Virtually everyone in investment management will have heard of the terms ‘AUM & Flow’, but do they understand how its accurate calculation is mission critical - and what a strategic weapon it is in the hands of the informed? By Mark Simpson, Richard Warrington and Nathan Alliston, the directors at Room Zero.

What is ‘AUM & Flow’ data?

Mark Simpson: “AUM & Flow, together as a dataset, is something special in the investment management world. Most people will recognise investment flows. For example, in the retail space, firms will be aware of the reporting from their transfer agency (TA), informing them of what is flowing in and out of their retail products. 

AUM (Assets Under Management) is probably the most common metric by which asset management firms are compared. AUM is a point in time measure of the total assets being managed by a buy-side firm.  

AUM & Flow as a dataset looks to explain the change in AUM from one point in time to another. It doesn’t just include the flows that have been reported by a transfer agent; it should include other factors such as the impact of currency and the performance of the funds themselves. Ensuring Product and Client information are woven into that mix appropriately then opens up the explanation to a far broader set of perspectives. AUM & Flow is therefore a reliable measure of a firm’s assets under management, where they have adhered to the rules and principles of double counting. Between two points in time, AUM & Flow seeks to describe and explain the change.”

Why is this of particular importance to asset management firms? 

Richard Warrington: “AUM is a commonly used measure of success – generally more assets equals ‘good’ and less assets equals ‘bad’ due to the revenue model used by asset managers (where fees are charged on the amount of assets retained). Flows are important in terms of changes in the AUM. If a change stems from Flows, looking backwards can act as a measure of success or failure for a firm’s marketing and distribution strategy. 

AUM & Flow is also important for a geographically holistic view of a business - and will deliver insights. Firms can tell where the actual Flows are coming from e.g. Singaporean retail investors. This information is invaluable as it informs and shapes the distribution strategy going forward. 

Also, firms can carve up their AUM ‘pie’ by various product dimensions, such as the strategy these funds are using or their geographic investment focus. This will show an asset manager where they may have gaps in their offering.

In essence, AUM & Flow is an important strategic tool for planning and an important source of MI for measuring success or otherwise. For publicly listed firms, it is an important metric for analysts and shareholders. AUM is also crucial to the calculation of revenue, profit and loss. If a firm’s AUM is not determined accurately then they will be unable to calculate the revenue or profitability of the business. AUM & Flow is therefore a key building block.

The topic of revenue is very broad and complex, with different issues depending on which component of revenue is being considered. Simply relying on the transfer agent for revenue figures is not enough. The TA will typically calculate Distribution expenses (Trailer Fees/Commissions), but asset managers often struggle to validate these numbers, or use this data to forecast. Furthermore, a TA can typically only handle vanilla fee types, so complex arrangements are handled manually by the asset manager. Lastly, many of the Distribution expense arrangements can be with clients who invest through an omnibus account. The TA will not have visibility of the underlying AUM in the omnibus account which blocks any automation for this type of arrangements. 

Who uses AUM & Flow data? 

Nathan Alliston: “AUM & Flow is essential data that is used by a number of different teams for different purposes, including at the highest level of strategic planning for an asset manager. If the CEO and CFO do not have a reliable view on the firm’s AUM & Flow data then they bear an immense risk to the business.

In particular it is vital that the CFO and Head of Distribution, when working with the CEO, have an agreed set of numbers that they can both work from and that gives each of them what they need. The data should allow them to see into the underlying clients (for KYC purposes) and also the distributors, to ensure that their products are being distributed responsibly.”