Assets Under Management (AUM): What It Is, How It’s Used

Assets under management (AUM) are securities portfolios (such as stocks, bonds, mutual funds and ETFs) that an investment advisor continuously and regularly supervises or manages. As a client, your AUM is the amount of your money that your investment advisor manages for you. AUM is sometimes viewed as a measure of an advisor's scale and business quality, but is not necessarily a direct measure of investment skill. Investment advisors often base their fees on a client's AUM.

How to calculate assets under management (AUM)

Assets under management (AUM) fees are usually calculated as:

Annual fee = AUM × fee rate

Where:

• AUM = value of assets managed

• Fee rate = annual percentage charged by the advisor

For example, if your portfolio value is $2,000,000 and the advisory fee is 1%, then the annual advisory fee is $2,000,000×0.01 = $20,000/year.

Does AUM matter?

AUM is one of the primary ways clients can evaluate an investment advisor, but as noted earlier, it’s not necessarily a direct measure of investment skill. Instead, AUM is often used to measure four things.

1. Firm size and market position

Higher AUM often signals that an advisor has more clients, institutional credibility, a long operating history or a strong network. An advisor with $50 billion of AUM, for example, is generally viewed differently from a $50 million startup advisor in terms of infrastructure and resources. But an advisor with a larger AUM does not automatically mean that advisor generates better returns for clients.

» Learn how to choose a financial advisor

2. Financial stability of the advisor

An advisor's revenue is often tied directly to AUM. For example, a 1% fee on $1 billion of AUM generates about $10 million of annual gross revenue.

That's why people may use AUM to determine an advisor's recurring revenue, potential profitability, ability to hire staff, ability to handle compliance and cybersecurity or ability to survive downturns. Institutional investors care a lot about these factors.

3. Operational sophistication

Larger AUM may indicate that the advisor has stronger compliance systems, risk management, trading operations, reporting infrastructure or custody relationships. Institutional consultants frequently use AUM as a proxy for an advisor's operational robustness.

4. Regulatory classification

The U.S. Securities and Exchange Commission uses regulatory AUM thresholds to determine things such as whether an advisor has to register with SEC or with the state, or other reporting obligations. An advisor's AUM can also influence the SEC's examination priorities.

In general, state authorities regulate firms with less than $100 million in AUM; the SEC regulates firms with $100 million or more in AUM (there are some exceptions)^[1].

» Know the difference between a fee-only advisor and a fee-based advisor

Limitations of using AUM

AUM can be misleading, because market swings can dramatically increase or decrease the value of assets. For example, a bull market can inflate AUM. Also, aggressive marketing on behalf of the advisor to gain clients can increase AUM.

Notably, very large AUMs may hurt returns if the volume of the advisor's trades affects share prices or if the manager cannot invest all the capital in high-quality investments and must hold more cash than desired. That's why some investment management firms intentionally stay small. In fact, a small specialist manager may outperform a massive asset manager.

» Learn more: How much does a financial advisor cost?