Assets under management (AUM) refers to the market value of the assets a financial institution has discretion over on behalf of clients or investors. Increasing AUM is a primary goal of most brokerages, mutual funds and financial advisor firms, and many will use a high AUM as a selling point when marketing themselves to potential investors. How certain institutions define or calculate their AUM can differ slightly. So, it’s important to understand these differences before you use a firm’s AUM to make any decisions.
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What Is AUM?
While some institutions have differing methods of formulating it, assets under management or AUM is the value of the investments that some entity is in charge of managing, typically on behalf of a client or many clients. The AUM is most important when considering a financial advisor to help you invest or when looking into a potential mutual fund to invest into.
Where institutions most frequently differ in formulating AUM is regarding which specific investments should be included in the calculation. As a general rule, AUM refers only to the values of the funds that an institution directly manages on behalf of its clients. In its instructions to financial advisors for filling out Form ADV, the Securities and Exchange Commission (SEC) says to only include “the securities portfolios for which you provide continuous and regular supervisory or management services.”
Some money managers also include client bank accounts and separate mutual fund shares in their calculations, since they advise clients on how much to keep in the bank and how much to put in mutual funds. This is sometimes referred to as assets under advisement.
Usually, when you hear about AUM, it’s referring to the entirety of the assets that the advisor or broker is managing at any given time. You might also hear your advisor use the term to refer to the value of the investments she’s managing for you alone. This is often the case when discussing financial advisor fees, for example. An advisor may charge 2% of your assets under management for her services. That’s not referring to all of the assets she manages. Rather, it refers to the assets you’ve placed in her care.
Why AUM Matters
Among financial advisor firms, mutual funds and other financial institutions, AUM is quite a significant metric. These institutions will tout a high AUM as an indicator of success, particularly if it has grown over time. In fact, it’s frequently included in any sales or marketing materials for financial institutions.
The reasoning behind this claim is easy enough to understand. If a financial advisor firm has a larger AUM than a competitor, then that firm will claim that more people trust the firm to grow their investments than they trust the competitor. And if a firm’s AUM has grown over time, that’s proof that either the firm has attracted more customers, that the firm has grown its existing customers’ money or both.
AUM isn’t the whole story of a financial institution, however. A firm with two high-net-worth clients, each with $5 million in assets, will have more in AUM than a firm with 25 clients, each with $100,000 in assets. However, the second firm has seen 23 more people choose it to handle their money than the first firm. It’s up to you whether you more highly value the firm that manages a large volume of clients, or the firm that is adept at managing the assets of high-net-worth clients.
AUM is also a key determinant for whether financial advisory firms must register with the Securities and Exchange Commission. Firms with more than $110 million in AUM are required by the SEC to disclose AUM each year, among other information, in a publicly accessible document called a Form ADV. Firms with less AUM are regulated by state security regulators. Before being required to register with the SEC, firms must register with their state regulator.
How AUM Can Determine Fees
AUM-based fees are a common way financial advisors, wealth managers, mutual funds and exchange-traded funds generate revenue, calculated as a percentage of AUM.
According to AdvisoryHQ, the average AUM-based fee for financial advisors ranges from 0.59% to 1.18% annually, depending on the advisor’s services and the size of the client’s portfolio. For example, an advisor managing $10 million in AUM with a 1% fee structure would earn $100,000 per year. As AUM grows, either through investment performance or new client acquisitions, the advisor’s income increases proportionally.
Mutual funds calculate expense ratios based on their AUM, reflecting the yearly costs of operating the fund as a proportion of its total managed assets. A fund with an expense ratio of 0.75% and $1 billion in AUM would collect $7.5 million annually to cover management fees, administrative costs and other expenses. Investors indirectly pay these fees, which are deducted from fund returns.
How to Calculate a Firm’s Assets Under Management
Different institutions have varied methods of calculating AUM. Some of these differences are structural — a mutual fund will calculate differently than a financial advisory firm. Some, as well, are based on preference. For example, some institutions will have a looser definition of which assets count under their discretion. This isn’t to say firms have total control over how they define AUM. The SEC also has rules that narrow down what can and can’t be included.
When it comes to actually calculating AUM, some sort of portfolio management software will do the work for you today. Where it may have involved a fair bit of manual number crunching in the past, computers handle calculating value and adding it all up now. Mutual funds, especially large funds, are constantly updating their AUM, which they may also refer to as net assets.
Because the calculation of AUM involves determining the market value of assets, any institution’s AUM will naturally fluctuate on a daily basis. This is because the value of investments like stock equity will fluctuate with the respective stock price. A mutual fund could start the day with $190 billion, have a great day at the office and end the day with $192 billion, simply because the existing assets increased in value.
Example of AUM for Mutual Funds
For a better understanding of how AUM works outside of a financial advisory firm, let’s take a look at a mutual fund with a nice mix of investments. Let’s say that the fund has a portfolio that consists of a value of $5 billion in stocks, $1 billion in government bonds, $2 billion in cash and $2 billion in corporate bonds. The total value of the fund’s assets under management would be $10 billion. The table below show’s this same information in a more digestible way.
AUM Breakdown Example
| Investment Type | Asset Value |
| Stocks | $5 Billion |
| Government Bonds | $1 Billion |
| Cash | $2 Billion |
| Corporate Bonds | $2 Billion |
| Total | $10 Billion |
Example of AUM for Financial Advisors
Both discretionary and non-discretionary assets contribute to a financial advisor’s total AUM, as they reflect the overall value of client funds managed by the advisor. However, the level of control the advisor has over these assets can impact their strategy and fee structures.
Consider a financial advisor who manages $50 million in client assets. Of this total, $30 million is under discretionary management, meaning the advisor has the authority to make investment decisions without prior client approval. The remaining $20 million is under non-discretionary management, where the advisor provides recommendations, but clients must approve each transaction.
Despite not having full discretionary control over the $20 million client assets, they still count toward the advisor’s total AUM, which is reported to the SEC.
Bottom Line
Assets under management can mean slightly different things depending on the context in which you see them. It could refer to the value of the total investment in a mutual fund, the market value of assets a financial advisor controls or the amount of money you have invested in a firm. Further, AUM can sometimes be helpful in determining the reputation of a financial institution. However, it’s best to refrain from using that as the only factor you review.
Tips for Finding a Financial Advisor
- While AUM can be a good indicator of trust with a potential financial advisor, it’s not everything. There are a number of items to look through when trying to find a financial advisor. Luckily, finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- A financial advisor’s assets under management are an important factor to consider when choosing whether to work with a firm. However, arguably more important is how they approach investing. While firms have overarching investing principles (for instance, favoring long-term investing), most will seek to strike a balance between equities, fixed income, and cash that aligns with your goals and risk tolerance. SmartAsset’s asset allocation calculator can help you do just that.
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