Assets under Management (AUM) is the amount of cash a financial institution manages for its customers.
Based on basic, hypothetical numbers when 10 people each put $1,000 into an mutual fund that is managed by assets of $10,000. If 10 people invest $1000 each in 10 mutual funds of the same company and the company has an asset under management that is $100,000.
In this article, we’ll expand on the definition of AUM, with a focus on the reason why it’s important for individual investors.
Definition and examples of Assets under Management (AUM)
Assets under Management (AUM) are the measure of how much cash or securities that the financial institution has to manage to serve its clients. For mutual funds such as a mutual fund the fund will combine the worth of all its assets (e.g. bonds, stocks or cash) and then report the sum as assets under management.
Banks and other financial institutions provide this information each quarter, partly because the assets under management are likely to fluctuate frequently.
For instance, when investors invest money in (called “inflows”) or take money out of mutual funds (called “outflows”), the assets of the fund under management will grow or decrease. If you consider the worth of your business or fund’s assets increases as do the investments under management.
- Acronym: AUM
What is the significance of AUM to investors?
A Barometer to gauge Investor Sentiment
As assets under management fluctuate and flow with the ebb and flow of the stock market, they’re an excellent instrument for analysis of market trends.
Institutions and individuals that study the performance of their funds as well as outflows and inflows of capital can utilize AUM as a indicator of the investor’s mood and behaviour.
For instance, eVestment (a branch of the company that runs its own Nasdaq Stock Exchange) monitors this kind of information. In its study, it found that because of the COVID-19 outbreak the hedge funds of April 2020 experienced redemptions that were three times greater than the previous April, which was April 2009. This decrease in AUM is a sign of investor fear at the prospect of contracting the virus.
In observing a large part of the billions of dollars that are invested in this manner we can assess the current state of market.
The stability of a financial Institution or Advisor
AUM also gives investors an insight into the financial stability of an investment company. Companies with AUM that exceeds $100 million are required to be registered in the U.S. Securities and Exchange Commission (SEC) and submit regular reports that include their AUM amount.1 The reports help authorities oversee the financial institutions who handle our money.
In the case of a fund, if you know how the total amount of money a company has is distributed across several funds, you will be able to better comprehend how diverse this fund’s family of funds is. You can determine the areas where the money manager focuses its assets, allowing to formulate any number of assumptions, such as what would happen if there was there was a huge outflow within one fund or more within a huge fund family.
The Investment Advisers Act of 1940 defines a broad set of regulations that apply to large financial institutions as well as money management companies, such as AUM reporting obligations. 2
Investors can make use of AUM to gauge the performance in the asset management company. Companies with higher AUM are more prominent with more prominent advisors and fund managers. For instance, BlackRock, the biggest asset management firm worldwide has $8.677 trillion of funds under management at December. 31st the year the year 2020. 3
Accounts of Clients Assets and Compensation and expenses
Assets under management are generally conceived as a collection of funds that is gathered from investors. The individual contribution of each investor contributes to knowing additional aspects that are associated with AUM.
The compensation of investment management companies and advisors is contingent on the assets they manage. For instance hedge funds typically employ an “two and twenty” fee structure. They are charged 2percent of their AUM as annual management charges and also keep 20% of their profits as an “performance fee” on gains that exceed a certain level. 4
Financial advisors may also charge 0.5%-2 percent of the client’s assets for their annual fees.
Mutual funds may also charge charges and fees depending on the amount of assets under management. In the actuality, some fees, such as 12b-1 charges are taken directly from the funds’ assets.
There are not all investment options suitable for everyone as well as some investment professionals prefer working with clients who don’t have large amounts of funds to handle, partly because of these fee structure. For instance investors would have to have at minimum 10 million dollars in investment-worthy assets to open an account at Goldman Sachs Private Wealth Management. 5
- Assets under management, also known as AUM, refers to the amount of money that a financial institution manages for its customers.
- AUM is a tool for investors to determine the strength and size of a business or specific mutual fund or a family of funds.
- We can utilize AUM as a measure especially when it is paired with outflows and inflows of cash, in order to measure the mood of the market and also to assess the health of money management companies.
- AUM is the base of expenses and compensation in certain kinds of funds as well as an the investment advisory relationships.