The Meaning of Assets Under Management (AUM) with Examples

The meaning of assets under management (AUM) is the total market value of all funds a financial institution or person manages on behalf of investors. The value of AUM is calculated by different methods depending on the firm. The metric is an important one in the money management industry.

What is the Meaning of AUM? 

The meaning of assets under management (AUM) is the total market value of all investments administered by a financial institution or an individual on behalf of clients. The term is sometimes referred to as total assets. Institutions include mutual funds, hedge funds, pension funds, venture capital firms, banks, brokerage firms, etc. An individual may be a registered investment advisor (RIA) or a portfolio manager.

The AUM varies daily depending on how much money flows into and out of a fund from new clients and redemptions. Additionally, equity and bond price fluctuations will affect the AUM value. Dividend payments will also change assets under management.

The United States Securities and Exchange Commission requires financial advisors and businesses with $110+ million in AUM to register with them. However, the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010 changed the thresholds and modified some registration rules. 

Generally, small- and mid-sized advisors with a lower value of AUM are not required to register with the SEC but must usually register with their state unless the state does not regulate advisors. Small-sized advisors are ones with less the $25 million of AUM. Mid-sized advisors have an AUM between $25 and $100 million.

How is AUM Used?

Assets under management is an essential metric because it is used to calculate advisor fees and thus impact revenue. Asset managers or financial advisors charge a percentage of AUM as a fee for their services. For example, an active mutual fund may charge an expense ratio of 0.50% of AUM. The expense ratio is sometimes on a sliding scale as a function of AUM, especially for financial advisors.

Another use of AUM is marketing. Assets under management is a measurement of success. Firms with higher AUM usually gather more clients and investable money, implying customers trust them more. Alternatively, a rising value suggests the firm has grown its client’s money. Furthermore, AUM is used to rank asset managers and banks, meaning it is a measure of prestige. Additionally, a portfolio or fund manager may be compensated based on AUM.

That said, some firms specialize in fewer clients with higher net worth, while others desire more clients with less investable money. This means many wealth managers have a minimum AUM. 

The two asset managers with the highest AUM are BlackRock and Vanguard. BlackRock is the number one provider of exchange-traded funds (ETFs), while Vanguard is the number one mutual fund company and the second for ETFs.

Example

From a specific mutual fund or ETF perspective, a larger AUM means they are more liquid. As a result, an ETF with a larger AUM often experiences higher trading volumes and less significant price swings. For instance, the Vanguard S&P 500 ETF (VOO) has a total AUM of $792.6 billion, meaning liquidity is high, and the average trading volume is 3.6 million shares. Hence, investors should easily be able to buy or sell shares of VOO during the trading day. 

How to Calculate AUM?

The precise meaning of AUM varies between firms. It depends on which funds are used in the calculation. Typically, it includes capital raised from investors, whether invested or in cash, referred to as discretionary funds. Assets under management may also have the firm’s own money added to it.

However, distinct types of companies will determine AUM differently. For example, a mutual fund will calculate it by one method, while a bank may use a slight variation. But the amount of discretion is limited because of the SEC’s rules on what can and can’t be included.

For example, in a balanced mutual fund, the AUM means money invested in stocks, bonds, and cash. The AUM will fluctuate daily based on three factors: net inflows or outflows, market action, and dividends.

New investors will add money to the mutual fund, while redemptions will reduce it. This shows up as a net inflow if positive or a net outflow if negative. Market action will result in equity and bond prices varying daily. In turn, this action will cause AUM to appreciate or depreciate. Dividend payments can lower AUM if they are not reinvested.

Final Thoughts on the Meaning of AUM

Assets under management is an important metric to understand, especially for retail investors putting money in ETFs and mutual funds. The AUM impacts fees paid to financial advisors and trading volumes. Additionally, money managers use it for marketing purposes and bragging rights because a higher AUM implies their clients trust them. It is also an indicator of investing performance.

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