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“Bigger is better” certainly isn’t true in every situation. But when it comes to investing, scale greatly influences how business is done.
For instance, any institution that wants to invest your money for you needs your confidence that they’re the right pick.
One of the most straightforward metrics for them to use is how much money other people have already invested through them – their AUM or assets under management.
But what is AUM, and why does it really matter?
What are Assets Under Management (AUM)?
AUM is the term for the total market price – or cash value– of assets (such as stocks, bonds, etc.) managed by an individual, or more often, an institution on behalf of their investors.
To give an example, let’s say that hundreds of investors have collectively handed $1 billion to an investment firm.
Then, that firm puts the money into stocks, bonds, mutual funds, and various commodities. In other words, they are managing $1 billion in assets.
Bear in mind that an entire spectrum of institutions wants to invest on your behalf as an investor. As such, being a savvy investor requires plenty of due diligence.
While AUM is one tool you can use to examine a company, it mainly serves as a reality check about the institution’s size – and little else.
Understanding Assets Under Management
When you think about a big, impressive investment bank, marble stairways and New York City skyscrapers probably come to mind.
And while it might be going too far to say that AUM is the equivalent of a marble entrance to a building, it’s certainly one way that investment firms try to lure potential investors.
You can think of AUM as a way for financial institutions to show investors just how big and established they are.
But just because a bank or fund managing billions in assets has clearly won the trust of its investors, that doesn’t necessarily mean it’s well run.
While a bank with a high AUM can typically afford more expertise, it’s what they do with the funds that matter.
That said, investors can also use the metric to gauge a firm’s performance.
For instance, the volatility of an institution’s AUM can hint at its investments’ stability – and success.
Additionally, prospective investors can use AUM as an indication of how a firm manages the in- and outflow of investor funds.
However, banks aren’t the only ones with assets under management. Your AUM – or the value of the assets in which you’ve invested – may be a deciding factor in what investments you can access.
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How to Calculate AUM
On its face, AUM seems like one of the more straightforward figures in investment. But the reality is that every institution decides how to calculate its own AUM – meaning that giving a single equation is a fool’s errand.
For instance, the simplest means of calculating assets under management is to pick a discretionary fund that an institution manages for investors and add up the total market price of assets in the fund.
But some firms may consider more nontraditional investments as well, such as bank deposits and other cash accounts.
Arguments can be made for using either system, of course – but it does muddy the water when it comes to comparing the size of various institutions.
Why Does AUM Matter?
Investors primarily use AUM as a quick reference for an institution’s size. That said, having more assets under management can lead to real-world impacts.
One of the most obvious is that funds over a certain size must register with the SEC, leading to more regulations and protections.
Though the actual size varies by business and location, a good rule of thumb is that it must register if a fund grows to $110 million or more.
Another reason a fund’s AUM is important is that many institutions generate their revenue via fees calculated as a percentage of AUM.
While a larger figure may mean you pay no more as an individual investor, it translates into greater profits for the company in question.
And even if the wealth of your asset managers isn’t overly important to you, knowing they can afford to pay more for experts and analysis might be.
Finally, as we mentioned above, your own AUM matters, too. Obviously, having more assets means that you have more resources, which is always nice.
But some firms also use your AUM as a metric to decide who they will – and won’t – allow to access certain opportunities.
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An Example of Assets Under Management
If you give your money to a responsible asset manager, they will invest your funds in several diversified assets, such as various stocks, bonds, commodities in different sectors.
And since they will most certainly invest several investors’ funds in a similar portfolio, the manager’s AUM would simply be the aggregate market value of all the securities they hold.
For instance, the world’s largest wealth management fund, run by UBS, boasted around $2.6 trillion in assets under management as of 2020.
But AUM can range all the way down to an individual investor who owns only a single share.
Assets Under Management FAQs
What does AUM mean?
Assets under management, or AUM, is the total market value of a financial institution’s holdings.
To translate, if you sold all the assets a company manages, AUM represents the cash total. But bear in mind that a firm’s AUM can change daily due to price fluctuations in its holdings and investor cash flow.
How is AUM calculated?
The simplest answer is that AUM is the total market value of assets under management – and for individuals, that holds true.
Unfortunately, there’s not a single formula for AUM when it comes to institutions, which can make a fund’s given values less illuminating than you might like.
That’s because every institution can decide which values to include in their AUM. For instance, some firms limit the parameters to discretionary investment funds, while others include bank deposits and other cash accounts.
What does AUM in finance mean?
AUM gives potential investors a quick insight into just how large (or small) a particular fund is, which can tell you what kind of institution you’re dealing with.
Moreover, larger AUMs – or firms that deal in specific industries or locations – must register with the SEC, leading to greater regulation and scrutiny.
Are AUM and net assets the same?
Net assets and AUM are similar, but the distinctions are important. While AUM is the total cash price of all assets held by an institution, net assets subtract a firm’s liabilities to represent its worth differently.
Bottom Line: Assets Under Management Definition
As an investor, you can dissect and examine potential opportunities in dozens of ways. AUM provides just one lens through which you can view a prospective firm or investment.
But remember that no one metric will paint a whole picture, and size is no guarantee of success.
Thus, if you want to maximize your security and gains, the only AUM that really matters should be your own – and that means digging deeper before you invest.