The decision of Rothschild & Co Wealth Management UK to reclassify £1.1 billion of custody assets as 'assets under management' (AUM) in 2020, to bring into line with group policy, provides another illustration of the problems associated with the latter metric.

It is not that Rothschild was doing anything underhand.

The firm was merely extending AUM to include client cash that had yet to be invested as part of a discretionary or advisory mandate, a practice commonly used at Rothschild’s peers.

Indeed, one could argue that Rothschild, along with other firms that make the distinction, was being extremely scrupulous in differentiating between assets currently managed for clients, and for which, presumably, a management fee is charged, and those held in the expectation that they would be invested, for which a custody and/or administrative fee is charged.

Nonetheless, the reclassification had a significant impact on Rothschild’s AUM, accounting for 8.2 percent of the end-year total of just under £12.2 billion and around 40 percent of the £2.7 billion of AUM growth recorded for the year.

The reality is that prior to 2020 Rothschild had under-recorded AUM.

And this would make nonsense of all those tables that rank wealth management firms in terms of AUM and AUM growth, especially if one group of firms were using the same convention as Rothschild while others were adopting an alternative.

The problem is, of course, is that it is virtually impossible to identify which firms use the “old” Rothschild convention and those that use the “new”. The disclosure of AUM, let alone all the other variants, is not a mandatory requirement for inclusion within a firm’s annual accounts.

Yet AUM still continues to be the wealth management sector’s preferred metric when it comes to defining absolute size as well as the health of an incumbent firm. An increase in AUM is generally considered to be good. A fall in AUM is considered to be bad.

The obsession with AUM, rather than more sensible metrics such as annual income or revenues, probably reflects the fact that in the not-so-distant past, wealth management and private client investment management were synonymous: they were one and the same.

This is hardly the case today.

Wealth management now encapsulates much more than investment management, with advice wealth planning-related activities assuming a greater prominence, even at former private client-related specialists.

And this makes AUM less relevant, both as an indicator of size and business health.

At its most basic, AUM can be divided between discretionary assets and advisory assets.

A discretionary asset manager assumes total control and responsibility for managing a client’s portfolio of assets and will charge a fee for doing so.

This is generally assumed to consist of an investment management fee.

It may include a custody fee, especially if the manager provides custody facilities or acts as an agent on behalf of a specialist institution that provides custody facilities on an outsourced basis.

But it could also include accounting and administration fees as well the transaction costs involved in buying and selling securities and investment funds as part of the portfolio management process.

Whatever they do, or do not include, the fees associated for managing a discretionary portfolio are higher than those associated with advisory management.

Here the manager may devise a strategic asset allocation for the client, and charge accordingly, and advise on the securities and funds to populate the portfolio devised as well as any tactical changes.

But it is the client that makes the ultimate decision about whether or not to execute the advice given.

The advisory firm may assume responsibility for executing the decisions made as well as overseeing custody and taking an appropriate fee for what is, to all intents and purposes, an administrative function.

This is far from automatic, however. 

In an extreme case the client may execute the advice him or herself and deal directly with a custodian(s).

All this certainly muddies the AUM concept, especially as far advisory firms are concerned.

The reality is that not all AUMs are the same in so far as they can command widely differing fees depending upon the management and other related services (e.g. custody) provided.

The problem is, of course, is that these distinctions are rarely alluded to in the accounts of wealth management firms, where all AUMs are assumed to be equal.

Of course there are exceptions.

Some of the former UK stockbroking firms that have metamorphosed as fully fledged wealth managers provided very detailed accounts that make these distinctions. Brewin Dolphin is one such example.

Others do recognise that they are effectively providing administrative as well as management services and talk about “assets under management and custody”.

Of course it could be argued that all this is a complete distraction from a wealth managers business of generating revenues and profits.

In today’s world it is these and not AUM that should be the appropriate metrics used to measure size and success.

But wealth managers, along with most of the media that report on their activities - this writer excepted of course - and the motley array of consultants and other “helpers” with which it associates, just don’t get it.