Investment Management: More Than Just Buying and Selling Stocks (2024)

What Is Investment Management?

Investment management refers to the handling of financial assets and other investments—not only buying and selling them. Management includes devising a short- or long-term strategy for acquiring and disposing of portfolio holdings. It can also include banking, budgeting, and tax services and duties, as well.

The term most often refers to managing the holdings within an investment portfolio, and the trading of them to achieve a specific investment objective. Investment management is also known as money management, portfolio management, or wealth management.

Understanding Investment Management

Professional investment management aims to meet particular investment goals for the benefit of clients whose money they have the responsibility of overseeing. These clients may be individual investors or institutional investors such as pension funds, retirement plans, governments, educational institutions, and insurance companies.

Investment management services include asset allocation, financial statement analysis, stock selection, monitoring of existing investments, and portfolio strategy and implementation. Investment management may also include financial planning and advising services, not only overseeing a client's portfolio but coordinating it with other assets and life goals.

Professional managers deal with a variety of different securities and financial assets, including bonds, equities, commodities, and real estate. The manager may also manage real assets such as precious metals, commodities, and artwork. Managers can help align investment to match retirement and estate planning as well as asset distribution.

According to an annual study by research and advisory firm Willis Towers Watson, the investment management industry is growing. Based on the combined holdings of the 500 biggest investment managers, the global industry had approximately $131 trillion in assets under management at the start of 2022, an increase of more than 10% from the previous year.

Running an Investment Management Firm

Running an investment management business involves many responsibilities. The firm must hire professional managers to deal, market, settle, and prepare reports for clients. Other duties include conducting internal audits and researching individual assets—or asset classes and industrial sectors.

Aside from hiring marketersand training managers who direct the flow of investments, those who head investment management firms must ensure they move within legislative and regulatory constraints, examine internal systems and controls, account for cash flowand properly track record transactions and fund valuations.

In general, investment managers who have at least $25 million in assets under management (AUM) or who provide advice to investment companies offering mutual funds are required to be registered investment advisors (RIA).

As a registered advisor, they must register with the Securities and Exchange Commission (SEC) and state securities administrators. It also means they accept the fiduciary duty to their clients. As a fiduciary, these advisors promise to act in their client's best interests or face criminal liability. Firms or advisors managing less than $25 million in assets typically register only in their states of operation.

Investment managers are usually compensated via a management fee, usually a percentage of the value of the portfolio held for a client. Management fees range from 0.35% to 2% annually. Also, fees are typically on a sliding scale—the more assets a client has, the lower the fee they can negotiate. The average management fee is around 1%.

Advantages and Disadvantages of Investment Management

Though the investment management industry may provide lucrative returns, there are also key problems that come with running such a firm. The revenues of investment management firms are directly linked to the market's behavior.

This direct connection means that the company's profits depend on market valuations. A major decline in asset prices can cause a decline in the firm's revenue, especially if the price reduction is great compared to the ongoing and steady company costs of operation. Also, clients may be impatient during hard times and bear markets, and even above-average fund performance may not be able to sustain a client's portfolio.

Since the mid-2000s, the industry has also faced challenges from two other sources.

1. The growth of roboadvisors—digital platforms that provide automated, algorithm-driven investment strategies and asset allocation
2. The availability of exchange-traded funds (ETFs), whose portfolios mirror that of a benchmark index

The latter exemplifies passive management since few investment decisions have to be made by human fund managers. The former challenge does not use human beings at all—other than the programmer writing the algorithm. As a result, both can charge far lower fees than human fund managers can charge. However, according to some surveys, these lower-cost alternatives will often outperform actively managed funds—either outright or in terms of overall return—primarily due to them not having heavy fees dragging them down.

The pressure from this dual competition is why investment management firms must hire talented, intelligent professionals. Though some clients look at the performance of individual investment managers, others check out the overall performance of the firm. One key sign of an investment management company's ability is not just how much money their clients make in good times—but how little they lose in the bad.

Investment Management Firms

The top 20 investment management firms control nearly half of all the global assets under management, according to the Willis Towers Watson report mentioned earlier—some $65 trillion worth.

As of year-end 2022, the U.S., the five leading asset management firms include, in descending order, were:

1. BlackRock ($8.6 trillion)
2. Vanguard Group ($8.1 trillion)
   
3. Fidelity Investments ($3.9 trillion)
4. The Capital Group Cos. ($2.2 trillion)
5. PIMCO ($1.7 trillion).
   

The Current State of the Investment Management Industry

The investment management industry is facing challenges, changing client expectations, and evolving technologies that will continue to be huge factors throughout 2023 and beyond. Increased competition from fintech firms will keep fee compression going in the industry, which is good for consumers but cuts into profits. Big data and AI will also continue to be drivers of innovation in investment management, helping to increase the effectiveness of strategies like smart beta.

Here are some of the key findings from Deloitte’s 2023 investment management outlook:

• The industry is expected to grow at a rate of 5.6% CAGR from 2023 through 2027.
• The industry is expected to reach $147.4 trillion in AUM by 2025.
• The industry is expected to continue longer-term trends towards passive investing, smart beta/factor investing, and pure alpha investing.
• The industry is expected to see increased competition among active managers.

Investment Management Process

Investment managers typically design a portfolio with the client's interests in mind. This can include meeting with the clients to discuss their investment goals and risk tolerance. Based on the client's feedback, the investment manager then buys the assets and securities to fill the client's portfolio.

From then on, the manager will occasionally rebalance the portfolio as the market changes. The frequency depends on their agreement with the client—in some cases, it may be assessed once a year, once a quarter, or even every month. The more actively a portfolio is being managed, the higher the management fees.

Investment managers may also provide advice to their clients in other areas, such as how to save for college or retirement.

The Bottom Line

Investment management, also known as asset management or portfolio management, is a service that helps investors achieve their financial goals and objectives through the professional management of their securities and assets. By employing various investment strategies, conducting thorough research, and consistently monitoring market trends and portfolio performance, investment managers enable clients to optimize their investments and navigate the complexities of the financial markets. As fees and investment approaches vary, it is essential for investors to carefully evaluate their options and choose an investment manager whose expertise, strategies, and fee structures align with their unique financial goals and risk tolerance. Ultimately, a well-managed investment portfolio can significantly enhance an investor's long-term financial security and wealth.