What is asset management?
– Asset management is the professional process of selecting, holding, and monitoring investments so they grow in value while keeping losses within a client’s acceptable risk level. In retail and institutional settings, asset managers act on behalf of clients (individuals, companies, or funds) to implement an investment plan consistent with stated goals and risk tolerance.
Key terms
– Fiduciary: a person or firm legally obligated to act in a client’s best financial interest.
– Assets under management (AUM): total market value of client assets an adviser manages.
– Registered Investment Adviser (RIA): a firm that provides investment advice and manages portfolios and—if large enough—must register with the SEC.
– Broker: an intermediary that executes trades and may custody assets; brokers are often not held to a fiduciary standard.
– Robo‑advisor: automated, algorithmic portfolio management with lower fees than human managers.
How asset management works (brief)
1. Establish goals and risk tolerance: retirement income, growth, capital preservation, etc.
2. Create an investment policy or plan that sets allowable asset classes and risk limits.
3. Select investments (stocks, bonds, real estate, commodities, mutual funds, alternatives).
4. Monitor holdings and rebalance or change allocations as markets and goals evolve.
5. Report performance and costs to the client.
Types of asset managers (short descriptions)
– Registered Investment Adviser (RIA): Advises and manages portfolios; required to register with the SEC if AUM > $100 million.
– Broker: Executes trades and may custody accounts; generally acts as an intermediary and may not owe a fiduciary duty.
– Financial advisor: A broad title for professionals who recommend and may trade securities on a client’s behalf; fiduciary status varies.
– Robo‑advisor: Software that builds and rebalances portfolios automatically based on inputs like age and risk tolerance; typically lower cost.
Fees and how they matter
– Common fee model: an annual percentage of assets under management. The body text notes an industry average of about 1% for accounts up to $1 million; larger accounts often pay lower percentage fees.
– Other fees: per-trade commissions, product commissions, or markups that can create conflicts of interest.
– Regulatory note: retirement advice is increasingly governed by fiduciary rules (e.g., the Retirement Security Rule) that require acting in a retirement investor’s best interest.
Important differences: asset manager vs. brokerage
– Asset managers actively design and maintain portfolios to meet goals; brokers primarily execute trades and hold custody of assets.
– Fiduciary duty matters: asset managers (especially RIAs) are more likely to be fiduciaries; brokers historically have had different standards.
– Account features at banks: customers may receive combined banking and investment services (cash management, margin lending). Bank deposits are FDIC-insured (typically up to $250,000 per depositor), but investments such as mutual funds, annuities, stocks, and bonds are not FDIC-protected.
Practical checklist for choosing an asset manager
1. Confirm registration
2. Review registration and disciplinary history
– Verify the firm and adviser on the SEC’s Investment Adviser Public Disclosure (IAPD) website (search by firm or individual). Look for Form ADV Part 2 (brochure) — it discloses services, fees, conflicts, and disciplinary events.
– If the adviser is a broker-dealer or registered representative, check FINRA BrokerCheck for employment history, licenses, and complaints.
– For bank-affiliated managers, confirm the charter and any state registrations; check FDIC resources for deposit protections and separate disclosures for investment products.
3. Understand fees and total-cost economics
– Request a clear fee schedule and an example that shows all costs: management fee (percent of assets under management, AUM), performance fee (if any), fund expense ratios, trading and custody costs, 12b‑1 or platform fees, and any wrap fees.
– Ask for an illustration of net returns after fees for a sample portfolio (not just gross returns).
– Example (worked numbers): Starting capital = $100,000; assumed gross annual return = 6% (constant); horizon = 10 years.
– Manager A fee = 1.00% AUM → approximate net return = 6% − 1% = 5% → future value = 100,000 × (1.05)^10 ≈ $162,889.
– Manager B fee = 0.25% AUM → approximate net return = 6% − 0.25% = 5.75% → future value = 100,000 × (1.0575)^10 ≈ $174,328.
– Fee drag over 10 years = $174,328 − $162,889 ≈ $11,439.
– Assumptions: constant gross return, annual fee charged against assets, ignores taxes and additional deposits/withdrawals. Ask for fee impact shown under different return scenarios.
4. Evaluate investment process and philosophy
– Confirm whether the strategy is active, passive, quantitative, factor-based, or discretionary asset allocation.
– Ask for a written investment policy or process description: security selection, rebalancing rules, risk controls, use of derivatives, liquidity constraints.
– Check whether the manager uses proprietary models and how often they are reviewed or backtested.
5. Check performance, benchmarking, and risk metrics
– Compare returns to an appropriate benchmark (e.g., a blended index for multi‑asset portfolios), not just to the S&P 500.
– Request risk-adjusted measures: standard deviation, Sharpe ratio (return in excess of a risk-free rate per unit of volatility), maximum drawdown, and rolling-period performance.
– Insist on a minimum track record length for the specific strategy (commonly 3–5 years) and watch for survivorship bias.
6. Assess operational, custody, and reporting arrangements
– Confirm who holds custody of assets (independent custodian is preferable). Custody separation reduces conflicts and operational risk.
– Verify reporting frequency and content: statements, trade confirmations, performance attribution, tax documents.
– Check for disaster recovery, cybersecurity controls, and whether the manager carries insurance (e.g., errors & omissions).
7. Identify conflicts of interest and compensation sources
– Look for revenue-sharing, proprietary product preferences, soft-dollar arrangements (paying brokers for research), or incentives to trade.
– Confirm whether the adviser is a fiduciary (registered investment adviser) and how they document acting in clients’ best interests.
8. Suitability, minimums, liquidity, and restrictions
– Ensure the manager can handle your account size and liquidity needs. Ask about minimum investment amounts and restrictions on withdrawals or redemptions.
– For taxable accounts, ask about tax‑efficient strategies and turnover.
9. References, independent verification, and reviews
– Request client references and check independent ratings (Morningstar for funds, third‑party due diligence reports for managers).
– Look up Form ADV filings and disciplinary records yourself rather than relying solely on the manager’s summary.
10. Exit terms and governance
– Understand the termination clause: notice period, redemption gates, potential fees on exit, and handling of residual positions.
– Ask how disputes are resolved and what governance or oversight exists (investment committee, independent directors).
Practical short checklist to take to meetings
– Confirm registration: IAPD and BrokerCheck links.
– Get a one‑page fee
summary that shows all explicit and implicit costs (management fees, performance fees, platform fees, custody fees, transaction costs, and any revenue‑sharing arrangements). Ask the manager to calculate a few “apples‑to‑apples” examples using your proposed investment amount and time horizon.
– Ask for model portfolio holdings and recent trade blotters (or an anonymized sample) to check concentration, liquidity, and turnover.
– Request audited financial statements for the fund/manager or proof of an annual independent audit.
– Get copies of the legal documents you will sign (management agreement, subscription/redemption docs, privacy policy) and note the notice periods, fee calculation formulas, and any indemnities.
– Confirm custody arrangements: who holds client assets, how often you receive statements, and whether custody is independent of the manager.
– Verify valuation policies: how are illiquid securities priced and how frequently are they marked? Ask for NAV calculation procedures.
– Ask about soft‑dollar and brokerage allocation practices and whether the manager receives any non‑monetary benefits from brokers or counterparties.
– Obtain references and speak to at least two current clients with similar profiles to yours; ask about realized returns, communications, and experience with redemptions.
– Confirm whether performance is presented on a net‑of‑fees basis and whether results are GIPS (Global Investment Performance Standards) verified, if applicable.
Quick numeric example: why fees matter (AUM fee drag)
Assume a $100,000 initial investment, gross annual return before fees = 7%, investment horizon = 10 years.
– Manager A charges 1.00% AUM → net annual return = 7% − 1.00% = 6.00%
Future value = 100,000 × (1.06)^10 = $179,085
– Manager B charges 0.50% AUM → net annual return = 6.50%
Future value = 100,000 × (1.065)^10 = $187,700
– Low‑cost ETF expense = 0.08% → net annual return = 6.92%
Future value = 100,000 × (1.0692)^10 = $195,140
Difference after 10 years: Manager B vs A = $8,615 more; ETF vs A = $16,055 more. This simple example illustrates how small percentage‑point differences compound over time. Assumptions: returns are steady, taxes ignored, fees taken from NAV.
Sample questions to bring to a meeting (short list)
– How is my fee calculated and when is it deducted? Can you show a worked example for $50k, $250k, and $1M?
– What benchmark do you use and why is it appropriate? Show net returns vs that benchmark over multiple periods.
– What are the liquidity terms (redemption frequency, notice, gates, side pockets)?
– What conflicts of interest exist and how are they mitigated?
– Who are the key people (CIO, PMs) and what is the succession or continuity plan?
– How do you handle trade execution, best execution monitoring, and broker selection?
– If something goes wrong, how will I get my money back? What is the dispute resolution process?
Red flags to watch for
– Lack of independent custody or third‑party audited statements.
– Vague or no answers on valuation for illiquid assets.
– Inability or refusal to provide Form ADV, audited financials, or client references.
– Performance presented only on a gross basis or cherry‑picked periods.
– Complex fee formulas that are not shown in writing or lack clear examples.
– High personnel turnover without clear reasons.
Step‑by‑step verification checklist before signing
1. Pull up the manager’s Form ADV (Part 1 and 2A) and read “Fees and Compensation” and “Disciplinary” sections.
2. Check adviser registration and disclosure on IAPD and BrokerCheck.
3. Confirm custody and obtain recent account statement examples.
4. Review audited financials and valuation policy.
5. Ask for a one‑page fee summary and at least two worked fee examples for your dollar amounts.
6. Compare net historical returns vs stated benchmark and peers (use third‑party sources).
7. Read the legal agreement—note redemption, termination, indemnification, and notice terms. Consider lawyer review for complex structures.
8. Call references and ask about real experiences (especially exits and disputes).
9. Confirm reporting cadence (statements, performance reports) and data format.
10. Keep copies of everything provided and log dates of conversations.
Where to verify documents and background (use these official tools)
– SEC Investment Adviser Public Disclosure (IAPD): search Form ADV filings and adviser registration — https://www.adviserinfo.sec.gov/
– FINRA BrokerCheck: check brokers and firms with brokerage registrations — https://brokercheck.finra.org/
– SEC EDGAR: for public fund filings and any required adviser filings — https://www.sec.gov/edgar.shtml
– Morningstar: independent fund ratings, expense ratios, and peer comparisons — https://www.morningstar.com/
Short closing checklist for the meeting (takeaway card)
– Confirm registration and pull Form ADV.
– Get a one‑page fee summary and worked examples.
– Ask for audited statements and valuation policy.
– Request sample performance net of fees and benchmark.
– Obtain references and independent ratings links.
– Note red flags and set a follow‑up to verify references/documents.
Educational disclaimer
This is educational information, not individualized investment advice or a recommendation to buy or sell any product. Always perform your own due diligence and consider consulting a qualified advisor or attorney before signing agreements.
Sources
– U.S. Securities and
Exchange Commission — https://www.sec.gov/
Morningstar — https://www.morningstar.com/
Investment Company Institute (ICI) — https://www.ici.org/
Financial Industry Regulatory Authority (FINRA) — https://www.finra.org/
CFA Institute — https://www.cfainstitute.org/