What Are Assets Under Management (AUM)?
Assets under management are the total market value of the investments held under management by an individual or an institution, typically on behalf of clients. Financial institutions that calculate AUM include mutual funds, RIAs, hedge funds, venture capital firms, and depository institutions. It is used as an indicator to measure performance, although its definition and calculation vary with different institutions.
AUM Meaning & How It's Used
Assets under management (AUM) are the total market value of the investments held under management by an individual or an institution. Also called funds under management, AUM is typically used to show growth of investment companies by comparing its current level to previous periods. Moreover, it is compared to its competitors’ AUM to show one fund or firm's competitiveness against peers. In addition to serving as a performance indicator, AUM is important because it is used to calculate the management fees an investment firm generates.
An investor choosing a financial advisor or a mutual fund will consider AUM as it measures the size of the financial institution and is a gauge for business success. Additionally, the value of AUM determines whether an institution must comply with securities regulations and register with the Securities and Exchange Commission.
Key Takeaway: AUM is used to calculate management fees as a percentage of the AUM. It is sometimes used as a metric of success for a fund.
The SEC requires financial advisors with more than $25 million in AUM to register with them on the federal level. The regulatory agency specifies that, when calculating the AUM, to only include the securities portfolios that the financial advisor provides continuous and regular supervisory or management services.
AUM for an institution fluctuate daily depending on the following reasons:
- The money flowing in and out of the firm from new customers and redemption.
- The price fluctuations of assets held under management.
- Dividend reinvestment of assets held under management.
What an AUM Increase Means
Financial institutions use the size of their AUM, especially its growth over time, to demonstrate success against competitors. An AUM that has increased over time can be a signal that the firm is either gaining new customers, that the firm is growing money for its existing customers, or both.
An increasing AUM is a measure of success because it generally leads to higher revenue and bigger compensation packages for management. Additionally, asset managers and financial institutions are ranked based on AUM, thus an increasing value is an indicator of investor confidence in the manager and/or the firm.
Importance of Assets Under Management
AUM is important for the following reasons:
- Investment managers and institutions are sometimes ranked based on the AUM.
- It is used to determine whether an investor qualifies for different types of services and investments (such as a hedge fund) based on a minimum amount of AUM the investor deposits.
- It is used as a marketing tool to attract new investors.
- Management’s compensation packages usually depend on the size of the AUM.
The calculation of AUM varies by company. Some banks may include deposits, mutual funds, and cash, while other institutions may include only funds under discretionary management. It can include the returns a mutual fund has made on its investment as well as the capital a manager has at its disposal to make new investments.
One reason why the calculation of AUM can be different is due to the different types of business models. A mutual fund calculates AUM differently from a financial advisor. Also, the SEC specifies what can be included and not included in the calculation, if the entity is large enough to be under SEC jurisdiction. Smaller firms under state regulation might have different definitions for AUM and what to include and not include.
Additionally, AUM can be calculated for a single client as well as for the whole mutual fund.
The following is a simple example of a mutual fund holding stocks, corporate and government bonds, and cash:
$2 billion of stocks + $1 billion of corporate bonds + $1 billion of government bonds + $1 billion of cash = $5 billion of AUM
AUM vs. NAV For Mutual Funds and ETFs
Net asset value (NAV) for a mutual fund or ETF is equal to the value of the fund’s total assets minus total liabilities, divided by shares outstanding.
NAV = (Fund's Total Assets - Total Liabilities) / Outstanding Shares
NAV is expressed on a per-share basis and is the price per share investors can purchase for mutual funds and ETFs.
AUM refers to the total market value of assets under management by an individual or a firm (not a fund) and is not expressed on a per-share basis.
Assets Under Administration (AUA)
Assets under administration (AUA) measures the total assets that a financial institution provides administrative services. In this regard, the financial institution acts as a third-party administrator, and the client retains ownership and control of assets. The bank or the financial institution charges a fee for being the administrator of assets but does not have the discretion to manage the assets.
This arrangement is most common with mutual funds and hedge funds having their portfolios under safekeeping at another financial institution, usually a bank. The main job of the administrator is to keep accurate books and to verify the accuracy of transactions.
Administrative services provided include:
- Settlement of trades and custody of assets
- Trade reporting
- Accounting and tax reporting
AUM of a firm is being constantly monitored and scrutinized since it is an indicator of the success of the firm. It is also a marketing tool deployed to obtain new investors as it is often compared to its competitors based on size. Management fees are often calculated based on a percentage of AUM. Moreover, portfolio managers and funds are often ranked based on their AUM.
Some of the companies that have the most assets under management are BlackRock Inc., Vanguard Group, Fidelity Investments, J.P Morgan, and Goldman Sachs.
AUM in real estate means the total market value of real estate holdings by an individual or firm on behalf of investor customers.
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