FAQs About Asset Management
Asset Management FAQs
What is asset management?
Asset management is the professional management of investment portfolios and other financial assets on behalf of clients or institutions. It may include investment selection, portfolio construction, risk management, monitoring, and reporting.
Why is asset management important for banks?
Effective asset management helps banks serve clients, manage investment risk, protect assets, meet fiduciary and regulatory obligations, and pursue appropriate investment objectives while maintaining strong operational and compliance controls.
What asset management services may banks provide?
Banks may provide services such as portfolio management, investment advisory services, institutional asset management, retirement-plan management, trust investment management, and investment research, depending on their structure and applicable requirements.
What is portfolio management?
Portfolio management involves managing a collection of investments according to defined objectives, risk parameters, time horizons, liquidity needs, and applicable investment guidelines.
What is an investment policy statement (IPS)?
An IPS is a document that establishes a client's or institution's investment objectives, risk parameters, asset-allocation guidelines, restrictions, benchmarks, and other portfolio-management requirements.
Why is asset allocation important?
Asset allocation determines how investments are distributed among asset classes. It helps align a portfolio with investment objectives, risk tolerance, liquidity requirements, and time horizon.
What is strategic asset allocation?
Strategic asset allocation establishes a long-term target mix of asset classes based on the client's objectives and risk profile.
What is tactical asset allocation?
Tactical asset allocation involves making shorter-term adjustments to portfolio allocations based on market conditions, valuations, economic expectations, or other investment considerations, subject to applicable guidelines.
What is portfolio diversification?
Diversification involves spreading investments across different asset classes, securities, sectors, geographic areas, or issuers to reduce concentration risk. Diversification does not eliminate investment losses.
What is investment risk?
Investment risk is the possibility that an investment or portfolio will decline in value or fail to achieve its expected return. Different asset classes carry different types and levels of risk.
What is liquidity risk?
Liquidity risk is the possibility that an asset cannot be sold or converted to cash quickly enough, or without a significant price impact, to meet an investor's needs.
What is market risk?
Market risk is the possibility of losses resulting from changes in market prices, interest rates, exchange rates, economic conditions, or other market factors.
What is credit risk in asset management?
Credit risk is the possibility that an issuer or counterparty will fail to meet its financial obligations, potentially resulting in losses to the portfolio.
What is concentration risk?
Concentration risk occurs when a portfolio has excessive exposure to a particular issuer, security, sector, asset class, geographic area, or other risk factor.
What is rebalancing?
Rebalancing is the process of adjusting a portfolio back toward its approved target allocation after market movements or other changes cause allocations to deviate from established guidelines.
How frequently should portfolios be rebalanced?
The appropriate frequency depends on the investment strategy, IPS, client objectives, market conditions, tax considerations, transaction costs, and applicable policies. Some portfolios use predetermined thresholds rather than a fixed schedule.
What is a benchmark?
A benchmark is a standard used to evaluate portfolio performance. The benchmark should be appropriate for the portfolio's investment strategy and objectives.
What is investment performance measurement?
Performance measurement evaluates how a portfolio has performed over a specified period, typically considering returns, risk, benchmark comparisons, fees, and other relevant factors.
What is a risk-adjusted return?
Risk-adjusted return evaluates investment performance relative to the amount or type of risk taken to achieve that return.
What is an investment mandate?
An investment mandate defines the authority and guidelines under which assets are managed. It may specify objectives, permissible investments, restrictions, risk limits, liquidity requirements, and reporting expectations.
What are investment restrictions?
Investment restrictions are limitations established by the client, investment policy, trust document, law, regulation, or bank policy. They may address prohibited securities, concentration levels, industries, geographic exposure, liquidity, or other factors.
How should client assets be safeguarded?
Banks should maintain appropriate controls for custody, recordkeeping, reconciliation, authorization, valuation, and access to client assets. Procedures should be designed to protect assets from loss, misuse, and unauthorized activity.
What is asset custody?
Asset custody involves safeguarding investment assets, maintaining records of ownership, processing transactions, collecting income, settling trades, and providing related reporting and administrative services.
What is reconciliation?
Reconciliation compares internal records with external records, such as custodian statements or transaction records, to identify and resolve discrepancies.
What is valuation?
Valuation is the process of determining the current value of an investment or portfolio. Banks should use appropriate valuation methodologies and controls based on the type and liquidity of the assets.
What is a managed account?
A managed account is an investment account in which a professional manager manages assets according to an agreed investment strategy and client mandate.
What is discretionary investment management?
Discretionary management allows an authorized investment manager to make investment decisions on behalf of a client within established guidelines and applicable authority.
What is non-discretionary investment management?
In a non-discretionary relationship, the client generally retains decision-making authority and the investment professional provides recommendations or services within the scope of the engagement.
What are conflicts of interest in asset management?
Conflicts may arise when the interests of the bank, an affiliated company, investment manager, employee, or another client could conflict with the interests of a client. Banks should identify, disclose, mitigate, and manage conflicts according to applicable requirements.
Can banks invest client assets in proprietary products?
Depending on the relationship and applicable requirements, banks or affiliates may offer proprietary investment products. Appropriate disclosures, conflict-management procedures, and applicable fiduciary, advisory, or other standards must be followed.
What is fiduciary asset management?
Fiduciary asset management involves managing assets subject to fiduciary duties. The manager must comply with the applicable fiduciary standard, governing documents, investment requirements, and other legal obligations.
How does BSA/AML apply to asset management?
Banks providing asset-management services must comply with applicable BSA/AML requirements. Depending on the activity and relationship, this may include customer due diligence, transaction monitoring, recordkeeping, and escalation of potentially suspicious activity.
How should asset managers handle suspicious transactions?
Potentially suspicious activity should be escalated through the bank's established BSA/AML, fraud, compliance, or risk-management procedures. Employees should not conduct unauthorized investigations or disclose confidential reporting information.
What is operational risk in asset management?
Operational risk is the possibility of loss resulting from inadequate or failed processes, systems, people, controls, or external events. Examples include trade errors, inaccurate records, unauthorized transactions, and technology failures.
What controls help prevent asset-management errors?
Important controls may include segregation of duties, authorization requirements, trade confirmations, reconciliations, exception reporting, access controls, independent reviews, valuation controls, and periodic testing.
How should investment-management records be maintained?
Banks should maintain accurate records of investment decisions, transactions, client instructions, portfolio holdings, valuations, communications, approvals, and other information required by applicable laws, regulations, agreements, and policies.
What should employees do if they identify an investment-policy violation?
The issue should be promptly documented and escalated to the appropriate investment-management, compliance, risk, or supervisory personnel. Material violations should be addressed according to established escalation and remediation procedures.
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