Asset management and investment management are two important concepts in the financial industry. Though they sound similar and are sometimes used interchangeably, there are some key differences between the two. This article will analyze the core distinctions between asset management and investment management from the perspective of business organizations. It will look at the definitions, objectives, scope, key players, fee structures as well as pros and cons of each model. Understanding the nuances between asset management and investment management can empower businesses to choose the right model that aligns with their financial goals and risk appetite.
Asset management focuses on investing assets based on client specifications while investment management involves making investments to generate returns
At its core, asset management refers to investing assets on behalf of clients based on their investment mandates. Asset managers accept funds from clients like pensions, endowments, sovereign funds, etc. and invest them across various securities like stocks, bonds, real estate, private equity, etc. The goal is to generate returns while adhering to the risk profile specified by the client. In contrast, investment management involves actively making investment decisions to earn returns for shareholders and investors. Investment managers use their expertise to invest in securities that they believe will appreciate over time. The key goal is maximizing investment returns rather than aligning with a client mandate.
Asset management models cater to institutional investors while investment management serves individual investors
A key difference lies in the clientele served by each model. Asset management firms largely cater to institutional investors like pension funds, insurance firms, endowments, etc. that have very large investable assets. The mandates are tailored to the client’s unique needs and risk appetite. On the other hand, investment management caters more to individual investors. Investment management firms offer mutual funds, hedge funds and other investment products marketed to individual investors based on their financial goals.
Asset management involves fiduciary duties while investment management does not necessarily have strict fiduciary requirements
Asset managers are bound by fiduciary duty which means they must act in the best interest of their clients when managing assets. This entails transparency, avoiding conflicts of interest, and putting client interests above their own profits. Investment managers may follow ethical practices but don’t necessarily have the same legal fiduciary duty. Their primary goal is earning returns for shareholders rather than serving clients.
Investment management aims for high absolute returns while asset management targets returns balanced with risks
Investment managers aim to maximize investment gains from the assets under their control. Their goal is achieving high absolute returns often beating a benchmark. Asset managers on the other hand, focus on aligning returns with a client’s mandated risk profile. Their goal is not just returns alone but balancing returns with risks based on the client’s objectives.
Asset management has bundled fee structures while investment management has performance-linked fees
Asset management firms follow bundled fee structures, charging an all-inclusive fee as a percentage of Assets Under Management (AUM). This covers investment research, portfolio management, trade execution, operations, reporting and other services. Investment managers earn performance-linked fees – a base fee plus a bonus if they achieve returns exceeding a hurdle rate. This aligns incentives by rewarding investment outperformance.
In summary, asset management emphasizes managing assets based on client mandates while investment management focuses on actively investing to maximize returns. Understanding these subtle differences allows businesses to select the appropriate model to meet their specific financial needs and objectives.