process for many individuals and businesses. The unpredictable nature of financial markets may lead to irrational and regrettable decisions. 

Rather than basing decisions on guts and unreliable tips, asset management can be a reliable help in the area of investment for many individuals, firms, and companies who hold huge capitals of liquid assets.

  1. Tasks

There are many tasks required in this form of financial service. Some of the main ones involve:

  • Monitoring asset performance
  • Developing strategies to increase return on investment (ROI) or minimize loss
  • Making purchase decisions
  • Researching markets and identifying trends 
  • Working and collaborating with the asset management team 
  1. Asset classes

Asset classes refer to the segment of the financial markets where investments can be made. Understanding the nature of these asset classes is essential since they affect the risk and return on the portfolio. 

The five main categories of asset classes are fixed income, equity, commodities, real estate, and alternative investments. 

  • Fixed income is an investment where the borrower is obliged to pay fixed interest or dividends until the maturity date. Examples of fixed income are government and corporate bonds, treasury notes, certificates of deposit (CDs), etc. 
  • Equity is the value of shares issued by a company to raise funds. Examples of equity would be apple shares, amazon shares, etc.
  • Commodities are raw materials or basic goods. The most common examples of commodities used for investment are gold, silver, oil, natural gas, etc.
  • Real estate, which can also be classified as real assets, involves properties consisting of land and buildings, and they are typically used for long-term investments.
  • Alternative investment involves investing in hedge funds, mutual funds, private equity, venture capital, etc.

Asset manager

Asset managers are financial professionals tasked with managing the client's money. They are responsible for growing the value of the assets in the client's portfolio and are referred to by many titles such as financial advisors, registered investment advisors (RIAs), investment brokers, and many more.

These professionals meet with the client regularly to determine their objectives and the risk they are willing to take. They provide strategic advice, manage the client's assets accordingly and prepare various reports on investment, management, risk, and finances.

So what makes a good asset manager?

Several factors make an excellent asset manager. One of the factors is to have strong analytical and finance skills. They interpret information based on how certain assets will perform in the market, changes in the market, and how the assets will perform at the current or future market conditions. 

They also require experience in the industry to make confident and wise decisions regarding the choices of assets in the portfolio. Experienced asset managers will know when to make the most appropriate investment in different market conditions or when the market changes.

Relationship and communication skills are essential for asset managers. They work and liaise with a variety of clients throughout their careers. Understanding the client's objectives and building long-term relationships can help the firm grow in the long run.

Roles

The team requires different roles to determine a successful outcome for the company and its clients. The three key areas are the distribution, investment, and support channels.

The distribution channel takes a more personal approach, mainly involving the sales team, marketing, events, and relationship manager. There are three key responsibilities and tasks that are required in this role. 

The first involves serving the client's request, such as delivering information or answering doubts regarding the organization. Likewise, it ensures that the client is served in the best and most appropriate manner.

The second requires building relationships with the clients. They need to maintain good working relationships and always be on good terms with them. This will potentially extend and lead to business opportunities for the company in the long run.

The third requires bringing in new business and pitching clients to the company. The role of the investment channel requires investing the capital brought in by the sales team. It is made up of research analysts, portfolio managers, and traders. 

They are responsible for the ideas and ways to invest in the financial markets and generate returns for clients.

They need to make sure that the portfolio and the investments abide by the risk, measures, and preferences of individuals, corporations, or pension schemes who are investing their money into the organization. 

The support function is made up of teams such as compliance, legal, HR, and finance. They tend to be considered as the back office rather than the front office, where client-facing is unlikely. They all work together to ensure that the goals and objectives of the client are fulfilled.

How does it work?

The first question that should be discussed between the client and the asset manager is risk tolerance. Many people or groups have different levels of risk, unique circumstances, and preferences toward their investment portfolio. 

For example, retirees or pension fund administrators are likely to be more risk averse towards their investment portfolio, while younger and passionate investors probably gamble more on higher-risk investments.

Asset managers will then evaluate several other factors involving the client's long-term financial objectives. These managers would then recommend and propose a mix of investments aligned with the client's objectives.

The investments are then handled according to a certain process or an investment mandate formulated internally. Due to the nature of these firms, they mostly offer their service to big companies and wealthy individuals. 

The reason is that it would be difficult to charge the same price for their services to smaller investors.

These wealthy investors deposit their money into private accounts with these firms and, in some cases, with third-party custodians. It is usually placed in a market money fund which offers a greater return than a regular savings account.

The asset manager then manages the account through their power of attorney. They can offer positions customized for the client's income needs, tax expectations, and liquidity expectations.

Asset management vs. Wealth management

Asset management focuses more on investing assets and serves high-net-worth clients. Wealth management, on the other hand, addresses the financial situation of an individual or family and provides solutions to maximize and manage their wealth in the long run.

Wealth management helps clients grow their wealth, protect their assets, and reduce their financial risk. Similar to asset managers, wealth managers work with their clients to understand their objectives, finances, and assets and propose investments according to their strategic plans.

Examples of wealth management services would be advice on investment management and planning, retirement planning, estate planning, debt management, health care and social security management, insurance services, income protection, tax services planning, asset preservation, and many more. 

Asset management company (AMC)

Simply put, an AMC is a firm that operates by managing funds from individuals and companies. AMC works with a group of investors to diversify their client's portfolios, enabling them to offer higher value options and mitigate the risk.

These firms invest pooled funds from their clients through different varieties of asset classes like fixed income, equities, real estate, and many more, depending on the financial objectives of the clients. Their primary goal is to increase the value of their client's portfolios by making smart purchasing decisions.

A common question is: are the AMCs on the buy or sell side? AMCs are in the category of buy-side firms. They help clients make investment and purchase decisions based on research of future investment prospects. 

However, their investment plan also utilizes information and security recommendations from the sell-side firms. 

On the other hand, sell-side firms such as investment and commercial banks sell securities to these management firms. They perform market analysis and create projections in order to generate the trade orders for which they will receive commissions and transaction fees.

For more info, you can refer to this video.

Another frequent question is: How do AMCs earn revenue? AMC charges investment fees, usually determined as a percentage of the client's total AUM. The fees can range from a few basis points to a large basis point of the shared profit. 

For example, if the AMC charges a 2.5% annual fee, it would charge $250,000 annually to the client's portfolio, which is worth a total of $10 million. In some cases, firms can charge a minimum annual fee, such as $10,000 or $20,000.

AMCs are usually distinguished by the total market value of the assets or investments managed or controlled by the firm. This is referred to as assets under management (AUM) and can be a strong performance indicator for AMCs. 

Larger values in AUM may indicate higher revenues for the company (assuming a constant ROA).

There are many asset management firms where as of 2021, the top 5 largest companies based on global assets under management (AUM) were Black Rock ($9.464 trillion), Vanguard Group ($8400 trillion), UBS group ($4.432 trillion), Fidelity investments ($ 4.230) and State Street Global Advisors ($3.860 trillion)

Clients 

Understanding the different types of clients that AMCs serve is critical since the job varies depending on the client. The clients typically fall into one of the three main categories: (1) High-net-worth individuals, (2) Mutual funds, and (3) Institutional investors. 

In most cases for AMCs, they would usually participate in all three categories. However, some firms specialize in only one. They assemble the three components as separate and different divisions within the company. 

For example, JP Morgan has divisions for high-net-worth clients but also sponsors mutual funds as well.

Below is a brief description of each category.

  1. High-net-worth individuals (HNWI)

These are classified as people with liquid assets exceeding a certain value. A good rule of thumb suggests that they invest assets with a minimum of $5 to $10 million. 

  1. Mutual funds

These are professionally managed investment portfolios that pool money from many investors to purchase securities. They are structured and maintained to follow the investment objective usually stated in the prospectus.

Mutual funds are renowned as the retail division of these management firms where investors of this investment vehicle are typically below the high-net-worth investors. They are intended to serve investors with lower net worths. 

Since mutual funds are managed in a single portfolio, investors can directly invest in the fund. They can simply put $5000 of capital in mutual funds offered by firms like Vanguard or JP Morgan. Not only mutual funds but index funds and exchange-traded funds are also traded.

  1. Institutional investors 

These are typically companies or organizations that represent a large pool of assets. Examples would be government pension funds, corporate pension funds, endowments, insurers, and many more. 

As to why the job varies for different clients, the need for different objectives and strategies are required in the handling of the investment portfolio. 

For example, the portfolio manager who represents high-net-worth individuals would have an entirely different focus than the one who handles institutional investors.

 

A career in this management is one of the most competitive careers in the finance industry. It takes passion, ambition, and dedication to succeed in such a role.

A key question normally asked is: What are the initial steps to help you get started in this career? The most recommended path in starting your career is to get a degree in economics or finance from a top-tier institution. The bigger companies would demand advanced certificates such as chartered financial analyst (CFA) certification

There are many skills demanded and required. Some of them are analytical skills, decision-making, communication, time management, and initiative.

Analytical skills involve identifying trends, predicting stock returns from qualitative and quantitative research, looking at data and headlines, and many more.

Decision-making skills ensure making confident, wise, and right investment choices based on the facts given by the research and information extracted from the market.

Communication skills are essential to explain the investment decisions made to the clients and build long-lasting relationships with them.

Time management skills deal with the pressure relating to how fast you react to the events taking place in the market.

The initiative is the ability to look for new opportunities and solutions actively.

Work-life balance: Asset management vs. Investment banks

In the finance industry, asset management is known to have a reasonable work-life balance compared to a career in investment banking. The average hours that asset managers work is around 40 to 50 hours which is the standard working hour for an average person. 

Asset management can be a fulfilling career for someone who prioritizes work-life balance at the top of their list. On the other hand, investment banking can be a bit of a "havoc" for people who prioritize work-life balance at the top of their list.

Investment banking employees can work up to 80 hours per week which can be a staggering amount of work. Even on weekends, especially Saturdays, investment bankers are obliged to work, whereas Sundays are not guaranteed a day off for these employees. 

One of the most asked questions is: What is the average salary asset managers receive? According to Pay Scale, the average salary for an asset manager in the United States is:

  • Base salary: $50k - $117k
  • Bonus: $2k - $24k
  • Profit Sharing: $1k - $20k
  • Commission: $0 - $2k
  • Total Pay: $45k - 126k

Career threats 

There are concerns regarding future careers in management due to the increased use of artificial intelligence (AI). AI models have helped the finance industry in many ways, from portfolio management to risk management, trading hedge funds, ETFs, and even cryptocurrencies.

Based on information from Refinitiv, there is an idea that many managers believe:

"Portfolio management should be modernized by applying techniques that analyze big data in a more dynamic way while removing emotion from the investment process." 

According to a study from the CFA institute research foundation, the use of AI has improved asset management, trading, and risk management practices by increasing efficiency, accuracy, and compliance. 

Likewise, it has helped construct portfolios based on more accurate risk and return forecasts. The CFA study has mentioned that there are even a fairly large number of AMCs that are now using AI and statistical models to run trading and investment platforms. 

According to Betterteam, there are five main interview questions for asset managers.

  1. What are some of the challenges currently faced by the asset management industry? How can they be overcome?
  2. Can you describe an experience when you had to negotiate favorable terms for a client?
  3. Please describe your financial background. What would you say are your strongest qualities?
  4. What method do you use to eliminate the errors in your work?
  5. How do you monitor asset performance and market trends?
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Researched and authored by Viriyan Dharma | Linkedin

Reviewed and edited by Sakshi Uradi | LinkedIn

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