Asset Management: Definition, Services & Examples

Instructor: Glenn Fydenkevez

Glenn is an experienced financial services professional with particular expertise in the financial markets, securities law, and real estate.

In this lesson, you will learn about asset management, one of the most important functions of the financial services industry. Asset management will be defined and the services asset managers perform will be illustrated.

Definition of Asset Management

We often think of brokers and investment firms as companies that only give investment advice to rich people and sell stocks and bonds. However, they do more than just passively advise people and offer investment products for sale. Investment companies also actively manage money for their individual and institutional clients.

Asset management goes beyond mere guidance and advice. From the standpoint of the financial services industry, asset management means taking discretionary authority over a portfolio and managing funds on behalf of a client for a fee.

Asset management businesses are regulated by the Securities & Exchange Commission (SEC). Any individual or company whose primary business is managing money for a fee must register with the SEC as a Registered Investment Advisor (RIA). Depending on state laws, they may also have to register in their home state and any states they do business in.

Let's take a closer look at asset management.

Services

Asset management firms provide several valuable services to investors. Foremost is professional management. Most people, even most wealthy people, don't have specialized knowledge of the capital markets. By hiring an RIA, clients benefit from full-time professional money management.

Asset Management
Asset Management

Another service asset managers provide is diversification. Diversification means spreading out investment risk by investing in many different securities, rather than concentrating investments in one or two. A diversified portfolio is generally less volatile than a concentrated one. Asset managers have access to thousands of different securities and have the knowledge to make appropriate choices.

Ongoing monitoring is also an important service of asset managers. Investors are busy with their own jobs and their own lives. Sometimes people just don't have time to keep a close eye on their money, but asset managers do have the time: it's their job. They keep track of all their accounts throughout every business day. This can be vitally important in today's volatile markets.

Discretion

Clients who hire asset managers delegate the authority to make investment decisions to the manager. Accounts held by asset management firms are discretionary accounts.

A broker must get explicit permission before making any move in a client's account. An asset manager, on the other hand, has full authority over the money placed with them. They may buy, and sell, and make all kinds of critical investment decisions without having to inform the client beforehand or get prior consent. This is what is meant by discretionary account.

Clients pay a fee to the asset manager for the manager's services. They give up the right to approve or reject investments, but they gain the expertise, skill, and dedication of a full-time professional investor.

Types of Asset Managers

Asset managers can be grouped into three categories: those who manage pooled assets, those who manage separate portfolios, and intermediaries.

The term pooled assets refers to a type of investment fund where some number of individual investors have 'pooled' their money together with a specific, common investment objective in mind. The pool, also called a fund or a portfolio, is run by an RIA called a portfolio manager. People invest in pooled funds based on the portfolio manager's reputation and track record.

The most common type of pooled funds are publicly traded mutual funds. A mutual fund is a pooled asset investment that trades on the various stock markets and is available to the general public.

Every mutual fund has a stated objective and a well-defined investment policy. By law, all material information about all public mutual funds is available to the public. Investors invest in a fund by buying shares the same way they might buy shares of stock.

There are over 8,000 mutual funds traded on American stock exchanges. Some invest in stocks for capital appreciation, while others invest in bonds to provide income, and others invest in secure short-term securities, such as Treasury bills or money market instruments, with the objective of keeping the client's money safe.

Not all managed portfolios are pooled or open to the public. Many funds are private and some are quite exclusive.

Privately managed funds, also called separately managed accounts, are run by Registered Investment Advisors (RIA). Separately managed accounts are never co-mingled with other accounts. They are invested by the portfolio manager for the benefit of a single client according to that client's specifications.

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