Takeaways
- AUM is the market value of the assets managed by a fund on behalf of investors.
- Depending on the size of AUM, investment advisors must register with the SEC.
- AUM changes as the value of assets fluctuate and capital flows in and out.
- AUM can affect investment strategy, fund prestige, and fund-size fee structures.
- AUM applies to investment advisors, including money managers, private funds, investment consultants, financial planners, and more.
What Are Assets Under Management (AUM)?
Assets under management, or AUM, is the total market value of the assets an investment advisor provides financial advice.[1] Investment advisors consist of financial institutions, financial planners, investment consultants, and private funds (e.g., hedge funds). AUM covers all investments, including stock, bonds, real estate, index funds, and other investments.
AUM is an essential indicator of an investment firm's size and success. It reflects the firm’s ability to attract new investors and manage the funds entrusted to it.
For most firms, AUM is not a static number. It changes as asset values fluctuate based on individual investment performance, stock market performance, investor capital contributions, and fund withdrawals.
A higher AUM typically means that the fund has performed well over an extended period and beaten average market returns. This type of above-average return draws the attention of new investors who make capital contributions to the fund so that their money is managed by the firm. Large funds can exert greater influence over the market itself. Portfolio managers want a higher AUM because they can earn more from portfolio management fees.
From an investor’s perspective, a firm's AUM is a critical factor to consider when selecting a fund manager. It can impact client services, investment strategy sophistication, and research capabilities.
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How AUM Works
AUM represents the total value of all assets managed by an investment firm or portfolio manager and includes all the clients they manage. This value is in constant flux due to a confluence of factors, but when the value of assets in portfolios increases, the AUM rises. However, the converse is also true, and when asset values undergo correction, the AUM will also tend to fall.
Investment firms and independent financial advisors generally charge fees based on a percentage of the AUM. This arrangement perfectly aligns the interests of the advisor and the investor. The investor wants the portfolio to perform as well as possible, and the advisor is paid proportionately to the portfolio’s performance.
AUM is the standard benchmark for comparing various investment advisors, including hedge funds, index funds, target date funds, mutual funds, and more. The SEC requires that firms report their AUM periodically to ensure compliance and promote integrity and trust.
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5 Reasons AUM Matters
AUM is an essential metric for both investors and investment firms. It can influence fees, investment strategies, investor psychology, and state and federal compliance.
Let’s look at how it influences these aspects and what that influence can do. A clear understanding of AUM will help you make far more informed investment decisions. Here are five reasons AUM matters:
1. Investor Trust
The larger the funds, the more investor trust they tend to attract. This is because it takes time, consistent returns, and sophisticated investment strategies to grow assets under management significantly.
Higher AUMs give investors’ confidence that their funds will be part of a well-defined diversification strategy for the fund.
The opposite is true for smaller funds. While smaller funds can stay small intentionally, they generally remain below their growth bar because of poor investment decisions, clients withdrawing capital, or an inability to scale their investment strategies effectively.
2. Fee Structure
No matter your advisor or firm, the fund's AUM will directly impact the fees you pay. Most firms charge a base management fee based on a percentage of the AUM, which means that as the portfolios grow, so does the firm’s revenue.
This usually works in both parties’ favor, but you should know that your fees can quickly compound, eating into potential returns.
Many fee-only advisors charge an annual fee of roughly 1% of assets under management. That percentage tends to scale inversely as the size of the portfolio under management increases. For example, the fees for a $500,000 portfolio might be 1%, but for a $1,000,000 portfolio, that percentage may drop to 0.75%.
3. Investment Strategy
AUM will also influence an investment firm's general investment strategy. Greater AUMs facilitate access to a broader range of potential investment opportunities.
Investment strategies can broaden to include diverse asset classes, allowing more resources for research and risk mitigation. With a wider buffet of investment options, funds can carefully titrate and inject risk capital into their portfolios.
Conversely, larger funds can have potential liquidity issues since rapid trade execution could have an outsized effect on the market. However, this usually comes down to trading execution rather than fund size.
4. Investor Psychology
When it comes to investor psychology, AUM is critical. Investors commonly see firms with higher AUM as more stable, reputable, and prestigious. This creates the flywheel of success, which then attracts more clients and grows the AUM even more.
The other side of that coin is that a decline in AUM can result in concerns about performance or stability, leading to a rush of capital withdrawals. In either case, it can quickly create a snowball or feedback loop, growing or evaporating fund size.
5. SEC Regulation
AUM is a central variable in regulatory oversight. Firms that manage substantial amounts of assets are subject to more rigid regulations and reporting requirements from regulatory bodies like the SEC. These regulations promote transparency while also providing a degree of protection to investors and the markets at large.
Firms with higher AUM must adhere to more rigorous compliance standards, which can then influence their daily operations and ongoing investment strategies.
Here’s the breakdown: [2]
| Assets Under Management | Regulatory Requirement |
|---|---|
| Less than $100 Million | Registers with State Securities Regulators |
| Between $100-110 Million | Registers with state securities regulators and opts to register with the SEC |
| Over $110 Million | Must Register with the SEC |
How to Calculate AUM
Calculating the AUM involves adding up the current market value of all assets managed by a specific financial institution or investment firm. For the most accurate calculation, the firms will consider the current value of investments they directly oversee, such as common stock, bonds, mutual funds, index funds, and any pending contributions and withdrawals.
The market value of funds increases when individual investments perform well, dividends are reinvested, and assets are acquired. AUM can also surge when current and existing investors deposit capital into the funds, too.
Benefits of High AUM
Higher AUMs undoubtedly give investors’ confidence in the fund. Practically, there are several reasons for this. Because a larger AUM means that the fund has more investments, it also means more liquidity at a larger fund than at a smaller fund. Investors enjoy this because they know they can withdraw their funds quickly.
Additionally, larger funds can also handle redemption pressures. If several investors need to fill their funds, this will not have an outsized effect on the fund's ability to execute its trading strategy.
Limitations of Focusing Only on AUM
Focusing on assets under management is an important metric when considering using an investment advisory firm. However, it does have its limitations. Here are three essential items to remember:
- Investment Performance and Size: AUM should be a factor when assessing a fund's quality. However, you should also examine its investment and management experience. Small funds can produce outsize returns with a concentrated investment strategy.
- Investment Dilution: Funds can focus on attracting new capital and dilute your current holding in the fund, decreasing your total potential returns. You must find a “right sized” fund for its talent pool and investment expertise.
- Size-based Fees: While investment advisory fees tend to be inversely correlated to the size of the fund, you might be willing to pay more fees for funds that are actively deployed in a strategy aligned with your personal portfolio.
Example of AUM
For a simple example of AUM, consider a freelance financial advisor who has just started building a client list. They have three clients right now, each with a portfolio worth $1 million. In this scenario, the advisor's AUM would be $3 million.
Smart Summary
Assets under management (AUM) is the market value of all the investments, capital contributions, and withdrawals of a fund that manages money on behalf of clients. The Securities and Exchange Commission regulates funds based on the size of their AUM. While AUM can be a proxy for sophistication, liquidity, and prestige, you should ensure the fund’s investment philosophy ties into your overall investment approach.
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(1) U.S. Securities and Exchange Commission. Assets Under Management. Last Assessed January 14, 2025.
(2) FINRA. Investment Advisers. Last Assessed January 14, 2025.
