What is Investment Management?

Investment management is like managing a restaurant…

The manager at a restaurant has to handle everything related to the restaurant, including buying ingredients, deciding what should go on the menu, and how to decorate the seating area. Similarly, investment management encompasses a variety of tasks related to a person’s investment portfolio and other finances. An investment manager helps build their client’s portfolio, handles buying and selling securities and creating an investment strategy.

Investment management is the process of handling a financial portfolio, which typically includes an individual’s brokerage accounts. It can also include giving advice to someone on how they should manage their financial situation, such as savings goals or estate planning.

Some individuals handle their own investment management, while others hire an outside party to manage investments on their behalf. Many people turn to financial professionals for some aspects of investment management, such as advice on individual investment decisions or how to structure their portfolio.

Investment managers charge a fee for their services, typically a percentage of the assets under their management. For example, someone who has an investment manager handling their $1M portfolio may pay a fee of 1%, or $10,000 annually.

In recent years, robo-advisors (automated programs that can manage investments) have gained popularity. Robo-advisory companies use software and industry knowledge to offer a more automated approach to investment management.

The primary objective of investment management is to help the investor accomplish their financial goals. These goals vary depending on the investor. Investors can have many different goals for investing, each of which may demand a different approach and strategy.

For example, some investors are saving for retirement, building a portfolio that they hope will grow and can sustain their lifestyle when they stop working. Depending on the investor’s age, goals, risk tolerance, and other factors, this may call for a mix of securities (like stocks and bonds) that suit their financial plan and style. Some investors may reduce their portfolio’s risk level over time, to help mitigate significant losses as they approach retirement.

Other investors primarily want to produce income from their investments. Investment management in this scenario may focus on building a diversified portfolio of dividend-paying stocks, bonds, and other assets that produce cash flow. Some investment strategies are aimed at hedging against losses while making sure the asset’s don’t lose value to inflation.

Investment management companies help their clients achieve their financial goals. Typically, their services encompass a combination of advice and various tasks related to managing an investment portfolio.

For example, an investment manager may meet with a client to discuss their financial situation and goals. This discussion can include topics such as the client’s job, income, debt, and any investments they currently have. The investment manager may ask about the client’s reasons for investing. Understanding the client’s goals and risk tolerance is an important part of designing a portfolio that fits the client’s needs.

Some asset management companies also provide help with researching and selecting specific investments. For example, if a client is interested in buying shares of the fictional company Widgets Inc., the investment management company might prepare a report explaining some basic details of the company and providing guidance as to whether buying shares may be a good idea. Investment managers may advise their clients on specific mutual funds to invest in, annuities and insurance products to purchase, or other aspects of managing money.

Investment managers can also handle the day-to-day aspects of a portfolio, such as buying and selling securities, and making sure the portfolio’s asset allocation (mix of investments) stays near the target.

Investment management is a multi-step process designed to help investors understand and achieve their goals. Each process may look a bit different depending on the investor. The steps below give a general sense of how it works.

The first step in the process often involves determining the investor’s goals and the best strategy to accomplish those goals. There are different methods that are well-suited for different aims. Investment managers also take into account factors such as the investor’s income, expenses, age, and risk tolerance. For example, a young professional saving for retirement may have a different goal from the parent who is saving for their child’s college education.

Investment managers typically work with their clients to help identify their goals and come up with a strategy, such as how much to save, how frequently to contribute to their portfolio, and what types of accounts and investments to use.

Once an investor knows their goals, the next step is to build their portfolio. At this point, investment managers may help their clients design the type of portfolio for their needs. Different securities offer different risk and reward profiles to help achieve the investor’s goals. For example, stocks tend to offer more risk and greater potential reward than bonds.

After an investor determines their goals and how they will structure their portfolio, the next step is to execute that strategy. Investment managers may help advise clients on trades they should make, or make transactions on their client’s behalf. They may also rebalance their client’s portfolio as needed.

Every so often, an investment manager and their client may take the time to revise their strategy. Market conditions change regularly, and so can investors’ goals and risk tolerance. The client’s investing strategy may adjust to reflect those changing conditions and goals.

There are many types of investments that people can add to their portfolios. Common options include:

Stocks are a type of security that represent ownership in a company. Typically, the price of a stock is determined by a combination of the business’s current value and expectations for changes in the company’s value.

Bonds are debt securities, representing a loan made to a government, business, or other entity. The holder of a bond receives regular interest payments from the group that issued the bond. They may receive the payments as cash, or the payments may compound in the value of the bond. Typically, bonds offer less risk, but lower returns, than stocks.

Some investors purchase real estate, including land, homes, or office buildings as an investment. They can receive income from rent paid by tenants, or wait for the property to appreciate in value and sell it for a profit. Other investors buy shares of Real Estate Investment Trusts (REITs), a type of company that invests in and manages real estate.

There’s a wide variety of other investment options with varying levels of risk and reward potential. Investors buy and sell options, commodities, futures, precious metals, cryptocurrencies, and more.

There are many different investment options out there. Each plays a unique role in an investor’s portfolio. Investment management focuses on helping the investor understand their goals, designing a portfolio that can help accomplish those goals, and maintaining or adjusting the target portfolio.

A major trend in the investment management industry is the growth in popularity of passively managed mutual funds. These funds often aim to track the performance of a specific index of stocks, like the S&P 500 or the Dow Jones Industrial Average. Index funds tend to require less input from investment managers.

Many investment managers say that cybersecurity is one of the greatest risks to their clients. Technology and internet-based attacks could have major effects on markets and individual investors, so advancements in cybersecurity will likely be important for investment management firms.