Assets under management (AUM) represent the total market value of assets managed by an advisor or firm for their clients. As an individual investor, your AUM reflects the amount you have invested. AUM can be used by investors to assess a firm’s quality, while advisors may utilize it to determine their fees.
How to compute assets under management (AUM)
For individuals
AUM for individuals is the total market value of their invested assets, which may include various financial instruments.
For investment firms
An investment firm’s AUM represents the total market value of the assets they manage for their investors. This can include a mix of clients with varying investment sizes.
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AUM is subject to market fluctuations as it represents the market value of investments.
Significance of AUM
AUM is utilized by investors, advisors, and regulatory bodies in three primary ways.
1. Assessing an advisor
AUM is one factor investors consider when evaluating a financial advisor for experience and stability.
However, AUM should not be the sole metric for selecting a financial advisor. Other factors to consider include:
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Longevity of the firm: A well-established firm with a large client base may offer the desired experience and stability, regardless of AUM.
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Client-to-advisor ratio: Firms with a lower ratio may provide more personalized attention to clients.
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Fee structure: Opting for a fee-only advisor over one receiving commissions can eliminate conflicts of interest.
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Credentials: Ensure the advisor is a certified financial planner and legally permitted to offer investment advice.
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Fiduciary duty: Choose fiduciaries who are obligated to act in your best interest.
This information, along with a firm’s AUM, can be found in its Form ADV, a disclosure document that advisors must submit to regulatory authorities.
2. Determining advisor fees
Advisor fees are often a percentage of the investor’s AUM, which can vary depending on the type of advisor. For instance, fees with a robo-advisor may start at 0.25% annually, while a fee-only advisor may charge up to 2% annually. Therefore, if your AUM is $100,000, your fees could be:
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$125 per year with a robo-advisor.
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$1,050 per year with a human advisor.
Generally, the fee percentage decreases for investors with higher investable assets.
3. Regulating investment advisors
A firm’s AUM determines whether they must register with a state regulatory authority or the SEC. Firms with less than $100 million in AUM fall under state jurisdiction, while those with $100 million or more must register with the SEC. Some exceptions apply.
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