What is Investment Management?

What is investment management?

Investment management involves making decisions regarding investments. It consists of selecting, monitoring, and researching assets matching the client’s goals, time frames, and risk profile. Investment management can encompass a wide range of investing opportunities to help grow wealth, from real estate and commodities to stocks, bonds, and other asset classes.

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Understanding investment management

Professional investment management focuses on meeting specific investment goals that benefit clients whose money they oversee. These clients can be individuals or institutional investors who invest money on behalf of groups like educational institutions, retirement plans, insurance companies, and government entities. Investment management services can include:

Asset allocation: Asset allocation involves dividing investments among various assets, including stocks, bonds, and cash. This investment strategy balances rewards and risks by appropriating portfolio assets according to the client’s investment horizon, goals, and risk tolerance.
Stock selection: Investment managers use systematic forms of analysis to make decisions on specific stocks and ensure they’re worth the investment. Active management gives the manager perspective on the stock’s future.
Financial statement analysis: Financial statement analysis helps investment managers make informed decisions. The statement evaluates a portfolio’s financial performance and business value through either a horizontal, vertical, or ratio-style report.
Monitoring existing investments: Occasionally monitoring the client’s existing investments can help ensure the expected returns.
Financial planning: Financial planning helps increase the corpus of funds through various strategies. After thoroughly analyzing income, estates, assets, and portfolios, investment managers build a financial plan based on a client’s requirements and devise strategies to help achieve short- and long-term financial goals.
Financial advice: Investment managers are experts in their field and can provide financial advice on holistic asset management, investment, and individual securities trading.
Tax planning: Tax planning is part of financial planning. This service can prevent income from unnecessary tax liabilities. An investment manager provides a legal and ethical path to lowering tax burdens through tax breaks, credits, classifications, and other strategies that comply with the tax code.
Retirement planning: Retirement planning is often at the forefront of investing. An investment manager uses the same analytical approach to retirement planning as they do with financial planning, except the time frame is typically longer, and the risks are generally less.
Portfolio strategy and implementation: The investment manager’s goals are to balance implementing change, optimize return on investment, and maintain current initiatives. This tactic helps the investment manager oversee and implement tasks successfully, from strategy to execution.

Professional investment managers can deal with various securities and financial assets, such as equities, commodities, bonds, and real estate and tangible assets like precious metals and artwork. They may also help align investments to match estate, retirement planning, and asset distribution.

Asset vs. investment management

There are two ways to manage funds—asset and investment. Asset managers focus on risk management, which is the spreading of investments across a variety of asset classes, reducing exposure to any single asset. Conversely, investment managers focus more on maximizing returns involving higher-risk strategies.

Types of investment management

Investment management varies based on the asset type and can take different forms, such as:

Traditional: This basic form of investment management involves a portfolio manager who invests in bonds, stocks, and other assets according to their client’s goals.

Private equity: Involves actively pursuing and buying stakes in private companies that aren’t publicly traded on stock exchanges.

Hedge fund: Acts as an investment vehicle that uses alternative strategies, including derivatives and leveraging debt, to maximize client returns.

Real estate: Includes purchasing properties in whole or in partnership to generate capital appreciation or rental income over time.

Quantitative: Involves creating models or algorithms to identify market trends and reveal potential trade opportunities based on specialized data analysis techniques.

Mutual fund: Joins other investors who pool their money together and invest in a wide variety of assets.

Cryptocurrency: Involves buying and selling digital currencies, including Ethereum and Bitcoin, to capitalize on the fluctuating prices of this highly volatile market.

Portfolio management: This is an umbrella term encompassing all other investment forms. Portfolio managers oversee the entire investment process, from analyzing opportunities and selecting investments to monitoring performance and taking necessary action.

Running an investment management firm

There are many responsibilities to consider when running an investment management business. The firm generally has professional managers to:

Conduct internal audits;
Research individual assets, asset classes, and industrial sectors;
Settle, market, deal, and prepare reports for clients.

Aside from training managers and hiring marketers, the heads of investment companies must ensure they operate within regulatory and legislative constraints, account for cash flow, examine internal controls and systems, properly track fund valuations, and record all transactions.

The Canadian Investment Regulatory Organization (CIRO) is Canada’s self-regulatory organization. They oversee all mutual fund and investment dealers and all trading activity on the national debt and equity marketplaces. Canadian investment firms typically compensate their investment managers based on a percentage of a portfolio’s value. The fee is generally negotiated at the start of the client-advisor relationship and pays the cost of managing the overall portfolio.

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Investment management objectives

Investment management objectives involve creating an investment portfolio to generate returns while minimizing risks. The following is a breakdown of various objectives:

Assess and manage risk: Investment managers assess the amount of risk their clients are willing to take from the onset of the relationship and monitor and manage it on an ongoing basis.
Establish goals: Managers help clients determine their financial goals and create a strategy to achieve them. The manager must continually monitor these goals because long-term ones can change as life changes—marriage, children, job promotion, job loss, or divorce.
Select investments: Investment managers deeply understand all the different asset classes available and will choose the appropriate investments according to their client’s goals and risk parameters.
Monitor progress: An investment manager continually analyzes market conditions and adjusts portfolios to maximize returns and mitigate risks when necessary.
Maximize returns: A successful investment manager maximizes their client’s returns with particular attention to tax efficiency and liquidity while minimizing losses over time.

Advantages and challenges of investment management

Although investment management firms can provide lucrative returns, fundamental problems may arise when running such a firm. An investment firm’s revenues often link to market behaviour. This correlation means the market’s valuations dictate the company’s profits. A significant decline in asset values can cause a firm’s revenue to decline, especially when the price reduction is considerable compared to the steady, ongoing operation costs. Also, clients can be impatient during bear markets and hard times, and even an above-average fund performance might not be enough to sustain their portfolio.

The investment industry also faces challenges from two other sources:

Robo-advisors: These digital platforms provide automated, algorithm-driven asset allocation and investment strategies.
Exchange-traded funds (ETFs): These packaged portfolios mirror a benchmark index—a measurement standard used for the performance of a security, investment manager, or investment strategy. Therefore, selecting a benchmark with a similar approach, risk-return profile, or investment manager can be wise.

ETFs exemplify passive management because human fund managers make very few investment decisions. Robo-advisors don’t use human investment managers at all, except for the programmers who write the algorithms. As a result, both of these investment sources can charge much lower fees than a human investment manager. According to some surveys, ETFs and robo-advisors are outperforming actively managed funds, either with outright better advice or in terms of overall returns—due primarily to not having higher fees weighing them down. Investment management firms must hire intelligent, talented professionals to keep up with the pressure of ETFs and robo-advisors.

Some clients research and analyze the individual performances of specific investment managers and the overall company performance before committing to a relationship. But sometimes, it’s not just how much money they can make their clients in good times; it’s how little they lose for clients in bad times. Below is a summary of the pros and cons of investment management:

Pros:

Provides professional analyses
Provides full-time diligence
Is proactive in down times to protect the portfolio
Out-performs or times the market just right

Cons:

Profits fluctuate with the market
Sizable fees
Competition from cheaper passively managed vehicles like ETFs and robo-advisors

What is Investment Management?

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