What Is Asset Management?
The practice of increasing total wealth over time by acquiring, maintaining, and trading investments with the potential to grow in value is known as asset management. This is a service provided by asset management professionals to others. Portfolio managers and financial advisors are other names for them. Many work for themselves, while others work for a bank or other financial institution. Click here and gain knowledge about marginal cost.
Key Takeaways
- The goal of asset management is to maximize the value of an investment portfolio over time while minimizing risk
- Financial institutions that cater to high-net-worth individuals, government entities, corporations, and institutional investors such as colleges and pension funds provide asset management as a service
- Asset managers are held to fiduciary standards. They make decisions on behalf of their clients and must act in good faith.
Understanding Asset Management
Asset management has two objectives: increasing value while mitigating risk. That is, the client’s risk tolerance is the first question to be asked. A retiree living off of a portfolio’s income, or a pension fund administrator overseeing retirement funds, is (or should be) risk-averse. A young person, or anyone who is daring, may want to dabble in high-risk investments.
Most of us fall somewhere in the middle, and asset managers try to figure out where that is for their clients.
The asset manager’s role is to decide which investments to make or avoid in order to achieve the client’s financial goals while staying within the client’s risk tolerance. Among the more well-known investments are stocks, bonds, real estate, commodities, alternative investments, and mutual funds.
The asset manager is expected to conduct extensive research using macro and microanalytical tools. This includes statistical analysis of current market trends, audits of corporate financial documents, and anything else that will help the stated goal of client asset appreciation.
How Asset Management Companies Work
Asset management firms compete for the business of serving the investment needs of high-net-worth individuals and institutions.
Check-writing privileges, credit cards, debit cards, margin loans, and brokerage services are frequently included in accounts held by financial institutions.
When people deposit money into their accounts, it is typically invested in a money market fund. Which provides a higher return than a regular savings account. Account-holders can choose between FDIC-backed funds and non-FDIC-backed funds.
Account-holders benefit from the fact that all of their banking and investing needs can be met by the same institution.
These types of accounts have only been possible since the Gramm-Leach-Bliley Act, which replaced the Glass-Steagall Act in 1999.
During the Great Depression, the Glass-Steagall Act of 1933 required a separation of banking and investing services. They only have to maintain a “Chinese wall” between divisions now.
How Does an Asset Management Company Differ From a Brokerage?
Asset management firms are fiduciary businesses. That is, their clients delegate discretionary trading authority over their accounts to them, and they are legally obligated to act in good faith on their behalf.
Before executing a trade, brokers must obtain the client’s permission. (Online brokers allow their customers to make their own trading decisions and initiate their own trades.)
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