Assets under management (AUM) is a key metric used to evaluate investment advisers and their success. AUM refers to the total market value of all investments an adviser manages on behalf of clients. AUM indicates the size and growth potential of an advisory firm. For investment advisers, maintaining and growing AUM is vital for their business operations and profitability. In this article, we will explore what AUM means for investment advisers, why it is important, how advisers can increase their AUM, and challenges they may face related to AUM growth.
AUM Indicates an Adviser’s Assets and Client Base Size
An adviser’s AUM indicates the total assets they have under management for all their clients. A larger AUM signifies that an adviser manages money for more clients and has achieved growth in assets. When evaluating an advisory firm, investors will look at the trend in AUM over time to judge the stability and growth of its client base. Growing AUM over the years suggests the adviser is attracting new clients and assets, while a decline may indicate client dissatisfaction or poor investment performance.
AUM Impacts an Adviser’s Fees and Revenue Generation
Most investment advisers charge fees as a percentage of AUM, typically 1-2%. Therefore, the total value of AUM has a direct impact on an adviser’s fee revenue and overall profitability. Advisers with larger AUM can generate higher total fee revenue. However, they also need sufficient support infrastructure to handle more clients and investments. Advisers need to balance revenue growth from higher AUM with the costs of expanding their operations.
Increasing AUM Allows Advisers to Gain Scale and Improve Viability
Building AUM allows advisers to gain economies of scale through distributing fixed costs over a larger asset base. Higher AUM can also provide access to investments and strategies that have high minimum account requirements. Furthermore, a solid AUM signals an adviser’s stability and viability to potential clients. However, advisers should be careful not to let AUM growth outpace their capacity to provide quality service to all clients.
AUM Growth Depends on an Adviser’s Investment Performance and Client Additions
Advisers can grow AUM either by attracting new clients or by delivering strong enough investment performance that boosts the value of existing client assets. Superior investment returns allow advisers to organically increase AUM as portfolio values grow. However, poor market performance can quickly erode AUM. Client additions from referrals or marketing efforts are essential for AUM growth. But advisers must also retain current clients, as client losses will offset AUM gains.
Extreme AUM Growth Presents Challenges for Advisers to Manage
While most advisers seek to grow AUM steadily over time, an extreme spike in AUM may be problematic. Advisers may struggle to handle a surge of new clients and assets without expanding staff and operations. Extreme AUM growth could also force advisers to invest in less optimal ways just to put the capital to work. Highly volatile AUM fluctuations also create challenges in maintaining adequate capacity. Advisers need strategic plans to adapt their business infrastructure alongside AUM growth.
In summary, assets under management are vital for investment advisers, impacting their client base, revenue generation, scale, and viability. While growing AUM is crucial for most advisory firms, they must balance expansion with quality service and optimal investment approaches. Managing the challenges of AUM growth is key for sustaining an adviser’s success.