What it means
Asset managers earn fees, usually a percentage of the money they manage. That makes the size of their assets under management a basic measure of the business, and ROAM turns it into a measure of profitability.
A higher figure means the firm keeps more profit from each dollar entrusted to it. The calculation is simple, but the definitions vary.
Some analysts use net income, some use operating profit and others use pre-tax profit as the numerator (the top number in a fraction). The denominator (the bottom number) is normally the average assets managed during the period, because the balance moves up and down.
ROAM is usually quoted as a small percentage, often below 1%, or in basis points (one basis point is one hundredth of 1%). Even a small difference matters because asset managers handle very large pools of money.
A change of 0.1% on $1,000,000,000 is worth $1,000,000. Several factors push the ratio up or down.
Fee levels, the mix of products, the cost of staff and technology, and the pace of asset growth all play a part. When markets fall the assets shrink and revenue drops, but many costs stay the same, so profitability can fall quickly.
ROAM is a measure for the owners of the management firm, not for the people who invest in its funds. A fund's client return is measured separately, after fees.
Anyone comparing firms should use the same definition of earnings for each so that the results are comparable. It is also worth separating fee income from performance fees.
Performance fees can swing sharply from year to year, so a strong ROAM driven by one good year may not last, and a careful analyst looks at the underlying base-fee profit as well.
In practice
Real-world examples.
Example
A boutique investment firm manages $300,000,000 and earns $1,200,000 of profit after costs. Its ROAM is 0.4%, and the founders compare it with a rival earning 0.6% to see where costs might be too high.
Example
A bank's asset management arm reports that its assets rose 20% during a bull market while profit rose only 5%. The finance team notes that ROAM fell because costs for new staff and technology grew faster than fee income.
Example
An analyst assessing a listed fund manager calculates ROAM for three years in a row. The ratio dips in a year when markets fall, which tells her that the firm's profits are sensitive to market levels. She concludes that the stock is riskier than the steady fee income suggests.
Formula
Calculation
ROAM = Net income / Average assets managed
Suppose an asset manager earns net income of $4,500,000 in a year. Its assets managed were $800,000,000 at the start and $1,000,000,000 at the end, so the average is ($800,000,000 + $1,000,000,000) / 2 = $900,000,000. ROAM is $4,500,000 / $900,000,000 = 0.005, or 0.5%, which equals 50 basis points.Case study
Seen in the real world.
Stonebridge Investment Partners is an illustrative, fictional firm that managed $2,000,000,000 and saw rapid growth in assets. The managing partner was pleased with the headline number until the finance director showed her the ROAM.
Profit had risen far less than assets, which had nearly doubled, which meant that ROAM had fallen from 0.45% to 0.30%. The firm had hired staff ahead of growth and was giving large fee discounts to win big mandates.
In this fictional case the partners renegotiated fee scales and reviewed hiring plans, and over two years ROAM recovered to 0.40%, even as assets kept growing steadily. The illustrative lesson is that growing assets does not guarantee growing profitability, so the ratio is worth tracking alongside the size of the firm. The partners now report ROAM to the board every quarter next to the headline asset figure.
Watch out
Common mistakes.
- Confusing ROAM, which measures the manager's profitability, with the return earned by clients on their investments.
- Using year-end assets instead of the average, which overstates or understates the ratio when assets change quickly.
- Comparing firms that define earnings differently without adjusting for the difference.
Questions
People also ask.
Is a higher ROAM always better?
Not always, because a high ratio can reflect high fees that drive clients away, so it should be read alongside client retention and fund performance.
How is ROAM different from return on assets?
Return on assets measures profit against a company's own assets, whereas ROAM measures profit against the client assets that the firm manages.
Which earnings figure should I use?
Use the same measure consistently, such as net income or operating profit, and state clearly which one you have chosen, so that anyone reading your figures can reproduce them.
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