- management includes Professional managers deal with a variety of different securities and financial assets, including bonds, equities, commodities, and real estate. Real assets, such as commodities, artwork, and precious metals, may also be managed by the manager. Managers can assist with asset distribution and retirement and estate planning alignment of investments. According to an annual study by research and advisory firm Willis Towers Watson, the 500 largest investment managers had a combined total of $128 trillion in assets under management (AUM) at the end of 2023. This is an increase of 12.5 percent compared to the previous year, when AUM decreased by $18 trillion. 1
Fast Fact
In corporate finance, investment management includes ensuring a company’s tangible and intangible assets are maintained, accounted for, and well-utilized.
Running an Investment Management Firm
There are a lot of responsibilities that go into running an investment management company. Professional managers must be hired by the company to handle, market, settle, and prepare client reports. Internal audits and research on specific assets, asset classes, and industrial sectors are two additional responsibilities. Aside from hiring marketers and training managers who direct the flow of investments, those who head investment management firms must ensure they move within legislative and regulatory constraints, examine internal systems and controls, account for cash flow, and properly record transactions and fund valuations.
Generally, managers with at least $25 million in AUM or those who advise investment companies offering mutual funds must be registered investment advisors (RIA).
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They must register with the Securities and Exchange Commission (SEC) and state securities administrators and agree to accept the fiduciary duty to their clients. This means they may face criminal liability if they don’t act in their client’s best interests. Those with less than $25 million in assets only register in their states.
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A management fee, which is typically a percentage of a client’s portfolio value, is typically the method by which investment managers are compensated. Also, fees are typically on a sliding scale—the more assets a client has, the lower the fee they can negotiate. The typical management fee is between 0.5 and 2 percent. Challenges of Investment Management
Market Behavior
Investment management firms’ revenues are directly correlated with the market’s behavior. This connection means the company’s profits depend on market valuations. When asset prices fall significantly in comparison to the company’s ongoing costs, this can have a negative impact on revenue. Clients may be impatient during hard times and bear markets, and even above-average fund performance may not be able to sustain a client’s portfolio.
Low-Cost Alternatives
Since the mid-2000s, the industry has also faced challenges from two other sources, both of which charge lower fees than human fund managers.
The growth of robo-advisors—digital platforms that provide automated, algorithm-driven investment strategies and asset allocation. Except for the algorithm’s programmer, robot advisors do not employ any humans. The availability of exchange-traded funds (ETFs), whose portfolios mirror that of a benchmark index. This exemplifies passive management since few investment decisions have to be made by human fund managers.
According to some surveys, these lower-cost alternatives will often outperform actively managed funds—either outright or in terms of overall return—primarily due to them not having heavy fees dragging them down.
Important
The pressure from the competition is why investment management firms must hire talented, intelligent professionals. While some customers focus on the performance of individual investment managers, others focus on the company as a whole. One key sign of an investment management company’s ability is not just how much money their clients make in good times—but how little they lose in the bad.
The Benefits and Drawbacks of Investment Management Advantages
Professional analysis: You can rely on the strength, history, and expertise of an investment management firm to guide your investment decisions and manage your portfolio.
Full-time diligence: It is common for investment managers to promise full-time diligence by mitigating risk, making sure that client portfolios align with their goals, and explaining the value risks of different investments.
Ability to time or outperform the market: Investment managers use different tools to align their decisions to time or outperform the market, including company fundamentals, economic indicators, and market research.
Ability to protect portfolios in down times: Investment managers have a fiduciary duty to act in their clients’ best interests so they can rest easy that their portfolios will be safe—even during times of distress. They may do this by diversifying asset classes and investment types, rebalancing portfolios, and hedging strategies.
Disadvantages
High fees: Investment management services can cost as much as 2% of a client’s managed assets, which can hurt their clients’ returns. Profits fluctuate with the market: Using an investment management firm—no matter how successful—doesn’t guarantee results. Rather,
Challenges from passively managed vehicles and robo-advisors: Investment management firms may rethink their fees and minimum asset requirements to compete with new entrants in the market, including passively managed vehicles and robo-advisors. Competitors like these make investing easier for individuals who want a no-nonsense and automated investing approach while paying low fees.