What Is Portfolio Management?

Portfolio management is the art and science of making decisions about

investment mix and policy, matching investments to objectives, asset allocation
for individuals and institutions, and balancing risk against performance. Portfolio
management is all about determining strengths, weaknesses, opportunities and
threats in the choice of debt vs. equity, domestic vs. international, growth vs.
safety, and many other trade-offs encountered in the attempt to maximize return
at a given appetite for risk.

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Portfolio Management

Understanding Portfolio Management

Although it is common to use the terms "portfolio management" and "financial
planning" as synonyms, these staples of the financial services industry are not
the same. Portfolio management is the act of creating and maintaining an
investment account, while financial planning is the process of developing
financial goals and creating a plan of action to achieve them. Professional
licensed portfolio managers are responsible for portfolio management on behalf
of others, while individuals may choose to self-direct their own investments and
build their own portfolio. Portfolio management's ultimate goal is to maximize the
investments' expected return given an appropriate level of risk exposure.

Portfolio management, in general, can by either passive or active in

nature.. Passive management is a set-it-and-forget-it long-term strategy that
often involves simply tracking a broad market index (or group of indexes),
commonly referred to as indexing or index investing.

Active management instead involves a single manager, co-managers or a team

of managers who attempt to beat the market return by actively managing a fund's
portfolio through investment decisions based on research and decisions on
individual holdings. Closed-end funds are generally actively managed.
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.

The Basics of 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.

In corporate finance, investment management includes ensuring a company's

tangible and intangible assets are maintained, accounted for, and well-utilized.

According to an annual study by research and advisory firm Willis Towers

Watson and the financial newspaper Pensions & Investments, the investment
management industry is growing. When based on the combined holdings of the
500 biggest investment managers, the global industry had approximately
US$93.8 trillion assets under management (AUM) in 2018. This figure is up from
an estimated $79 trillion in 2017.

KEY TAKEAWAYS

 Investment management refers to the handling of financial assets and

other investments by professionals for clients
  Clients of investment managers can be either individual or institutional
investors.
 Investment management includes devising strategies and executing trades
within a financial portfolio.
 Investment management firms handling over $25 million in assets must
register with the SEC and accept fiduciary responsibility toward clients.
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 marketers and 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 flow and 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%.

Pluses and Minuses 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.
Pros

 Professional analysis
 Full-time diligence
 Ability to time or outperform market
 Ability to protect portfolio in down times

Cons

 Sizeable fees
 Profits fluctuate with market
 Challenges from passively managed vehicles, robo-advisors

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

1. The increase of robo-advisors—digital platforms that provide automated,

algorithm-driven investment strategies and asset allocation
2. The availability of exchange-traded funds, whose portfolios mirror that of a
benchmark index

The latter hinderance 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.
What is Asset Management?
Asset management is the direction of all or part of a client's portfolio by a
financial services institution, usually an investment bank, or an individual.
Institutions offer investment services along with a wide range of traditional and
alternative product offerings that might not be available to the average investor.

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Asset Management

Understanding Asset Management

Asset management refers to the management of investments on behalf of others.
The process essentially has a dual mandate - appreciation of a client's assets
over time while mitigating risk. There are investment minimums, which means
that this service is generally available to high net-worth individuals, government
entities, corporations and financial intermediaries.

The role of an asset manager consists of determining what investments to make,

or avoid, that will grow a client's portfolio. Rigorous research is conducted
utilizing both macro and micro analytical tools. This includes statistical analysis of
the prevailing market trends, interviews with company officials, and anything else
that would aid in achieving the stated goal of client asset appreciation. Most
commonly, the advisor will invest in products such as equity, fixed income, real
estate, commodities, alternative investments and mutual funds.

Accounts held by financial institutions often include check writing privileges,

credit cards, debit cards, margin loans, the automatic sweep of cash balances
into a money market fund and brokerage services.

When individuals deposit money into the account, it is typically placed into
a money market fund that offers a greater return that can be found in regular
savings and checking accounts. Account holders can choose between Federal
Deposit Insurance Company-backed (FDIC) funds and non-FDIC funds. The
added benefit to account holders is all of their banking and investing needs can
be serviced by the same institution rather than having separate brokerage
account and banking options.

These types of accounts resulted from the passing of the Gramm-Leach-Bliley

Act in 1999, which replaced the Glass-Steagall Act. The Glass-Steagall Act of
1933 was created during the Great Depression and did not allow financial
institutions to offer both banking and security services.
KEY TAKEAWAYS

 Asset management refers to the management of investments on behalf of

others.
 The goal is to grow a client's portfolio over time while mitigating risk.
 Asset management is a service offered by financial institutions catering to
high net-worth individuals, government entities, corporations and financial
intermediaries.
Example of an Asset Management Institution
Merrill Lynch offers a Cash Management Account (CMA) to fulfill the needs of
clients who wish to pursue banking and investment options with one vehicle,
under one roof. The account gives investors access to a personal financial
advisor. This advisor offers advice and a range of investment options that
include initial public offerings (IPO) in which Merrill Lynch may participate, as well
as foreign currency transactions.

Interest rates for cash deposits are tiered. Deposit accounts can be linked
together so that all eligible funds aggregate to receive the appropriate rate.
Securities held in the account fall under the protective umbrella of the Securities
Investor Protection Corporation (SIPC). SIPC does not shield investor assets
from inherent risk but rather protects those assets from financial failure of the
brokerage firm itself.

Along with typical check writing services, the account offers worldwide access to
Bank of America automated teller machines (ATM) without transaction fees. Bill
payment services, fund transfers and wire transfers are available. The MyMerrill
app allows users to access the account and perform a number of basic functions
via a mobile device. Accounts with more than $250,000 in eligible assets
sidestep both the annual $125 fee and the $25 assessment applied to each sub-
account held