Lesson 11: Asset Management Part 1

Summary

This lesson on banking 101 covers the essentials of asset management, focusing on how financial assets are managed by legal entities. The content differentiates between investment management and asset servicing, and explores the roles of various players in asset management, including advisors, broker-dealers, and custodians. It explains concepts such as discretionary and non-discretionary advisory services, separately managed accounts (SMAs), and pooled investment vehicles like mutual funds and hedge funds. The lesson also touches on wealth management and private banking, which cater to high-net-worth individuals, offering specialized financial services alongside core banking products.

Takeaways

• 😀 Asset management involves managing financial assets on behalf of others, divided into investment management and asset servicing.
• 😀 Investment management focuses on allocating capital to generate returns based on an investor’s risk appetite.
• 😀 Asset servicing ensures accuracy in execution, with services like settlement and dividend posting on investments.
• 😀 Banks' asset management divisions mainly focus on managing assets for clients as agent intermediaries, not as owners of the assets.
• 😀 There are three categories of asset managers: asset owners, principal intermediaries, and agent intermediaries, with banks falling under agent intermediaries.
• 😀 Investment management products aim to grow capital, while asset servicing products help execute and manage assets after investments are made.
• 😀 The investment life cycle includes decision-making on where to invest, formulating investment packages, executing trades, and servicing the resulting positions.
• 😀 Alpha and beta are key metrics in traditional investing: Alpha measures returns compared to the market, while beta measures volatility relative to the market.
• 😀 ESG investing adds environmental, social, and governance goals to traditional financial returns, influencing how assets are managed.
• 😀 Wealth management and private banking cater to high-net-worth individuals, offering a broader range of financial products and services, including tax management, estate planning, and asset protection.

Q & A

What are the four product categories within banking covered in the course?

The four product categories within banking covered in the course are Consumer Banking, Wholesale Banking, Capital Markets Products, and Asset Management Products.

How does Asset Management differ from Investment Management and Asset Servicing?

Asset Management refers to the professional management of financial assets on behalf of others. Investment Management focuses on allocating capital to assets to generate returns based on an investor's risk appetite, while Asset Servicing facilitates the investment process, focusing on executing and managing the positions with accuracy and cost-efficiency.

What is the purpose of Asset Servicing products?

The purpose of Asset Servicing products is to facilitate the investment process and manage the resulting asset positions, such as executing trades, ensuring accurate settlement, and handling ongoing tasks like dividend payments.

Who are the key players involved in Asset Management?

Key players in Asset Management include individual investors, legal entities like pension funds, corporate investors, financial intermediaries such as banks, professional money managers, and advisory firms.

What is the role of a financial adviser in Asset Management?

A financial adviser in Asset Management provides investment advice and makes decisions on behalf of clients regarding their asset allocations. These advisers can serve clients on either a discretionary or non-discretionary basis, managing investments based on the client's preferences or specific strategies.

What is the difference between a broker-dealer and a custodian?

A broker-dealer executes trades based on instructions from clients or advisers, while a custodian holds and safeguards assets on behalf of investors. Both roles fall under Asset Servicing, but they have distinct functions in the investment process.

What is the significance of 'Assets Under Management' (AUM)?

Assets Under Management (AUM) refers to the total value of financial assets being managed by a firm or individual. It includes all cash and securities that are invested on behalf of clients, and it serves as a key metric for assessing the size and success of an investment management firm.

How do Robo-Advisors work in Investment Management?

Robo-Advisors are algorithm-based platforms that provide automated investment advice. They assess an individual's demographics, such as age and risk tolerance, and recommend a tailored asset allocation across equity and debt mutual funds, making investment decisions on behalf of clients.

What are the primary differences between separately managed accounts (SMAs) and pooled investment vehicles?

Separately Managed Accounts (SMAs) are tailored to the individual investor’s needs, offering customization in terms of asset allocation, risk tolerance, and ESG preferences. Pooled investment vehicles, such as mutual funds or hedge funds, combine the investments of multiple investors, often at a lower cost but with less personalization.

What are some common revenue models in Investment Management?

The main revenue models in Investment Management are fees calculated as a percentage of assets under management (AUM), performance-based fees earned on gains, and fixed fees. Additionally, advisers may earn commissions from fund sponsors, though this model has become less common due to conflicts of interest.