How to Calculate AUM

AUM, meaning assets under management, is one way to look at an investment firm or fund. It's not the only metric to evaluate how successful an investment program is, but it can be a way to gauge the relative size of funds, brokerages and similar opportunities. It's often listed in public documents such as prospectuses and Securities and Exchange Commission filings.

AUM in finance stands for assets under management. It's a term commonly used by financial firms such as financial brokerages, banks, fund managers and other similar institutions. AUM, or the full form, is used to refer to the total amount of client money with which a firm, a fund or some other entity is entrusted.

You can often find this number in SEC filings, prospectuses and other documents providing information on the financial health and status of a firm or investment opportunity. Depending on the firm using the term, it can either refer to any funds handled by the firm, including bank deposits, money in funds and cash in other accounts or only to funds where the firm directly manages the money with authority from clients.

Some firms will also provide a separate number called assets under advisement, or AUA, which can refer to funds where the firm provides some advice but doesn't directly manage the money involved. Make sure you understand the working definition of either AUM or AUA when you see them in financial reports. Search for footnotes or introductory materials that might indicate what these numbers mean if their meaning is not immediately clear or contact the firm that issued the report for guidance.

AUM can be useful in determining the relative size of two funds or other investments and thus determining their relative liquidity. For example, one mutual fund that invests in the energy sector might have $50 million in assets under management while another fund that makes similar investments might have $100 million in assets under management.

The second fund is likely to be more liquid, meaning that it's easier to sell shares in the fund and cash out your holdings because there are likely more people invested in it who will potentially buy your shares. This may not be true in all cases, but it's often a useful rule of thumb.

Of course, you should look at other factors than AUM when evaluating funds, including other public information disclosed in their prospectuses and reports along with the organization and individuals running the fund. You'll likely want to look at anything they have shared about investment strategies and about returns in prior years. Note that funds with higher AUM aren't necessarily more successful for their investors, and funds with less AUM can still get high returns on the investments they make on the assets that they do manage.

AUM naturally fluctuates over time as fund assets go up and down in value and investors enter and exit the fund. However, AUM on a particular date can still be a useful rough measure of a fund's size and potential liquidity.

As funds and investment firms become larger in terms of AUM, they may become subject to more stringent regulation by the SEC and other regulators. Generally, investment firms with up to $110 million in AUM in the United States are regulated chiefly by state regulators, and those with $110 million or more in AUM are regulated by the SEC, the federal investment regulatory agency. In some cases, firms with $100 million or more may elect to register with the SEC as well as state agencies.

Check records for smaller investment firms in your state and others where the firm does business to see if they have run afoul of the law or been accused of any wrongdoing. For larger firms, you may wish to check both the SEC and state regulators.

In some cases, you may decide to buy stock in a financial firm, such as bank or brokerage, rather than or in addition to investing with that organization. In this case, considering AUM relative to its competitors and how those numbers have changed over time might help determine how significant the firm is in the industry and whether it appears to be growing a customer base over time.

Again, as with investing with a firm, you should look at factors beyond AUM in deciding whether to invest in a financial firm. Look at regulatory filings and other public information for the firm and its competitors as well as any records of regulatory action.

Financial firms will sometimes refer to individual AUM, meaning assets under management for one particular client. The number is fairly straightforward and simply means the value of the assets the firm manages on behalf of that person or entity.

For example, if you invest $100,000 in a mutual fund, the fund's individual AUM for your account is $100,000. Naturally, this number will fluctuate as you add and remove assets from the fund and as the assets increase and decrease in value.

Some funds set a minimum individual AUM, meaning they aren't interested in working with potential clients who wish to invest less than that minimum. You can often find this number in literature published by a fund or on its website. Contact a fund manager to inquire about minimum individual AUM if you don't see this number. If a financial firm refers to minimum assets under advisement, this generally works in much the same way.

Funds often charge fees based on AUM, which simply means that they charge you a percentage of your assets in the fund each year or on another regular basis. Some may charge an additional percentage of returns or returns above a certain level, known as the hurdle rate. The percentage of AUM charged as fees is the expense ratio.

For exchange-traded funds, where shares are bought and sold through public exchanges using ticker symbols similar to individual stocks, AUM can be calculated as the price per share times the number of shares outstanding. This is the same formula used for calculating market capitalization for individual firms.

As with other types of funds, other factors matter in choosing an investment in an ETF besides AUM. You will likely want to look at how the ETF chooses investments. Many ETFs are index funds, which buy and sell stocks according to their weight in a particular index, such as the Standard & Poor's 500 index or Dow Jones industrial average. Some follow more esoteric indexes, perhaps looking at particular industries of market sectors.

Funds that allocate money programmatically, such as index funds, often charge lower fees in terms of AUM than actively managed funds, which hire human experts to decide what to invest in. If the returns are comparable, this can mean that you will save money by investing in index funds over actively managed funds. If the actively managed funds outperform their more automated counterparts, you may be better off investing with the active funds and paying the higher fees.