What It Is:
Assets under management (AUM) refers to the total market value of investments managed by a mutual fund, money management firm, hedge fund, portfolio manager, or other financial services company.

How It Works/Example:
AUM generally changes according to the flow of money into and out of a particular fund or company. It also fluctuates based on changes in the value of a fund or company's underlying investments.

Why It Matters:
The CFA Institute, formerly known as the Association for Investment Management Research, has established ethical standards that asset management companies should comply with when disclosing AUM and related information. These standards, called the Global Investment Performance Standards (GIPS), require management companies to, among other things, include the following in their AUM calculation:

-- Discretionary and nondiscretionary portfolios
-- Investments controlled by a third party on behalf of the asset management company

The SEC also provides guidance, defining AUM as the sum value of securities portfolios that receive "continuous and regular supervisory or management services." However, these guidelines still leave room for interpretation on what may be included in AUM, and there are at least two important reasons why investors should be sure to understand an asset manager's method.

First, investors are entitled to fair and transparent disclosure of an asset manager's true performance over time. Because many asset management companies compare the size of their AUM with competitors as a measure of success, accurate disclosure is especially important for accurately evaluating the money brought in by an asset manager.

Second, many asset management companies charge management fees that are equal to a fixed percentage of AUM. This arrangement often leads to improved financial performance when AUM levels are rising, and also motivates the asset management company to maximize AUM.

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