What Is an Asset Management Company?

In 2020, the global asset management industry grew by 11 percent with more than $100 trillion in assets now held by a collection of firms in the sector, according to a recent analysis by the Boston Consulting Group.  

The sheer scale of this industry is hard to wrap your head around, as there are hundreds of asset management companies in the United States alone.  

But what exactly is an asset management company, and how do they differ from the other financial services firms available to consumers? We’ll help you understand what asset management companies do, how they work and share some pros and cons they bring to the table so you can decide what role, if any, they play in your financial plan.  

What does an asset management company do?  

An asset management company (AMC) is an investment firm that pools money together from clients and uses that money to make a variety of investments for both institutions and retail investors. Often, you’ll hear asset management companies referred to as money managers or money management firms. Hedge funds, private equity funds and emerging fintech companies that automate investing can all be considered asset management companies.  

Who can invest with an asset management company? 

Criteria for working with an asset management company varies by the type of company. Investments such as index funds, exchange traded funds (ETFs) and mutual funds that are built and administered by asset management companies are generally available for all investors to invest in. That being said, many of the investments offered require a minimum initial investment, so you will need to meet those requirements in order to purchase shares of the fund. 

Other asset management companies only offer or provide access to investments available to accredited investors and/or Qualified Purchases (QPs) —individuals that meet income and/or net worth requirements—as well as those that meet certain professional criteria indicating they have the experience and understanding to invest in complex assets. Hedge funds and private equity funds, for example, are typically only available to accredited investors or (QPs).  

How do asset management companies work?  

Asset management firms pool investor money and put funds to work by making make a wide range of investments with the money.  These firms often build and administer mutual funds, exchange-traded funds (ETFs) and index funds as well as provide access to bond markets, real estate, private equity and other types of investments.  

Essentially, they design financial products that make it easier for institutions and individual investors alike to build and manage diversified investment portfolios.  

Asset management companies excel at building products or technologies that simplify investing. Rather than clients setting up their own bond trading desk or managing a portfolio of thousands of stocks, an asset management company will use its scale and in-house expertise to design a fund that buys and sells these investments. Or, they may offer technology that provides access to these markets.  

In exchange, asset management companies may charge fees on the funds they oversee for clients. Given some asset management companies are very large, these companies often leverage scale advantages to keep costs lower for clients, which allows some firms to offer no-fee funds or commission-free trading.  

In addition to investable products, most asset management firms provide access to a range of third-party and proprietary research and forecasting tools to help investors make more informed decisions about their portfolios—think retirement calculators, automated portfolio rebalancing and more.  

Whether it’s a Fortune 500 company or a single investor just getting started with a small sum, there’s an asset management company that’ll cater to their needs—hence the massive scale of this industry. 

How does an asset management company differ from a wealth management company? 

Asset management and wealth management are terms that are commonly used interchangeably, but there’s a nuanced difference in terms of their focus. 

Think of an asset management company as the financial equivalent of a hardware store. If you’re handy and could build your own house, you can find every tool and material you could possibly need for the project at a hardware store. An asset management company, similarly, may have just about every financial tool you could need for an investment portfolio. In this way, an asset management company is a more product-focused business. They provide a vast array of investment tools that you can use to grow your wealth, which is incredibly useful if you know what you’re doing. 

But what if you need a little more help? That’s where a wealth management firm differs. 

Think of a wealth management firm as the financial equivalent of a general contractor. A general contractor will purchase tools and materials from a hardware store (they often have their own equipment, too), but they’re also charged with overseeing the construction site, keeping things on budget, and coordinating a host of sub-contractors to serve their customer. That’s the aim of a wealth management firm. It’s like hiring someone to build your house for you. 

In addition to building an investment portfolio, a wealth manager will also take care to protect your assets and develop a multigenerational plan that’s tailored to you and your family. That’ll often include other financial tools that aren’t tied to markets, such as whole life insurance, to give you more optionality and stability. It may also include a wider range of services, including business succession planning, coordinating your legal and tax advisors, financial advice and estate planning.  

What’s clear is wealth management is a highly personalized, diversified service that goes well beyond channeling capital into investable assets. 

For example, a wealth manager may coordinate the activities of your attorney or accountant to ensure the “team” is aligned with your plan. They’ll help you build in strategies to optimize taxes now and in the future, or they’ll walk you through a business succession plan. Wealth management looks at you and your entire financial life to provide flexible options to grow, protect and enjoy what you’ve earned. It’s not uncommon for a relationship between a client and their wealth manager to span decades.   

To be fair, there can be overlap between an asset management company and a wealth management company. Both may offer in-house financial products they’ve built for clients or concierge wealth planning services. However, we believe the difference lies in where these firms choose to specialize, which ultimately dictates where talent and resources will be funneled. 

Pros and cons of asset management companies 

Before choosing to invest through an asset management company, it’s important to have a sense of its strengths and weaknesses.  

What are the benefits of asset management?  

Economies of scale 

There are cost benefits to using a larger AMC: Its cost of doing business (making trades, etc.) is much lower than the cost would be for an individual investor, which gives investors access to investments they may not have been able to access on their own.   

Specialized expertise 

When building and managing a portfolio, asset management companies will often hire experts in specific areas of the market who will inform the fund’s strategy. 

Legal liability 

Most asset management companies are fiduciaries, which means they are legally required to act in the best interests of their clients. Failure to do so can result in criminal liability, which offers some protection to investors.  

What are the drawbacks of asset management?  

Management fees 

Regardless of how well (or poorly) a fund performs, investors typically pay a fund management fee. Management fees for ETFs and index funds are usually low (and there are even some with no fees). Fees for mutual funds, private equity funds and hedge funds are typically much higher.  

High account minimums 

Hedge funds, private equity funds and mutual funds usually require investors to meet account minimums in order to invest. With mutual funds, this is usually a few hundred to a few thousand dollars. With hedge funds and private equity funds, this can be anywhere from $100,000 to more than $1 million. Though this is not always the case, as there are some no-minimum funds out there, too.  

No guarantee of outperforming the market 

While the goal of most hedge funds, private equity funds and many mutual funds is to track an index or outperform a particular benchmark, there is no guarantee that this will happen—regardless of whether you invest with a wealth management firm or an asset manager. That means you may be paying a high management fee just without outperformance.  

Should you use an asset management company for your plan?  

As most people invest, they'll likely take advantage of an asset management company in one form or another. Index funds and ETFs, for example, can be an excellent way for new investors to quickly diversify their portfolios and a great investment for advanced investors to diversify their portfolio. And for the right investor, hedge funds and private equity funds may offer growth opportunities that would be hard to come by elsewhere.  

When making any investment decision, it’s important to have a sense of how that decision fits into your larger financial plan. A Northwestern Mutual financial advisor can show you how a range of financial options—including a mix of traditional and nontraditional investments—can help grow your wealth over time and work with other elements of your financial plan to achieve your life goals.  

  

All investments carry some level of risk, including loss of principal invested and no investment strategy can guarantee a profit or protect against loss.