Here is a question:
Is there a way to guarantee profits from the stock market every year at all times without fail?
If you think: ‘How is that even possible, especially during uncertain times today, as we continue to face political, economical and pandemic crises?’, think again!
In this letter, I’ll discuss a concept to reveal how the rich invest their money and how their mindset differs from the rest. This concept is known as: ‘Assets under Management’ or AUM and it is a tool of the ultra-rich to earn recurring streams of passive income with little or no capital at minimum risk.
So, What is AUM?
Well, have you invested your money into unit trust funds?
If you do, then, your investments within the fund is a part of the fund’s AUM. In brief, AUM is the size of a unit trust fund. But, if you are new to investing or this concept of AUM, here is a quick illustration on it:
Let’s say, I have a fund management license.
I founded ‘Ian’s Provident Fund’, a unit trust fund which invests in different asset classes namely, equities, bonds, and money market instruments in Asia-Pacific.
I hired digital marketers to promote my fund on social media and let’s say, you’d stumbled upon my ads and are interested in investing in my fund.
You decided to make an initial investment of $10,000 into my fund. Many others had followed suit and as a result, I convinced 10,000 people to invest $10,000 in the fund. So now, the size of my fund or the fund’s AUM is now $100 million.
How Do I Make Money from You?
There are two key ways that I can make money from you.
First, I will impose a sales charge of 3% for every dollar in initial investment into my unit trust fund. So, I’ll earn $300 in sales charge from your initial investment of $10,000 in my fund.
Second, I will charge an annual management fee of 1% based on the total value of your investments in the fund. So, what does it mean? Basically, it means that if your investments in my fund:
a. Increase in Value to $15,000: I’ll earn $150 in annual management fees.
b. Retain its Value at $10,000: I’ll earn $100 in annual management fees.
c. Drops in Value to $5,000: I’ll earn $50 in annual management fees.
Can you see that it really doesn’t matter how the stock market performs? It can go up, come down and move sideways. But, the fact is this: I’ll continue to earn money from you for as long as I can keep you invested in my unit trust fund.
But, you may ask:
How Do I Keep You Invested if the Stock Market Crashes?
That is simple.
I would reiterate that unit trust is a mid-to-long term investment.
Also, I may encourage you to exercise dollar-cost-average (DCA) so that you can buy more units in my fund, instead of you cashing your investments out. Thus, I could still earn sales charges from you even if the stock market has crashed. My downside is quite protected as I’m still earning profits from the remaining value of investments retained in my fund and sales charges from investors who like to DCA on my fund. Besides, I don’t have any capital invested in my own fund.
With that, I’ll reveal 3 different viewpoints on how the rich sees unit trust funds from the rest of the population:
You invest your own money to make money from investing into my fund.
I make money from your investments. I don’t have capital invested in my fund.
You are likely to measure a fund’s performance based on capital gains.
I make profits in the form of cash flow from your investments into my fund.
c. Stock Market Crashes:
You are likely to be concerned about the ups and downs of the stock market.
I make money regardless. My task is to keep you invested for the long-term.
Public Mutual Bhd: A Profit Machine to Public Bank Bhd
Presently, Public Bank Bhd owns 100% shareholdings of Public Mutual Bhd.
Public Mutual Bhd had increased the AUM of all its unit trust funds consistently from RM 23.4 billion in 2008 to RM 86.6 billion in 2019. How much could Public Bank earn in passive income a year from having an AUM of RM 86.6 billion?
From Public Bank’s annual reports, we’ll learn that Public Mutual Bhd increased its Profit Before Tax (PBT) from RM 183.3 million in 2008 to RM 646.8 million in 2019, thus, accounting for 9% of Public Bank’s Total PBT in that year.
Of course, Public Bank is just one of the many operators of unit trust funds. It is a classic example of how the ultra-rich guarantee steady profits year-after-year at all times in the stock market, without investing their own money into them.
To name a few more, we will find that, in 2019:
a. DBS has an AUM of S$ 245 billion in its wealth management business.
b. OCBC has an AUM of S$ 227 billion in its wealth management business.
c. UOB has an AUM of S$ 127 billion in its wealth management business.
Thus, it is evident that unit trust is a great ‘long-term investment’ for the rich to earn recurring income year-after-year in all market conditions without investing their own money into it. And because of this, we now have:
New Kids on the Block
This will include fintech wealth management firms such as iFast Corporation Ltd (headquartered in Singapore), Lufax (China), and a dozen of robo-advisory firms such as StashAway, Wahid, Raiz, and Mytheo.
They appeal to a new generation of investors as these platforms offer a number of liquid investments (Equities, Bonds, ETF, Index funds, Money Market funds … etc) conveniently online at lower sales charges and annual management fees. It is seen as a new alternative to the traditional method of buying unit trust funds from bankers, unit trust agents, and financial planners.
So, how will it impact the conventional unit trust industry?
Will it put a dent to the amount of yearly passive income to banks who operate unit trust funds?
To answer these questions, let me ask you the following:
a. What is the proportion of uncles, aunties, SME owners and owners of publicly listed companies who will sell off their unit trust funds and invest them into FSM (iFast) or any of the robo-advisory firms stated above?
b. Are banks willing to embrace technology and invest into Blockchain, Machine Learning, Artificial Intelligence (AI) … etc to introduce new investment or wealth management apps that would rival or are better than the ones offered by these new fintech players?
c. Will banks form partnerships with fintech firms so that they could leverage on each other’s strength to introduce better wealth management products or apps in the market? Or, would banks just acquire stakes in these fintech firms?
Of course, there are a lot more questions to be answered than the three stated above as both the conventional and the digitised will continue to coexist in the market presently. Only time could verify our own independent views on both the resilience of the traditional unit trust industry and on the maturity of the fintech corporations in the near future.
AUM is an asset of the ultra-rich as they earn recurring risk-free passive income year-after-year from it. The letter written above is intended to explain what the ultra-rich think about unit trust and how it is different from others, reveal why I will want to find out a bank’s AUM when assessing its income-generating ability and finally, to discuss the new competition that was brought by fintech firms as we become more tech-driven and digitised as a society.
So, what are your thoughts on AUM and the discussed above?
Maybe you can post your views by replying to this article so that we can all learn from each other.