It’s bankingspeak hence it can be misinterpreted by those who are not inside the biz. As it is this blog’s job to lift the curtain on all the nasty private banking jargon, I thought it appropriate to delve a bit more in to the assets under management (AUM) thingy.
It is this:
Assets under management are not necessarily managed. I mean to say, all assets that are managed are assets under management but not all assets under management are managed. Clear? No? Oh do pay attention please.
Okay, I’ll try again.
It’s the word “management” that gets people. Think of it like this: The term assets under management simply refers to how much moolah-money-spondulicks and other assorted assets are in custody with the bank. Those are assets under management. It has nothing to do with who manages the money (makes the investment decisions). It is simply a top dog, alpha male contest between banking CEOs to see who has the biggest swinging AUM.
So now we come to the management side of the money. Who manages the money? This is a decision the client needs to make when they open an account with a private bank.
When we digest the whole private banking proposition to its legal core, the client has two choices.
2. Discretionary management
This means the client is the one who legally makes the final decision on the investments. Their banker will wine ‘em, dine ‘em and advise ‘em. But it is the client who makes the decision to pull the trigger to buy stocks in that rubber farm in Las Vegas that is listed on the Nairobi stock exchange.
This is what people often confuse the term assets under management with. A discretionary mandate is when the client outsources the investment decision making process to the bank and a team of super whizzes straight out of university will play wonders with their excel charts and move money about from here to there and there to here. In effect they manage the money. The client simply sits back while their banker wines’ em dines ‘em and notifies ‘em.
The banker’s job is simply to tell the client what is happening in the portfolio and why things are being done the way they are.
Does the clear it up?
I hope that clears it up. It's an important distinction, because when we boil it down, the big question each and every time, particularly if there is a dispute, is who is responsible for the final decision of making the investment.