Asset management is a giant business. In 2019, the top 500 largest asset managers worldwide oversaw $104.4 trillion worth of assets, according to Thinking Ahead Institute by Willis Towers Watson.
These stratospheric numbers might make the term asset management seem way beyond your world. But asset management is a financial service that can benefit those with small or huge net worths.
Asset Management Definition
Asset management is the service of managing a client’s money. At its core, that means identifying a client’s financial goals and then working to accomplish those goals via portfolio management—buying and managing stocks, bonds and funds.
Asset management clients can range from regular people to nonprofit organizations and public companies large and small. Similarly, companies that provide asset management services can be huge corporations or one-person operations.
What Is an Asset Manager?
An asset manager is a financial professional who manages money and securities on behalf of a client, with the goal of growing the value of the assets. Asset managers are known by many names: investment advisors, financial advisors, wealth managers, institutional wealth managers, registered investment advisors (RIAs), robo-advisors and stockbrokers, to name just a few.
“The financial industry uses a lot of buzz words with asset management, and it’s confusing,” says Caroline Hill, a wealth manager at Sage Rutty Inc., a financial services company based in Rochester, N.Y. Here’s how Hill breaks down the different asset managers that cater to regular investors.
Registered Investment Advisors. A RIA is an individual or firm that’s legally committed to keeping the client’s best interest in mind when providing investment advice and management. RIAs are compensated with annual fees rather than sales commissions.
Investment brokers. An investment broker is a registered individual or firm that’s compensated via sales commissions for transactions, such as buying and selling investments.
Financial advisors. Advisors work with clients to establish financial goals and build an investment portfolio best suited to accomplish those goals. There is no regulation around who can call themselves a financial advisor; some may act like RIAs, and others may function as brokers. Be sure to ask potential financial advisors how they are compensated and if they are fiduciaries to determine if they have a legal obligation to put your best interest over their own.
Just as they have many names, asset managers also wear many hats, according to Eric Alexander, a financial advisor with Benchmark Income Group in Richardson, Texas. However, “at a high level, an asset management company handles three fundamental tasks,” he says. These include:
Providing everyday investors with access to institutional money managers, even when they don’t necessarily have institutional-level money.
Serving as specialists in their market segment so they can make any appropriate changes to a client’s portfolio, if necessary.
Offering a platform for other financial advisors to meet their client’s needs and goals.
Individual financial advisors may partner with asset management companies to gain access to a larger, more specialized team to help manage a client’s investment plans. This “helps an investment advisor focus their attention on the client,” says Alexander.
How Much Does Asset Management Cost?
Costs vary for asset managers and asset management strategies. An active investing model, for instance, will have greater costs than passive, index-based investing model.
Here’s how the most common asset management costs break down:
Active investment management fees. These fees can vary, depending on the asset manager and the amount of assets in an investment portfolio. Typically, asset managers charge a 1% annual fee. That means an investment portfolio of $100,000 would cost $1,000 annually for advisory fees.
Passive management fees. Asset managers who use a passive investment model, meaning they place client money in index funds that mirror major benchmarks, like the S&P 500, cost less on an annual basis. Common passive management fees range between 0.20% and 0.50% on an annual basis, so $200 to $500 each year for a $100,000 portfolio.
Robo-advisor management fees. Asset managers at so-called robo-advisor investment firms use algorithms to manage client portfolios instead of humans. Typical annual asset management fees for robo advisors range between 0.25% and 0.50% of managed assets on an annual basis. This works out to $250 to $500 per year for a $100,000 portfolio.
Brokerage fees. Investment brokers who make trades on behalf of a financial client may charge a per-trade transaction fees, which can be as low as zero (for online trades) and as high as $50 per trade, depending on the broker and the type of service provided.
Additional fees. Asset managers may also charge annual account fees, ranging from between $25 and $100 annually. If a client closes an account, an asset manager may charge a closing fee ranging from $25 to $150 per account.
Keep in mind, if you use a professional asset manager, you may not actually use any one model exclusively. “The advisor may use a low-cost, more passive manager for a portion of the assets and a different, more active, high feature management company for a different portion of the assets,” Alexander says. “This helps keep overall costs down and maximize the value for the services and performance clients receive.”
Asset Management and You
Working with an asset manager can help your investments earn more and assist you in reaching your financial goals sooner.
“Asset management helps the average investor build toward their financial goals, whether that is a college fund, a new home or eventually retirement,” says Anthony Pellegrino, a fiduciary advisor and founder of Goldstone Financial Group, in Oakbrook Terrace, Ill. “It’s working with someone who can understand your goals, resources and constraints and working within those to achieve a financial goal.”
Pellegrino advises investors to conduct their due diligence and pick an asset manager who meets their unique needs.
“Talk with more than one professional before committing to a relationship. Make sure you understand the types of investments your advisor is going to use and the potential risks and rewards you could see,” he says. Most importantly, though, ensure you find out how your advisor gets paid and if they have any personal conflicts with managing money for you.