AUM stands for assets under management and is a measure how much money an asset manager, such as personal wealth adviser or mutual fund company, manages on behalf of clients. Generally, the more money an institution manages, the more resources and personnel, such as financial analysts and sector specialists, it can employ. Knowing how AUM is calculated will help you put the figure in perspective and properly evaluate the credentials of a wealth manager.
Assets under management is the total market value of all securities portfolios for which an asset manager provides continuous and regular supervisory or management services. Since the value of most financial assets changes on a daily basis, the AUM for an investment manager also changes daily. In addition, transfer or withdrawal of a client portfolio will also result in variations. It is important for investors to understand the exact definition and calculation of AUM, since asset managers tend to use AUM as a measure of their success. The addition of new client portfolios as well as appreciation of existing portfolios, both of which point to success of the manager, result in an increase in AUM.
The portfolio value of a client is counted toward AUM only if it fits the definition of "securities portfolio" set forth by the Securities and Exchange Commission, which mandates that at least half of the total value of the account must consist of securities. Assets such as real estate or precious metals such as gold or silver are not considered securities. Cash, however, is considered a security. Accounts belonging to non-U.S. people and funds that are managed for free, as well as assets within a private fund are all counted as securities.
Continuous and Regular Supervisory Service
Even if the portfolios individually meet the definition of securities portfolios, the asset manager must provide continuous and regular management services for these portfolios to be included in the AUM. The SEC uses the term "ongoing supervisory and management services," meaning that occasionally providing advice for an account does not count. In some instances, the asset manager may not have direct discretion over an account and cannot enter buy and sell orders for the financial assets in the portfolio. Such assets are usually deposited in another institution. However, if the asset manager has an ongoing duty to select or make recommendations for purchases and sales of securities, and is also responsible for arranging the purchase or sale, the portfolio value is counted toward the total.
Calculting the AUM
Once you have determined that a particular portfolio under management does qualify for inclusion, you will have to calculate the individual portfolio value. The value of a portfolio equals the total value of individual assets in the portfolio. The value of an asset equals the number of the asset in the portfolio multiplied by the most recent market price. If, for example, a portfolio contains 250 units of Apple stock that's trading at $110, the value of Apple stock equals 250*$110, or $27,500. After performing this calculation for each asset in the portfolio, add up the figures to arrive at the portfolio value. You then add up the values of all qualifying portfolios to find the AUM.