The term “investment management” creates images of people in suits on the stock exchange frantically finalizing trades to try and maximize their returns. But the truth is far from that.
After a drop off in 2008, investment activity has returned to its usual amount and in 2024, 62% of adults in the United States were invested in stocks. This means that 62% of adults are participating in investment management.
For the new adopters, practiced vets, and trained professionals, investment management is at the center of generating money from savings. And here’s what you need to know about the practice and industry that surrounds it.
What is investment management?
Investment management is the process of handling an investment portfolio or set of assets to successfully achieve an investment goal.
What falls under investment management generally includes creating an investment strategy, planning out a portfolio breakdown, buying and selling assets, and planning for the eventual taxation of any capital gains.
Almost any type of investment falls under investment management. Whether it’s choosing a single mutual fund or picking and choosing individual stocks and bonds, you may be doing investment management without even knowing it.
What are investment management services?
The term investment management services is most often used when discussing asset management firms or wealth management services. These are businesses whose sole responsibility is managing the money of their clients to maximize the return on their assets.
Instead of an individual managing their investments, a third-party does it all for them. They’re responsible for staying on top of shifts in the markets and making decisions on the fly to achieve the goals of their clients.
Investment management vs. financial planning
While both investment management and financial planning involve overseeing money usage, they serve different purposes.
Financial planning is a larger umbrella which includes budgeting and day-to-day money management. For example, a financial planner could help their client figure out their typical monthly earnings and bills, outline an amount that could be put in investments, and help plan for year-end taxes given all of the client’s financial activity.
Investment management hones in on solely the investment activity. They’re not concerned with what a client is doing day-to-day with their money so long as the investments are performing well.
Types of investment management
Investment management is as involved or hands-free as a process as you want it to be. Here’s how investment management services are categorized in the industry.
Active vs. passive investment management
Investors have the option of making individual investments (e.g. stocks and bonds) or indexed investments (e.g. mutual funds).
The act of buying individual investments is called active investment. This process is more time-intensive and requires an eye for detail as the portfolio is likely made up of a greater volume of investments, each with a higher volatility.
Passive investing favors mutual funds or ETFs over individual investments. This classification of investments includes pre-bundled individual investments, which helps curb the volatility. As a result, it’s less time-consuming and more hands-off, hence the name “passive” investing.
Discretionary vs. non-discretionary management
Depending on the client, they may want to approve every single purchase and sale of an investment, or they may trust their investment manager completely. This difference refers to discretionary and non-discretionary investment management.
In discretionary management, the investment manager has the authority to buy and sell without getting the approval of the client. However, this doesn’t give them free reign to do whatever they’d like as they have to abide by the investment strategy and uphold their fiduciary duty.
In non-discretionary management, the investment manager cannot make any changes without the explicit approval of the client. They may advise the client and suggest moves, but they cannot execute on the plan without the client’s approval.
Alternative investment strategies
While investment most often refers to the management of an investment portfolio composed of stocks and bonds, there are alternatives that can similarly be managed by individuals or professionals.
Some examples of alternative investment strategies include:
- Real estate
- Private debt
- Foreign currency
- Shorting
- Private markets
- Hedge funds
- Venture capital
With each of these options, it’s best to work with a specialist who’s familiar with the unique ins-and-outs of the specific investment strategy to get the best return.
The importance of investment management
Generally speaking, the purpose of investment management is to maximize the money earned on a portfolio of assets. But this means different things to different investors.
The goals of an investor will vary based on their risk tolerance, timeline, and willingness to put in the time and effort to manage a portfolio.
What this means is that “maximizing the return on an investment” depends heavily on the individual. And their investment management approach or investment management services should reflect that.
Think of investment management like planning out a route for a road trip. It starts with questions like where do you want to go, how long do you have to get there, and are you willing to risk something off the beaten path on the journey, then creates a plan built around these factors.
In the case of investing, similar questions are asked that impact the distribution of funds. The distribution will have a unique diversification, level of risk, and asset allocation that reflects the person at the heart of it all.
Advantages and disadvantages of investment management
For some, investment management is a no-brainer decision, while others may still be on the fence about trusting their money. These are the advantages and disadvantages considered when making the decision.
Advantages
- A knowledgeable resource: Investment managers do more than manage money. They help their clients understand the dynamics of investing so they know exactly what’s going on with their money and for what purpose.
- Understanding market trends: Someone with a history of playing the markets recognizes when something is trending in a good or bad direction. With their know-how, investment managers can potentially outperform the market.
- Preparing for taxation: How money gets invested affects the taxes on capital gains. Savvy investment minimizes the tax bill while maximizing the return.
Disadvantages
- Paying management fees: Management fees are typically based on a percentage of the managed assets. These fees add up on large portfolios and must be paid regardless of whether the investments were successful or not.
- Performance still hinges on the market: Investment firms can only take advantage of the opportunities in front of them. If the market as a whole is in a downturn, their options are going to be limited.
- Establishing trust: Giving up savings to a stranger is daunting and requires trust. That trust is required to weather any low periods and achieve the client’s long-term goals.
Investment management process
An investment management engagement can be broken down into 7 simple steps.
1. Collecting information
At the start of an engagement is a conversation where the investment manager gets familiar with their client’s goals. Some factors they’ll dig into are:
- What is the purpose of the investment?
- What is the level of expected return?
- When are they expecting to see that return?
- How much risk are they willing to take on to achieve the result?
- Are there any legal restrictions on what they can invest in?
- Are there any industries or business types they would or wouldn’t want to invest in?
Once the investment manager has what they need, they can get to work.
2. Creating an investment policy statement (IPS)
How the investment manager will service the client is formally documented in an investment policy statement. These are the guidelines on what they can invest in, how the money will be distributed, and how decisions will be made.
The IPS plays an essential role in establishing their fiduciary duty: if any decisions are not in line with this document, they are not in the client’s best interest.
3. Making an investment allocation plan
Once the IPS is finalized, the investment manager has what they need to start planning how to distribute the money. Using models and metrics, they’ll experiment with different potential allocations before determining the best approach.
4. Buying the investments
Investments are purchased only once a plan has been finalized. If the investment management is discretionary, purchases will only be made if the client approves of them. In a non-discretionary investment agreement, the client remains hands-off.
5. Monitoring and revision
The portfolio is monitored to ensure all purchases went through smoothly and that all cash is allocated. There may be revisions made at this point but unless the investment manager is taking an active, non-discretionary role, it’s most likely that the portfolio will be left to accrue data before changes are made.
6. Performance reporting
Traditionally, performance reports and statements are provided to the client monthly. This includes an overview of how the entire portfolio is performing and a breakdown of the individual investments.
7. Continued communication and adjustment
As performance is monitored, the investment manager will communicate the results and make suggestions regarding new opportunities or adjustments that could bolster returns. Managers are available to help their clients understand the whats, whys, and hows of their portfolio so they can feel confident about their money.
About investment management firms
An investment management firm is composed of certified professional managers who handle managing assets as well as report on their performance to their clients through monthly reports and meetings.
Each professional manager would oversee the portfolios of a selection of clients. They’re responsible for asking the right questions, then creating and executing an investment strategy based on the answers.
The management firm makes their money off of management fees, a percentage of the value invested by their clients ranging from 0.5% to 4% of the portfolio. This payment structure incentivizes firms to make money for their clients—the more money they generate, the larger the assets, the greater the fee.
To prevent any malpractice, registered investment management firms face penalties if they fail to act as a fiduciary of their clients. They must always act in the best interests of their clients or face a penalty, including potential jail time.
The Future of Investment Management
Investment management has been around for hundreds of years, and will continue to be around for the foreseeable future. But how it looks is having drastic changes that reflect the changing landscape and desires of clients.
Technology and automation
The introduction of AI and automated portfolio management is putting investment power back in the hands of its users through “robo advisors.” These innovations are more accessible and cost-efficient then using traditional investment management.
Looking forward, investment management firms need to hone in on how they service their clients. They need to think about the value they provide their clients beyond the results.
At the same time, adopting some of these tools could help investment managers with forecasting, modeling, and improving the composition of a portfolio. Adopting this technology would free up time that could be used on providing a personalized service.
The rise of sustainable investing
Environmental, social, and governance (ESG) investing has grown with an increased demand for investments that further social causes. This is sometimes referred to as “ethical investing.”
Part of ESG investing involves incorporating social impact into the financial management and portfolio allocation. In short, it factors in social benefit into its decision making, which would be formally outlined in the investment policy statement (ISP).
With this in mind, it’s prudent to get familiar with investments in renewable energy, climate projects, ecotech, and green bonds.
Changing regulations and security
In the current technological landscape, transparency and security are prioritized. Governments and financial regulators aim to protect the clients with their money on the line by making firms disclose privacy policies, security policies, and their usage of AI technology in their decision-making.
In the United States, this is done by the Division of Investment Management, a section of the Securities and Exchange Commission (SEC).
But regulations can only move so fast. There’s still work to be done with regards to cryptocurrency and decentralized finance to guarantee money is only being used with the best interests of the client in mind.
How investment management firms bill in 2025
Investment management firms care about the money their clients trust them with, but they need to also care about how they’re getting paid. To get paid promptly and securely, they turn to BILL.
“It comes down to three key benefits: enhanced service, security, and time savings.” - Laura Blaire, COO, CCO, and Managing Partner of JFS Wealth Advisors.
BILL leverages automation to save time invoicing clients while maintaining the high level of security needed, keeping the information of both the firm and the client safe. And with overnight payments, payment times are cut down so money is in the bank sooner.
Reach out for a demo to see how BILL could save you both time and money on billing clients.
