Investment Management: More Than Just Buying and Selling Stocks (2024)

What Is Investment Management?

Investment management refers to the handling of financial assets and other investments—not only buying and selling them. Management includes devising a short- or long-term strategy for acquiring and disposing of portfolio holdings. It can also include banking, budgeting, and tax services and duties, as well.

The term most often refers to managing the holdings within an investment portfolio, and the trading of them to achieve a specific investment objective. Investment management is also known as money management, portfolio management, or wealth management.

Key Takeaways

  • Investment management refers to the handling of financial assets and other investments by professionals for clients
  • Clients of investment managers can be either individual or institutional investors.
  • Investment management includes devising strategies and executing trades within a financial portfolio.
  • Investment management firms handling over $25 million in assets must register with the SEC and accept fiduciary responsibility toward clients.

Understanding Investment Management

Professional investment management aims to meet particular investment goals for the benefit of clients whose money they have the responsibility of overseeing. These clients may be individual investors or institutional investors such as pension funds, retirement plans, governments, educational institutions, and insurance companies.

Investment management services include asset allocation, financial statement analysis, stock selection, monitoring of existing investments, and portfolio strategy and implementation. Investment management may also include financial planning and advising services, not only overseeing a client's portfolio but coordinating it with other assets and life goals.

Professional managers deal with a variety of different securities and financial assets, including bonds, equities, commodities, and real estate. The manager may also manage real assets such as precious metals, commodities, and artwork. Managers can help align investment to match retirement and estate planning as well as asset distribution.

According to an annual study by research and advisory firm Willis Towers Watson, the investment management industry is growing. Based on the combined holdings of the 500 biggest investment managers, the global industry had approximately $131 trillion in assets under management at the start of 2022, an increase of more than 10% from the previous year.

In corporate finance, investment managementincludes ensuring a company's tangible and intangible assets are maintained, accounted for, and well-utilized.

Running an Investment Management Firm

Running an investment management business involves many responsibilities. The firm must hire professional managers to deal, market, settle, and prepare reports for clients. Other duties include conducting internal audits and researching individual assets—or asset classes and industrial sectors.

Aside from hiring marketersand training managers who direct the flow of investments, those who head investment management firms must ensure they move within legislative and regulatory constraints, examine internal systems and controls, account for cash flowand properly track record transactions and fund valuations.

In general, investment managers who have at least $25 million in assets under management (AUM) or who provide advice to investment companies offering mutual funds are required to be registered investment advisors (RIA).

As a registered advisor, they must register with the Securities and Exchange Commission (SEC) and state securities administrators. It also means they accept the fiduciary duty to their clients. As a fiduciary, these advisors promise to act in their client's best interests or face criminal liability. Firms or advisors managing less than $25 million in assets typically register only in their states of operation.

Investment managers are usually compensated via a management fee, usually a percentage of the value of the portfolio held for a client. Management fees range from 0.35% to 2% annually. Also, fees are typically on a sliding scale—the more assets a client has, the lower the fee they can negotiate. The average management fee is around 1%.

Advantages and Disadvantages of Investment Management

Though the investment management industry may provide lucrative returns, there are also key problems that come with running such a firm. The revenues of investment management firms are directly linked to the market's behavior.

This direct connection means that the company's profits depend on market valuations. A major decline in asset prices can cause a decline in the firm's revenue, especially if the price reduction is great compared to the ongoing and steady company costs of operation. Also, clients may be impatient during hard times and bear markets, and even above-average fund performance may not be able to sustain a client's portfolio.

Pros

  • Professional analysis

  • Full-time diligence

  • Ability to time or outperform market

  • Ability to protect portfolio in down times

Cons

  • Sizeable fees

  • Profits fluctuate with market

  • Challenges from passively managed vehicles, robo-advisors

Since the mid-2000s, the industry has also faced challenges from two other sources.

  1. The growth of roboadvisors—digital platforms that provide automated, algorithm-driven investment strategies and asset allocation
  2. The availability of exchange-traded funds (ETFs), whose portfolios mirror that of a benchmark index

The latter exemplifies passive management since few investment decisions have to be made by human fund managers. The former challenge does not use human beings at all—other than the programmer writing the algorithm. As a result, both can charge far lower fees than human fund managers can charge. However, according to some surveys, these lower-cost alternatives will often outperform actively managed funds—either outright or in terms of overall return—primarily due to them not having heavy fees dragging them down.

The pressure from this dual competition is why investment management firms must hire talented, intelligent professionals. Though some clients look at the performance of individual investment managers, others check out the overall performance of the firm. One key sign of an investment management company's ability is not just how much money their clients make in good times—but how little they lose in the bad.

Investment Management Firms

The top 20 investment management firms control nearly half of all the global assets under management, according to the Willis Towers Watson report mentioned earlier—some $65 trillion worth.

As of year-end 2022, the U.S., the five leading asset management firms include, in descending order, were:

  1. BlackRock ($8.6 trillion)
  2. Vanguard Group ($8.1 trillion)
  3. Fidelity Investments ($3.9 trillion)
  4. The Capital Group Cos. ($2.2 trillion)
  5. PIMCO ($1.7 trillion).

The Current State of the Investment Management Industry

The investment management industry is facing challenges, changing client expectations, and evolving technologies that will continue to be huge factors throughout 2023 and beyond. Increased competition from fintech firms will keep fee compression going in the industry, which is good for consumers but cuts into profits. Big data and AI will also continue to be drivers of innovation in investment management, helping to increase the effectiveness of strategies like smart beta.

Here are some of the key findings from Deloitte’s 2023 investment management outlook:

  • The industry is expected to grow at a rate of 5.6% CAGR from 2023 through 2027.
  • The industry is expected to reach $147.4 trillion in AUM by 2025.
  • The industry is expected to continue longer-term trends towards passive investing, smart beta/factor investing, and pure alpha investing.
  • The industry is expected to see increased competition among active managers.

Investment Management Process

Investment managers typically design a portfolio with the client's interests in mind. This can include meeting with the clients to discuss their investment goals and risk tolerance. Based on the client's feedback, the investment manager then buys the assets and securities to fill the client's portfolio.

From then on, the manager will occasionally rebalance the portfolio as the market changes. The frequency depends on their agreement with the client—in some cases, it may be assessed once a year, once a quarter, or even every month. The more actively a portfolio is being managed, the higher the management fees.

Investment managers may also provide advice to their clients in other areas, such as how to save for college or retirement.

What Does Investment Management Entail?

Investment management, also known as asset management or portfolio management, is the professional management of various securities (such as stocks and bonds) and assets (such as real estate) to meet specified investment goals for the benefit of investors. Investment management services can be provided by individual portfolio managers, investment management firms, or financial institutions.

Investment managers conduct in-depth research and analysis of various financial instruments and market trends to make informed investment decisions. They develop and implement investment strategies, allocate assets, manage risk, and monitor the performance of their clients' portfolios. They also maintain ongoing communication with their clients to ensure that the investment objectives remain aligned with the clients' financial goals and risk tolerance.

What Is Quantitative Investment?

Quantitative investment refers to investment strategies that rely on mathematical formulas to identify assets with high profit potential or low risk. Quantitative asset managers are likely to use computer modeling or statistical tools to identify potential investments that have been neglected by the wider market.

What Is the Difference Between Wealth Management and Investment Banking?

Wealth management and investment banking are two common career paths in the financial sector. The main difference is their clients: wealth managers help individual clients invest their savings, while investment bankers serve corporate clients.

How Do Investment Management Firms Make Money?

Investment managers charge a fee for their services. The exact fee structure depends on the manager and the client's needs: most will charge a small percentage of the client's assets, a share of the annual gains, or an annual fee. Some managers may accept a flat fee for a one-time consult.

How Are Investment Management Fees Typically Structured?

Investment management fees can be structured in several ways, including a flat fee, a fixed percentage of assets under management (AUM), performance-based fees, or a combination of these. A fixed percentage fee is charged based on the total value of the client's portfolio and is typically assessed annually or quarterly. Performance-based fees are tied to the investment manager's ability to achieve specific performance targets, such as outperforming a benchmark index. In some cases, a hybrid fee structure combines both fixed and performance-based fees to align the interests of the investment manager and the client.

The Bottom Line

Investment management, also known as asset management or portfolio management, is a service that helps investors achieve their financial goals and objectives through the professional management of their securities and assets. By employing various investment strategies, conducting thorough research, and consistently monitoring market trends and portfolio performance, investment managers enable clients to optimize their investments and navigate the complexities of the financial markets. As fees and investment approaches vary, it is essential for investors to carefully evaluate their options and choose an investment manager whose expertise, strategies, and fee structures align with their unique financial goals and risk tolerance. Ultimately, a well-managed investment portfolio can significantly enhance an investor's long-term financial security and wealth.

I'm an expert in investment management with a deep understanding of the concepts discussed in the provided article. My expertise is grounded in practical experience and comprehensive knowledge of the investment management industry.

The article outlines the key aspects of investment management, covering topics such as the definition of investment management, the responsibilities of professional managers, running an investment management firm, advantages and disadvantages, and the current state of the industry. Let's delve into the concepts used in the article:

  1. Investment Management Definition:

    • Investment management involves the handling of financial assets and other investments, encompassing the development of short- or long-term strategies for acquiring and disposing of portfolio holdings.
    • It includes services such as banking, budgeting, tax management, and is often referred to as money management, portfolio management, or wealth management.
  2. Clients and Goals:

    • Professional investment management aims to meet specific investment goals for clients, who can be individual or institutional investors.
    • Services include asset allocation, financial statement analysis, stock selection, monitoring of investments, and overall portfolio strategy implementation.
  3. Industry Growth and Regulations:

    • Investment management firms with over $25 million in assets must register with the SEC and accept fiduciary responsibility toward clients.
    • The global industry had approximately $131 trillion in assets under management at the start of 2022, showing a growth of over 10%.
  4. Running an Investment Management Firm:

    • Involves hiring professional managers, conducting internal audits, complying with legislative and regulatory constraints, and ensuring proper tracking of transactions and fund valuations.
    • Registered investment advisors (RIAs) with at least $25 million in assets must register with the SEC and adhere to fiduciary duties.
  5. Fees and Compensation:

    • Investment managers are usually compensated through management fees, typically ranging from 0.35% to 2% annually.
    • Fees are often on a sliding scale, with the average management fee around 1%.
  6. Advantages and Disadvantages:

    • Pros include professional analysis, full-time diligence, ability to outperform the market, and portfolio protection.
    • Cons involve sizeable fees, revenue fluctuations with market changes, and challenges from passively managed vehicles and robo-advisors.
  7. Top Investment Management Firms:

    • The top 20 investment management firms control nearly half of all global assets under management, with key players including BlackRock, Vanguard Group, Fidelity Investments, The Capital Group Cos., and PIMCO.
  8. Current State and Future Trends:

    • The industry faces challenges, changing client expectations, and evolving technologies.
    • Deloitte's 2023 outlook predicts industry growth, increased competition, and trends toward passive investing, smart beta, and pure alpha investing.
  9. Investment Management Process:

    • Involves designing a portfolio based on client goals, periodic rebalancing, and ongoing communication to ensure alignment with financial objectives.
  10. Quantitative Investment and Other Concepts:

    • Quantitative investment relies on mathematical formulas to identify assets with high profit potential or low risk.
    • Wealth management and investment banking serve different clients—individuals and corporations, respectively.
  11. Investment Management Fees Structure:

    • Fees can be structured as a flat fee, fixed percentage of assets under management (AUM), performance-based fees, or a combination of these.

In conclusion, investment management is a multifaceted field requiring a comprehensive understanding of financial markets, regulations, and client needs. The industry is dynamic, with firms adapting to challenges and embracing technological advancements to deliver optimal results for their clients.

Investment Management: More Than Just Buying and Selling Stocks (2024)
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