What Is Investment Management?
Investment management refers to the handling of an investment portfolio or a grouping of assets. It involves asset allocation management, asset buying and selling, investment strategies, and a tax plan. Banking, budgeting, and other financial responsibilities may also be included. The term most often refers to the management of holdings in an investment portfolio and trading them to achieve a specific investment objective. Investment management is also known as money management, portfolio management, or wealth management.
Understanding the Management of Investments The goal of professional investment management is to achieve specific investment objectives for the benefit of clients whose funds they manage. These clients may be individual investors or institutional investors, such as pension funds, retirement plans, governments, educational institutions, and insurance companies.
Investment management services include asset allocation, financial statement analysis, stock selection, monitoring of existing investments, and portfolio strategy and implementation. Investment management may also include financial planning and advising services, not only overseeing a client’s portfolio but coordinating it with other assets and life goals.
Bonds, equities, commodities, and real estate are just a few of the financial assets that professional managers deal with. The manager may also manage real assets like precious metals, commodities, and artwork. Managers can help align investments to match retirement and estate planning as well as asset distribution.
Running a Business that Manages Investments 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.
Registered investment advisors (RIAs) are typically managers who advise investment companies that offer mutual funds and have AUM of at least $25 million. 2
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 that if they don’t act in their client’s best interest, they could be held criminally liable. Only those with assets of less than $25 million can register. 3
Investment managers are usually compensated via a management fee, which is a percentage of the value of the portfolio held for a client. Also, fees are typically on a sliding scale—the more assets a client has, the lower the fee they can negotiate. The average management fee is between 0.5% to 2%.
Challenges of Investment Management
Market Behavior
The revenues of investment management firms are directly linked to 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. Robo-advisors don’t use human beings at all—other than the programmer writing the algorithm.
The availability of exchange-traded funds, also known as ETFs, whose portfolios are similar to those of a benchmark index. Because few investment decisions need to be made by human fund managers, this exemplifies passive management. 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.