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What Are Assets Under Management (AUM)?

According to the Financial Conduct Authority (FCA), UK asset management firms hold as much as £6.6 trillion in assets under management, more than any other country in Europe.

What are assets under management? How are assets under management calculated? Find out everything you need to know about wealth management assets under management with our definitive guide.

Assets under management explained

Assets under management (AUM) refers to the total market value of the investments or assets managed by a mutual fund, hedge fund, wealth management firm, portfolio manager, or other financial services firm. In other words, assets under management is the total amount of other people’s money that a person or entity controls. In some cases, assets under management includes the total amount of assets that an entity manages for all clients. Otherwise, AUM refers to the total market value of assets managed for specific clients.

How does assets under management work?

Generally speaking, assets under management includes funds that the manager can use to make transactions on a discretionary basis. For instance, if you’ve invested £100,000 in a mutual fund, this money would become part of the overall AUM. Therefore, the manager of the fund could buy and sell stocks and shares using the invested capital without seeking special permission.

It’s also important to note that the manager of your mutual funds assets under management will charge a management fee covering their compensation and fixed administration costs. Generally, the payment will be a flat rate charged to the overall fund, allocated proportionately to every investor. Depending on the specifics of the fund, the fee could be several percent or several thousandths of a percent.

How to calculate assets under management

So, how are assets under management calculated? This isn’t a simple question, as calculation methods for AUM vary between different companies. For example, some institutions/investors include cash and bank deposits in the calculation, whereas others limit assets under management to discretionary investment funds. Furthermore, because assets under management change as money flows in and out of a fund, it can fluctuate from one day to another.

Many different factors can cause your mutual funds assets under management to increase, including:

  • The number of dividends paid out by companies in the portfolio

  • Performance of assets

  • Acquisition of new customers and assets

There is also a range of factors that can lead to a decrease in assets under management, including:

  • Investment performance losses

  • Decreases in investor flows

  • Fund closures

The importance of assets under management

Why is it important to pay attention to wealth management assets under management? Total assets under management can be a strong performance indicator for financial institutions, as a larger AUM is typically correlated with larger revenues (assuming a constant ROA). Furthermore, the size of financial advisor assets under management is often a measure of prestige by which banks or asset managers are ranked. Financial institutions often use assets under management to compare their performance to competitors and assess industry trends.

Analysing wealth management assets under management

When you’re analysing assets under management, there are a couple of significant trends to pay attention to. Firstly, it’s essential to understand that funds with frequent inflows/outflows of investor capital will experience more volatility, meaning that these types of funds are more difficult to manage. There are several solutions to issues like this, including lock-up periods (where it’s not possible to withdraw funds) or temporary/permanent closures of the fund.

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