Asset Management

What is Asset Management?

Asset management refers to systematic approach to the governance and realization of value from the things that a group or entity is responsible for, over their whole life cycles. It may apply both to tangible assets (physical objects such as buildings or equipment) and to intangible assets (such as human capital, intellectual property, goodwill and/or financial assets). Asset management is a systematic process of developing, operating, maintaining, upgrading, and disposing of assets in the most cost-effective manner (including all costs, risks and performance attributes).

The term is commonly used in the financial sector to describe people and companies who manage investments on behalf of others. Those include, for example, investment managers that manage the assets of a pension fund.

It is also increasingly used in both the business world and public infrastructure sectors to ensure a coordinated approach to the optimization of costs, risks, service/performance and sustainability.

What Does Asset Management Mean?

In its broader definition, asset management is an organized method of introducing, operating, preserving, improving and disposing of various assets in a cost-effective way. Hence, this may refer to the management of tangible assets such as property, land, and equipment and intangible assets such as securities, bonds, intellectual property or human capital.

Financial institutions offer asset management services using both traditional and alternative investment vehicles such as credit cards, debit cards, money market fund accounts and brokerage services. Through assets under management (AUM), a financial institution determines the total funds managed on behalf of its clients as well as the level of risk and performance per each type of asset. The clients of a management institution may be individual investors, but most of the times they are institutional investors such as pension funds.

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.

How Does Asset Management Work?

An asset management company serving as an advisor to a client has one overriding goal — to substantially grow its client’s portfolio. Asset managers are often hired by institutional investors like pension funds, corporations, and financial intermediaries, as well as high net worth individuals.

Asset managers conduct research, interviews, and statistical analyses of companies, markets, and trends in order to determine what investments to make or avoid on behalf of their clients. Asset managers do not generally need “asset manager” licenses, though the firms that hire these managers often require registration with one or more exchanges and/or the National Association of Securities Dealers (NASD).

In corporate finance, asset management requires finding ways to maximize a company’s value by managing fixed and intangible assets to be more reliable, efficient, or cheaper — including evaluating asset financing options, asset accounting methods, productions operation management, and maintenance discipline.

Example

Michael holds an AM position in a real estate firm. His duties include conducting research on the real estate market and performing statistical analysis on the trends based on different variables, including location, income level, age, and ethnicity. His goal is to maximize the performance of each individual portfolio of real estate assets of each of his clients, seeking to achieve the maximum gain.

Michael is familiar with all types of real estate, i.e. residential properties, commercial properties, and land. Unlike most of his colleagues, Michael applies a comprehensive real estate AM strategy to capitalize on relevant investment opportunities. In addition, he is familiar with asset accounting methods, mainly the cost method and the market value method, a fact that makes him one of the best in his company. Michael is not certified by any financial management organization, but he is officially registered with the National Association of Securities Dealers (NASD).

Why Does Asset Management Matter?

Although most financial jobs don’t carry an official “asset manager” title, the truth is that nearly everyone in the finance world is an asset manager.

As a result, most financial professionals are judged on their ability to successfully manage assets – either directly or indirectly. Proficiency in asset management makes the difference between a mediocre and a stellar performance at both the individual and corporate levels.

There are several reasons why businesses should be concerned about asset management, including:

1. Enables a firm to keep tabs on all of its assets

The process makes it easy for organizations to keep track of their assets, whether liquid or fixed. Firm owners will know where the assets are located, how they are being put to use, and whether there are changes made to them. Consequently, the recovery of assets can be done more efficiently, hence, leading to higher returns.

2. Helps guarantee the accuracy of amortization rates

Since assets are checked on a regular basis, the process of asset managment ensures that the financial statements associated with them are kept updated.

3. Helps identify and manage risks

Asset management encompasses the identification and management of risks that arise from the utilization and ownership of certain assets. It means that a firm will always be prepared to counter any risk that comes its way.

4. Removes ghost assets in the company’s inventory

Instances exist where lost, damaged, or stolen assets are still recorded on the books. With a strategic asset management plan, the firm’s owners will be aware of the assets that have been lost and, thus, not keep recording them in the books.

The Asset Management “Paradigm”

  • The capacity to produce output of value to our customers is directly related to sustained performance of our assets using the process of triple bottom line evaluation of the services provided utilizing environmental, social and economic analysis.
  • Failures in the asset base directly affect system performance.
  • Sustained system performance is the result of successfully managing failure within the asset base.
  • The management of failure in the asset base is highly constrained by cost; that is, customers are not typically willing to pay for zero likelihood of failure.
  • Different assets have different probabilities of failure, as determined by age, materials and assembly processes, operating environment, demand/usage and maintenance.
  • Failures vary substantially in their consequence to the organization, that is, in terms of the production of valued output to the customer.
    Investment in assets (their acquisition, operation, maintenance, renewal and disposal) should be guided by the likelihood of failure and its consequence to the customer and regulator.
  • The more we understand about our assets – the demand for our assets, their condition and remaining useful life, their risk and consequence of failure, their feasible renewal options (repair, refurbish, replace) and the cost of those options – the higher the confidence we can have that our investment decisions are indeed the lowest life cycle cost strategies for sustained performance at a level of risk the community is willing to accept.

Summary

  • Asset management means the managing financial assets with the aim of balancing the costs and capitalizing on investment opportunities.
  • 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.

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