A Guide to Calculating Assets Under Management vs. Assets Under Advisement

A Guide to Calculating Assets Under Management vs. Assets Under Advisement
A Guide to Calculating Assets Under Management vs. Assets Under Advisement

Regulatory authorities have been paying close attention to discrepancies in filings and regulations and are closely monitoring assets under management (AUM). 

Businesses are being extra careful in calculating their regulatory assets under management when their annual updates are due. 

In the process of doing this calculation, a fundamental mistake that firms often make is not including their assets under advisement in their assets under management calculation. 

There is a possibility that firms report the wrong assets under management, give an overestimation of assets, or do a misclassification of assets.

Understanding Assets Under Management

The total market value of hedge funds or money that a firm manages on behalf of a client is called assets under management. 

These investments include the sum of the market value of bank deposits, cash, mutual funds, and other such investment instruments. 

For a financial institution, assets under management can represent the sum total of all the assets it manages for all the clients or the sum of all the assets it manages for a single client. It includes the funds the financial institution can use to make transactions for its clients. 

Understanding Assets Under Advisement

Assets under advisement are the assets for which a financial institution offers consultation, but it does not possess the discretionary authority over these assets. It also includes assets for which the firm offers advice but does not arrange or bring into effect the transaction. 

These services include consulting services, including financial planning, where the assets are used to gain a detailed perspective of the client’s financial status only for information purposes and not for placing a trade. 

All those assets that a financial institution monitors for a client on a non-discretionary basis and for which it may make recommendations are also a part of assets under advisement. For such assets the firm only makes recommendations and is not responsible for the purchase or sale of such instruments. The client is then the responsible party in this case. 

Assets under advisement are disclosed as a separate asset figure than assets under management in the AUM reporting

It is not mandatory to disclose the assets under advisement, but some firms include them to let the prospective clients get an all-encompassing picture of the firm’s responsibilities. 

Firms that decide to include their assets under advisement in their AUM reporting need to ensure a clear distinction between the assets under advisement and the regulatory assets under management. 

Calculating the Assets Under Management and Assets under Advisement

Firms need to consider the value of every single asset in the securities portfolio for which it offers regular and continuous supervisory or management services in the assets under management calculation. 

The assets for which the asset managers merely provide advice are not a part of the regulatory assets under management and must not be included in the calculation. They can only be reflected separately in the report if the manager deems fit.

To calculate the value of a single securities portfolio, the firm must add only the part of the entire portfolio for which it provides regular management or supervisory services. 

To do this calculation, firms need robust portfolio management software that can calculate the assets under management for the firm. If the calculation is required for a portion of only a selected few assets managed by the firm, the software should be able to include only the value of those particular assets. 

Often the wealth managers in these firms seek external support in calculating their assets under management. 

The asset managers at the financial firms need to keep a proper, dated, and explanatory record of how they calculated the assets under management they reported. They need to strike a balance between the firm’s document retention policy and th3e regulatory policy requirements. 

In most cases, the firms are required to maintain these records for a period of five years, and they must ensure that the reported assets under management should match the calculations represented in the documents maintained by the firm.

When asset managers file the annual updates, they need to carefully differentiate between assets under management and the assets under advisement based on the clients’ assets and the services offered by the firm for those assets.

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