In finance, assets under management (AUM) is a common term used by banks, financial brokerages and other similar institutions to describe the total amount of client money that a firm is entrusted to manage. Often, this term (or figure) is found in documents and filings that show a firm’s financial health or investment status. Depending on the type of company, AUM can refer to money in the bank, in cash, or in funds that the entity has the authority from clients to manage directly.
Among financial companies and institutions, the use of AUM is significant and taken by many as an indicator of success, particularly if the number has increased over time. The reasoning behind this is quite easy. If an entity can show a larger AUM than its peers or competitors, it can claim that more clients trust it to care for their assets. Similarly, if the AUM number has increased over time, the company can claim this growth as proof of its capability to attract clients or grow assets.
However, AUM doesn’t tell the entire story. A business might have three ultra-high-net-worth clients whose aggregated assets make its AUM quite high compared to another with tens of clients who have relatively small amounts of investments. The second company, on the other hand, can tout the high number of clients as proof of its investment abilities. Regardless, both are reasonable ways of evaluating a company for a potential client.
Overall, looking at AUM is one way to evaluate an investment or a company. In many cases, it is assessed alongside management experience or performance. Additionally, investors can consider higher AUM figures as positive proof of a company’s management ability or experience.
In wealth management, AUM may have some requirements attached to it by investment managers. In some circles, the figure can be the measure of an investor’s ability to qualify for hedge funds, for example. In such an instance, a wealth manager may prefer higher AUM as it can cushion an investor from adverse market conditions. A client’s own AUM can also be a consideration for deciding the type of services they qualify for from a financial advisor, in which case the figure may closely relate to their net worth.
Kevin Neal, a former independent financial advisor (IFA), has experience with AUM. While working at Bluefin Capital, a Luxembourg-based fund which raised over a billion in funds over 12 years. Bluefin Capital distributed property and alternative asset classes very successfully in Dubai, with the fund operating with over 500 million of assets under management.
First, it’s important to note that AUM fluctuates according to the flow of investor money in and out of a company and fund. Additionally, how the asset performs can cause fluctuation. Reinvested dividends and capital appreciation are some of the ways that lead to an increase in AUM.
Second, different companies have varied ways of calculating AUM. Some differences are structural. For example, a financial advisor may calculate this figure differently from a mutual fund. Other methods relate to institutional preference so that some companies will loosely define the assets that come under their management. However, regulatory authorities also have a say in how AUM is calculated. In the United States, for example, the Securities and Exchange Commission (SEC) has rules on what constitutes AUM.
Thanks to technological advancement in the financial world, there is software that can assist in calculating the figures, especially where crunching large numbers is involved. The use of software ensures that companies can continually update their AUM to reflect daily fluctuations.
Looking Beyond AUM
While AUM is a good indicator of performance or growth when evaluating funds, it should not be the only factor considered. Potential investors are encouraged to read through other public information about the company and fund managers, including investment strategies used.