Have you ever heard of asset management? There are plenty of firms and professionals that claim to offer this service. However, most beginners in financial marketing don’t quite understand what it is and when it is necessary.
We’re here to answer the million dollar question: what exactly is asset management and are you in need of it? In a world where the financial market and services is always growing and changing, it’s important to understand how to make your investments as successful as possible.
That’s where and investment analysis and portfolio management professional comes in, as you’ll see below.
What is asset management?
In simple terms, asset management is a service reserved for individuals or companies that want to make their assets (or investments) more profitable. The professional or firm in charge of managing assets takes quick investment decisions that can lead to financial gain.
That’s great, but an individual who owns many investments can also take such decisions alone, right? Technically yes, but firms working in the field have privileged access to a great group of investors. Thus, their client’s portfolio becomes more diversified, which is important to guarantee investment safety and better returns.
It also employs several risk-management techniques to ensure the investor’s and client’s safety. Have you ever heard of a company’s stocks crashing, which creates financial damage to their investors? That’s exactly what management can prevent with the right expertise.
Can everyone assess asset management companies?
The answer to this question depends a lot on your objective and nature of assets. Most management firms require a minimum, such as US$500.000, to start. That may seem hard to reach for beginners, but experienced investors often have need for services of such magnitude.
For those of us who haven’t been investing all of their lives, there are simpler solutions. Management professionals and companies often have basic services with a low minimum for you to start. At least for personal investments management.
Companies need to have more assets to be able to hire such companies, since the fees charged are based on a percentage of the value invested.
Asset management for small companies
That doesn’t mean small companies shouldn’t look for asset management services of their own! There are some firms specializing in investments for small business owners. That allows for healthy growth and more security over the years.
These companies look for ways to grow capital on long term investments. It’s an interesting way of making a company more prepared to enter the big financial world. If you’re still in doubt about hiring such services for your small business, talk to an advisor. Managing assets is important for anyone looking to grow over the years.
How does asset management work?
Once a person hires a management firm they’re in charge of their investments and buying decisions. That means their main objective is making smart buying decisions that allows the investment portfolio to grow.
They might be responsible for:
- Stock acquisitions;
- Insurance policies;
- Mergers (when it comes to company asset management);
- Selling or diversifying previous investments.
Don’t be confused: management isn’t the same as advising! Some professionals out there sell advice, which means they teach the owner of the investments to manage it themselves. A management firm has full decision power over the funds.
Costs of hiring asset management
We repeat this a lot in this article, but costs vary greatly for these services! It depends on the firm and, specially, on asset management type. So we broke everything down to a few main categories that you might find when researching about the topic.
Active investment management
Once you hire this management, there will always be a specialist overseeing your investments. They’ll use their knowledge, research and market forecasts to make buy, sell or hold decisions with a given number of funds. Everytime, the objective is to outperform the market, bringing better gains to the fund owner.
The cost depends on the variety of assets and amount invested. Most companies charge around 1% annual fee. But, as we said before, it varies a lot. So do some market research before you set on a simple company or service provider.
Passive management
Instead of trying to beat the marketing, like the active management type, companies adopting passive strategies will manage according to an established index. Since they require less active monitoring, the fees are usually lower.
This follows the Efficient Market Hypothesis (EMH), which was developed in the 1960s and has been successful ever since. The hypothesis defends that no one can beat the market for long and passive management is the best option for long term returns. Fees usually float around 0,2% or 0,5% anually.
Brokerage fees
Active management fees have brokers that deal with stock exchanges for clients. Most can charge per trade. Once again, the values depend on the type of trade. Some online exchanges, for example, have a low cost or zero fee. Meanwhile, offline ones can cost up to US$50 each.
Asset management vs. asset allocation
These terms, asset management and asset allocation, are often used interchangeably. However, they don’t mean the same thing! Allocation is one of the asset manager’s main duties, and it means allocating parts of the funds in different kinds of investment.
Every investor (or fund owner) has their own risk tolerance and long term goals. Those are what guides the manager when making an allocation decision. They balance risk and return possibility in the best way possible according to the client’s profile.
People who are looking to spend their investments on short term objectives, for example, might be more comfortable in a conservative mix. Certificates of deposit, short-term bonds and other options are ideal for quick and safe return.
Other investors are attempting to prepare for retirement. Since there’s more time to see returns, stocks are a good idea, as long as they have a high tolerance to risk. A less tolerant investor will need their allocation to happen elsewhere.
Who can be an asset management advisor?
Not all who sell asset management services are actual professionals. Your typical manager is a financial analyst or economist with deep knowledge of the investment world. Bachelor’s degrees in related fields are also accepted by most management firms, as long as the professional knows their way around funds and investments.
Experience is incredibly important for anyone who works in the field. Knowing that, it’s recommended to look not only at a specialist’s credentials when hiring, but also referrals. If they worked before with acquaintances or friends and family, you can feel safer.
We explain below the types of financial professionals that might act as managers or advisors so you can choose wisely.
1. Registered financial advisors
These professionals are registered with the U.S. Securities and Exchange Commission or other state administrators. Which basically means they are legally obligated to only give financial advice that is in their clients’ best interests.
Not only do they know how to manage investments, they can also advise clients in all sorts of financial subjects. So if you also need help with taxes, state planning and other subjects, feel free to hire one of RIA registered professionals.
2. Investment brokers
Unlike RIA registered individuals, brokers have a narrower focus when it comes to finances. They are also registered by U.S. officials, however their specialty are assets and stocks. Most of them work with brokerage firms to serve as intermediaries in trade agreements.
Their only objective is to find investments suitable to the client’s investment portfolio, rather than their financial lives in its entirety.
3. Financial advisors
This is a broader category of professionals, since they don’t have to legally be registered anywhere. Advisors will work with a client to establish a financial goal (long-term or short-term) and work with their investments to achieve it.
Since most states have no regulation as to who can call themselves advisors, it’s important to find a reliable partner. Look for people working with firms that have a broad portfolio to be sure you’ve taken the best decisions.
What to consider when hiring an investment manager?
Here comes the first tip: don’t rush your decision when hiring and investment manager. Remember this person or company will manage all of their investments and guarantee long and short term objectives. Research companies and professionals thoroughly and look for as many referrals as possible.
Another point to consider: are you looking for a specialist or generalist? Most management companies specialize in a certain area. That way, they can design products and services that can better attend to their clients’ needs. You can find, for example, companies that only work with passive investment or long term investment.
Others are generalists and perfect for the investor who hasn’t found their fit in the field yet. There are even firms that specialize in wealthy personal investors and hedge funds. It all depends on your current financial objectives, investment size and type of asset portfolio.
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