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.

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 a 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 usually 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 usually 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 lower.               
• 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: This involves actively pursuing and buying stakes in private companies that aren’t publicly traded on stock exchanges.

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

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

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

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

• Cryptocurrency: This involves buying and selling digital currencies 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 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.

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:

• Assessing and managing 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.
• Establishing goals: Managers help clients determine their financial goals and create a strategy to achieve them. The manager usually continually monitors these goals because long-term ones can change as life changes (marriage, children, job promotion, job loss or divorce).
• Selecting investments: Investment managers deeply understand all the different asset classes available and choose the appropriate investments according to their clients’ goals and risk parameters.
• Monitoring progress: An investment manager continually analyzes market conditions and adjusts portfolios to maximize returns and mitigate risks when necessary.
• Maximizing returns: A successful investment manager typically maximizes their client’s returns with particular attention to tax efficiency and liquidity while minimizing losses over time.

Advantages and challenges of investment management

While investment management firms can deliver significant value and strong long-term returns for clients, they also face structural and competitive challenges that can impact profitability and client retention:

Advantages

Active investment management firms typically offer distinct benefits that passive or automated alternatives often cannot fully replicate:

• Professional, in-depth analysis: Experienced teams conduct thorough research on companies, industries and macroeconomic trends, aiming to identify opportunities that broad market indices may overlook.
• Full-time diligence and active oversight: Portfolio managers continuously monitor holdings, rebalance positions and adjust strategies in response to new information or changing market conditions.
• Proactive risk management during downturns: Skilled managers can employ defensive strategies (e.g. reducing exposure, hedging or shifting to higher-quality assets) to help protect capital when markets decline.
• Potential to outperform the market: Through stock selection, sector rotation or tactical timing, talented managers may generate alpha (excess returns above the benchmark) over full market cycles.

Challenges

Despite these advantages, the business model of traditional investment firms has some inherent vulnerabilities:

• Revenue highly correlated with market behaviour: Most firms earn fees based on assets under management (AUM). When markets fall sharply, AUM shrinks rapidly while fixed operational costs (salaries, rent, compliance, technology) remain largely constant, squeezing profit margins.
• Client impatience during bear markets: Even if a manager outperforms relevant benchmarks during difficult periods, clients often focus on absolute losses and may redeem assets, triggering further AUM decline and revenue pressure.
• Intensifying competition from lower-cost alternatives:
  • Robo-advisors: Algorithm-driven platforms typically offer automated portfolio construction, rebalancing and tax-loss harvesting at a fraction of traditional fees.
  • Exchange-traded funds (ETFs): These passively managed vehicles track broad or specialized indices with minimal management fees and may attract massive inflows, putting pressure on active managers to justify higher costs.

Here is a summary of the potential pros and cons:

Pros of traditional investment management firms

• provide deep professional analysis and expertise
• offer full-time monitoring and diligence
• actively protect portfolios during downturns
• have the potential to outperform benchmarks or time markets effectively

Cons

• revenues and profits fluctuate sharply with market levels
• charge significantly higher fees than passive alternatives
• face intense competition from low-cost robo-advisors and ETFs

Investment management offers guidance and potential for superior returns yet typically comes with higher fees and market-dependent risks. For those valuing professional oversight and active protection, it can be a powerful tool. For cost-conscious investors, passive alternatives may suffice.