What is Asset Management?
Asset management is a massive industry. According to Willis Towers Watson’s Thinking Ahead Institute, the top 500 largest asset managers in the world managed $104.4 trillion in assets in 2019.
With these staggering figures, asset management may appear to be a far-fetched concept. Asset management, on the other hand, is a financial solution that can help people with a low or high net worth.
What Is Asset Management?
The service of managing a client’s money is known as asset management. The process of developing, running, maintaining, and selling assets in a cost-effective manner is referred to as asset management. This is a service that asset management specialists provide for others. Portfolio managers and financial advisors are other terms for them. Many people work for themselves, while others work for a bank or other financial institution. Individuals or businesses that manage assets on behalf of individuals or other entities are referred to as asset managers in finance.
The business must maintain track of all of its assets. As a result, its stakeholders will be aware of which assets are accessible to be used to generate the best possible profits. Any company’s assets are divided into two categories: fixed and current assets. Assets acquired for long-term use are referred to as fixed or non-current assets, whereas current assets can be turned into cash in a short period of time.
When it comes to asset management, managers are frequently faced with two issues. The first question is: what role does asset management play? Second, how can a company create an effective asset management strategy?
How Does Asset Management Work?
An asset management firm, also known as an investment management firm, invests money from a group of investors in order to achieve certain financial goals. This group could be a corporate retirement fund or an insurance business that entrusts the investment management firm with its pooled assets.
Investment bankers assist their customers in growing their portfolios by putting investor funds to work. They typically invest the assets in a range of vehicles, such as equities, bonds, real estate, and indexes, while keeping their clients’ financial objectives in mind. Many people associate asset managers with a wealthy clientele, which may be one of the reasons why so few individuals use their services.
Importance of Asset Management
There are various reasons why asset management might be a priority for corporations, including:
1. Assists in the identification and management of risks
To management refers to the process of identifying and managing risks associated with the use and ownership of specific assets. It implies that a company will always be prepared to deal with any risk that may arise.
2. Eliminates phantom assets from the company’s inventory.
There have been instances where assets that have been lost, destroyed, or stolen have been incorrectly documented on the books. The firm’s owners will be informed of any assets that have been lost as a result of a strategic asset management plan, and they will be removed from the books.
3. Allows a company to keep track of all of its assets.
The method makes it simple for businesses to maintain track of their assets, whether they are liquid or fixed. Firm owners will be able to see where assets are situated, how they are being used, and whether they have been modified. As a result, asset recovery can be done more efficiently, resulting in higher profits.
4. Assists in ensuring that amortization rates are accurate.
Because assets are examined on a regular basis, the asset management process guarantees that the financial statements accurately reflect them.
How Asset Management Company (AMC) Works
An asset management company (AMC) is a corporation that pools client funds and invests them in a variety of assets such as stocks, bonds, real estate, master limited partnerships, and other vehicles. AMCs manage hedge funds and pension plans, as well as pooled structures like mutual funds, index funds, and exchange-traded funds (ETFs), which they can manage in a single consolidated portfolio to better serve smaller investors.
AMCs are also known as money managers or money management organizations informally. Investment firms and mutual fund companies are both terms for companies that offer public mutual funds or ETFs. Vanguard Group, Fidelity Investments, T. Rowe Price, and a number of other companies fall into this category.
AMCs are distinguished by their assets under management (AUM), or the total value of the assets they handle. AMCs provide investors with additional diversification and investment possibilities since they have access to a broader pool of resources than an individual investor could access on their own. Because AMCs buy for so many clients, they can benefit from economies of scale and often earn a discount on their purchases. Investors can bypass the minimum investment requirements that are sometimes required when acquiring securities on their own by pooling assets and receiving proportional returns, as well as invest in a larger variety of securities with a lesser quantity of investing funds.
Fees for AMC
AMCs often charge a fee based on a percentage of the client’s total assets under management (AUM). This asset management fee is calculated and paid monthly and is based on a specified annual percentage. If an AMC charges 1% annual costs, for example, it would charge $100,000 in annual fees to manage a $10 million portfolio. However, because portfolio values fluctuate on a daily and monthly basis, the management fee calculated and paid on a monthly basis will also fluctuate.
Using the same example as before, if the $10 million portfolio grows to $12 million in the next year, the AMC will earn an extra $20,000 in management fees. In the event that the $10 million portfolio falls below $8 million as a result of a market downturn, the AMC’s fee will be cut by $20,000. Thus, charging fees as a proportion of AUM aligns the AMC’s interests with the client’s; if the AMC’s clients flourish, so do the AMC’s revenues; meanwhile, if the clients’ portfolios lose money, so do the AMC’s revenues.
In order to focus on clients with a portfolio size of at least $500,000 or $1 million, most AMCs impose a minimum annual charge of $5,000 or $10,000. Furthermore, some specialty AMCs, such as hedge funds, may impose performance fees for generating returns that exceed a predetermined threshold or outperform a benchmark. In the hedge fund industry, the “two and twenty” fee arrangement is customary.
Asset management is a system that allows businesses to keep track of all of their assets, including vehicles, equipment, and investments. Keeping track of assets can assist expedite operations, especially when it comes to selling or disposing of them. Because all available assets are fully accounted for, the procedure reduces the risk of registering ghost assets.