What are assets under management (AUM)?
Assets under management (AUM) is a term used to describe the total market value of the investments a firm or individual manages on a client’s behalf. AUM can include bank deposits, mutual funds, cash, and discretionary investment funds managed on behalf of individual investors. AUM is the capital a fund manager can use to make transactions on behalf of their clients. The fund manager can use all these investments to buy or sell shares according to the client’s financial goals without asking for permission.
An investor must have a minimum amount as AUM to qualify for certain investments. The AUM may also be the same as a person’s net worth in some cases. The AUM also decides the type of services the investor can access from the asset management firm.
A few factors that can increase AUM include: acquiring new assets, asset performance, dividend reinvestment, and capital appreciation. Asset management firms must register with the United States Securities and Exchange Commission (SEC) if their AUM is between $25 million to $110 million. Firms and individual fund or portfolio managers also charge a fund management fee which is usually a fixed percentage of the AUM. The higher the AUM, the lower the fees.
Why is AUM important?
Firms and portfolio managers usually use their AUM as a marketing tool to attract more clients. Investors assess the company’s scale and range of operations based on its AUM. Higher AUMs typically indicate that funds within the firm or investment company are more liquid – so investors can buy or sell shares easily.
Higher AUMs are better for the companies too because even if one investor leaves, they are not too affected by the loss of funds.
When does an AUM change?
AUMs can change based on how much the investor chooses to invest or withdraw during a certain period. Depending on the market conditions, the investor may either add more funds or withdraw some. Changes in the market value of the assets and dividends paid to investors can also affect the value of the AUM. If a firm acquires or merges with another, its value may increase.
