How AUM Impacts Business Fees, Investor Trust, and Growth
Making decisions about where to invest or whom to trust with your assets can be overwhelming. For many corporate leaders, a firm’s Assets Under Management (AUM) offers a clear window into its stability, success, and ability to handle large investments.
Understanding this metric helps businesses evaluate the capabilities of financial institutions and guides them in selecting partners that can support their long-term growth. Let’s take a closer look at what AUM means and how it impacts corporate investment strategies.
What Does AUM Mean?
Assets Under Management (AUM) represents the total market value of all the assets that a financial professional or firm manages on behalf of clients. These assets can include investments like stocks, bonds, real estate, and cash holdings. AUM reflects the combined worth of everything the firm is responsible for managing and growing. In essence, it’s a snapshot of the company’s capacity and performance in handling client wealth.
Why Should You Care About AUM?
AUM gives investors an idea of the firm’s size and reliability. If a company has a large AUM, it signals that many clients trust them to manage their investments. Higher AUM often means better diversification, more investment opportunities, and stronger leverage in the market. As a result, investors tend to view firms with higher AUM as more credible. Plus, AUM impacts the services a firm can provide, with larger firms often offering more personalized service and a wider range of investment options.
What Kinds of Assets Are Included in AUM?
Assets under management include a variety of financial instruments, such as:
- Stocks – Equity investments that represent ownership in a company.
- Bonds – Debt securities that provide fixed returns.
- Mutual funds – Pooled investments spread across a range of asset classes.
- Real estate – Property investments, including commercial and residential properties.
- Cash and cash equivalents – Liquid assets like Treasury bills and money market funds.
Why Different Companies Count AUM Differently
Not all firms calculate AUM the same way. Some might include bank deposits and insurance products in their AUM, inflating the number, while others focus solely on actively managed investments—those where the firm makes active decisions on behalf of the client. This discrepancy can impact how much involvement a firm has over its reported assets.
Firms that only count actively managed funds may have more hands-on control, while those including passive assets might simply be inflating their AUM without added management efforts. For investors, understanding what’s included in a firm’s AUM helps in assessing the level of expertise and service offered.
How Do Companies Calculate Asset Under Management?
The process of calculating AUM involves adding up the market value of all assets a firm manages. Here’s a step-by-step breakdown of how companies do this:
- Identify assets under management – This includes a range of assets—stocks, bonds, mutual funds, real estate, and cash—that the firm manages for its clients.
- Assess the current market value – Each asset’s current market price is determined. For securities, this could mean checking stock prices or bond values at a specific point in time.
- Aggregate the values – The market value of all managed assets is summed up to determine the total AUM. This figure includes both client inflows (new investments) and outflows (withdrawals).
- Adjust for market performance – AUM can rise or fall based on market fluctuations. For instance, if the stock market performs well, the value of the managed assets increases, leading to a higher AUM. Conversely, market declines can reduce AUM.
- Recalculate regularly – Since markets change daily, AUM needs to be recalculated frequently to reflect accurate numbers.
What Can Change a Company’s AUM?
Several factors can cause AUM to fluctuate:
- Market performance – As asset prices rise and fall, so does AUM.
- Client behavior – New investments increase AUM, while withdrawals decrease it.
- Mergers and acquisitions – Firms that acquire other companies or portfolios will see a sudden increase in AUM.
Why the Assets Under Management Are a Big Deal for Investment Firms
AUM is a Measure of Success
AUM is more than just a number for investment firms. It’s often considered a key indicator of success. Higher AUM means the firm has earned the trust of numerous clients, showcasing its ability to manage large sums effectively.
A larger AUM provides more opportunities for diversification and access to larger investments. The size of a firm’s AUM can also determine its market influence, with more substantial assets granting the company better negotiating power in deals.
How Firms Use AUM to Grow
Investment firms don’t just measure AUM—they actively seek to grow it. Here’s how:
- Marketing and credibility – AUM is a powerful marketing tool. Firms with large AUM often advertise this as proof of their expertise and reliability, attracting new clients.
- Product development – Larger AUM allows firms to develop new investment products that cater to specific client needs or market trends. These could be niche funds, specialized strategies, or innovative financial solutions.
- Client acquisition – Firms with high AUM can attract bigger, wealthier clients. They’re able to offer tailored services and competitive pricing to high-net-worth individuals and institutions, further growing their AUM.
How Assets Under Management Affect the Fees You Pay
Management fees
The amount of AUM a firm manages directly influences the fees you pay as a client. Most firms charge a management fee as a percentage of the total AUM.
For example, a firm may charge 1% of AUM annually, meaning if the AUM increases, so do the fees. The fee covers portfolio management, decision-making, and administrative tasks involved in overseeing the investments.
So, the larger your portfolio, the higher the fees in dollar terms, even if the percentage remains constant.
Different Fee Structures for Different Clients
Fee structures can vary depending on the type of client.
Institutional clients
Institutional clients, such as pension funds or corporations, often negotiate lower fee rates due to the significant sums they bring in.
Individual investors
In contrast, individual investors may face higher fees because their portfolios often require more personalized attention. Some firms offer tiered pricing, where fees decrease as AUM grows, benefiting clients with larger portfolios. This structure incentivizes clients to grow their investments with the firm, offering better deals for bigger sums.
Why Investors Trust Firms with Higher AUM
Many investors see firms with higher AUM as safer and more reliable. This is because a larger AUM indicates that a firm has managed to attract and retain a large number of clients, signaling trust and credibility. Investors believe that these firms are better equipped to handle market challenges with more resources and experience at their disposal.
However, it’s important to note that a larger AUM doesn’t always equate to better performance. Some firms with smaller AUM may provide better returns by being more agile or specialized, so while a higher AUM can inspire confidence, it doesn’t guarantee success.
What Happens to AUM When Markets Change
AUM fluctuates based on market conditions. When markets are performing well, the value of assets increases, resulting in higher AUM. However, during economic downturns or periods of market instability, asset values drop, leading to lower AUM.
Investor sentiment also plays a big role—when investors feel uncertain or negative about the economy, they may withdraw their investments, further reducing AUM. On the other hand, during optimistic times, investors tend to pour more money into firms, increasing their AUM. Thus, AUM serves as a reflection of market cycles and investor behavior.
AUM and the Role of Financial Regulators
Firms managing $100 million to $110 million or more in assets must register with the Securities and Exchange Commission (SEC). This ensures that they comply with strict regulations designed to protect investors from fraud and misconduct.
The SEC mandates transparency, regular reporting, and adherence to rules that promote fairness and protect client interests. Firms that manage less than this threshold are regulated at the state level, where different sets of rules may apply, but the goal is still to ensure that smaller firms operate ethically and protect their clients.
Why Smaller Firms Follow State Rules
Firms with lower AUM fall under state jurisdiction rather than federal oversight. This means that they are regulated by state-specific laws, which can sometimes be more flexible but still ensure accountability. As firms grow their AUM, they may shift from state regulation to federal regulation under the SEC. This transition brings stricter oversight and increased scrutiny.
For smaller firms, state regulation allows them to operate with fewer bureaucratic hurdles, but as they expand, they must meet the more rigorous demands of federal oversight, reflecting the complexity and size of their operations.
Why Growing AUM Isn’t Easy: Key Challenges
Growing AUM is a challenge for many firms, especially those competing against larger, established companies.
Competition
Competition is fierce, as larger firms often have more resources, a more extensive client base, and a stronger brand presence, making it hard for smaller firms to keep up.
Market volatility
Furthermore, market volatility can significantly hinder growth. When markets experience downturns, clients may become hesitant to invest or, worse, withdraw their investments, causing a decline in AUM. This uncertainty makes growing AUM a constant challenge, even for firms with solid strategies.
Retaining clients while trying to grow
Retaining clients is just as important as acquiring new ones when it comes to growing AUM. Firms must strike a balance between providing excellent service to existing clients and attracting new investors. Losing current clients while focusing solely on growth can lead to stagnation in AUM or, in some cases, a decline.
Firms need to focus on client satisfaction, offering consistent performance, effective communication, and tailored services to maintain long-term relationships. At the same time, they must devise strategies to draw in new investors to continue growing their AUM. Balancing these priorities is crucial for sustained growth.
Who Are the Firms with the Largest AUM in the World?
Some firms dominate the global financial landscape due to their massive AUM. BlackRock leads the way with over $9 trillion in assets, making it the largest investment management firm in the world.
Similarly, Vanguard manages more than $7 trillion in assets, securing its position as one of the top players in the industry. These firms have earned the trust of institutional investors, governments, and individual clients, giving them incredible influence over financial markets.
How Massive AUM Impacts Market Influence
Firms with such enormous AUM have the ability to shape markets. Their decisions can impact everything from stock prices to corporate governance. With large stakes in major companies, these firms hold significant sway in boardroom decisions, often influencing corporate policies and strategies.
Additionally, their sheer size allows them to influence market trends, making them key players in the global financial ecosystem. Firms like BlackRock and Vanguard don’t just manage money—they shape markets.
Key Takeaways
AUM is a key metric for evaluating the size and credibility of an investment firm. It provides investors with insight into a firm’s ability to manage and grow wealth while also reflecting the firm’s influence in the financial market. However, AUM should not be viewed in isolation—it’s important to consider other factors like performance, fees, and services when choosing where to invest. In short, AUM offers a valuable snapshot of a firm’s capabilities but should be part of a broader evaluation of its overall competence.
FAQs
What is AUM for a bank?
AUM for a bank refers to the total value of all assets it manages for its clients, including investments like stocks, bonds, and mutual funds. It’s a key indicator of the bank’s wealth management performance.
Is high AUM good or bad?
High AUM generally indicates that a firm is trusted and successful in managing large sums of money. However, bigger isn’t always better—firms with large AUM can sometimes become less flexible, and they might not always deliver the highest returns.
What is 1% of AUM?
1% of AUM is a common management fee that investment firms charge. For example, if a firm manages $1 million for a client, they would charge $10,000 annually as a management fee.
How often does AUM change?
AUM can change daily depending on market performance, client investments, and withdrawals. The value of the assets under management fluctuates with stock prices, bond values, and other market conditions.
What is the difference between AUM and net worth?
AUM refers to the total value of assets a firm manages for clients, while net worth is the total value of an individual’s or company’s assets minus their liabilities. AUM measures what a firm manages, whereas net worth measures personal or corporate wealth.
