In 2020, the global asset management industry grew by 11 percent with more than $100 trillion in assets now held with myriad firms that comprise 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.
There are hundreds of asset management companies in the United States, but what is an asset management company, and how do they differ from the other financial services firms available to consumers?
What is an asset management company?
Asset management firms pool investor money and provide a wide range of assets for them to put that capital to work. These firms often build and administer mutual funds, exchange traded funds (ETFs), provide access to bond markets, real estate, private equity and more. Essentially, they design financial products that make it easier for institutions and individual investors alike to build and manage diversified investment portfolios. 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.
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 trove of third-party and proprietary research and forecasting tools to help investors make informed decisions within 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.
Does an asset management company differ from a wealth management company?
Asset management and wealth management 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. You can find every tool and material you could possibly need for a 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’re handy. 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. 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.