Asset managers have many potential career paths ahead of them. Asset managers who work for mutual funds, for example, manage money for retail clients, while asset managers at investment banks often invest money for institutional investors, like companies or municipalities. Asset managers can also work for hedge funds, which combine outside capital with capital contributed by the partners of the fund and invest the money (using complex and sometimes risky techniques) with the goal of earning extraordinary gains.

Insiders say that investment management is a misunderstood field. "So many people think its investment banking; they think it?s capital markets," says Michael Weinstock, a recruiter with Manhattan-based Advisors Search Group. Essentially, says Weinstock, "The industry is built around people who would like to have their money managed, whether it's for pension funds, 401(k) plans, endowments, foundations, high-net-worth individuals, families or trusts.? Investment management relies on customers who feel comfortable "giving money to a professional and saying, 'You're on the pulse of the market. Watch my money for me. Manage it for me.' Investment managers have the autonomy to do this without clearing every trade with our clients."

Buy side vs. sell side

To manage the assets under their purview, investment managers buy stocks, bonds and other financial products from salespeople at investment banks who are on what is called the "sell side." Because sell-siders earn commissions on every trade they facilitate, they provide research and ideas to the buy side--along with perks like prime seats to sporting events, sold-out concerts and expensive dinners at fancy restaurants--in hopes of making their securities look especially appealing. "In general, if the sell-side person is with you, there's no limit on what he can spend," says an insider at Lazard, an international investment bank and money manager.

Back on the "buy side," asset management firms build their business around supporting the people who manage portfolios, including analysts, administrative support staff and marketers who drum up the business and educate clients about their investments.

Although asset management firms exist virtually everywhere there's money to invest, New York and Boston are buy-side centers. The largest firms employ several hundred professionals to manage total assets upwards of hundreds of billions of dollars, covering both institutional and individual clients. Smaller shops may employ three or four professionals to handle $300 million to $800 million in institutional money. Firms serving high-wealth clients use about the same number of people to manage slightly less money. Major firms also have roots in Los Angeles, San Francisco and Chicago. Other cities considered up-and-coming include Baltimore, Minneapolis, Atlanta, Denver, Dallas, Fort Worth and San Diego.

History / State of the Industry

While the informal process of managing money has been around since the beginning of the 20th century, the industry did not begin to mature until the early 1970s. Prior to that time, investment management was completely relationship-based. Assignments to manage assets grew out of relationships that banks and insurance companies already had with institutions--primarily companies or municipal organizations with employee pension funds--that had funds to invest. (A pension fund is set up as an employee benefit. Employers commit to a certain level of payment to retired employees each year and must manage their funds to meet these obligations. Organizations with large pools of assets to invest are called institutional investors.)

These asset managers were chosen in an unstructured way--assignments grew organically out of pre-existing relationships, rather than through a formal request for proposal and a bidding process. The actual practice of investment management was also unstructured. At the time, asset managers might simply pick 50 stocks they thought were good investments--there was not nearly as much analysis on managing risk or organizing a fund around a specific category or style. (Examples of different investment categories include small-cap stocks and large-cap stocks.) Finally, the assets that were managed at the time were primarily pension funds. Mutual funds had yet to become broadly popular.

ERISA, 401(k) plans and specialist firms

The two catalysts for change in the industry were: 1) the broad realization that demographic trends would cause the U.S. government's retirement system (Social Security) to be underfunded, which made individuals more concerned with their retirement savings, and 2) the creation of ERISA (the Employment Retirement Income Security Act) in 1974, which gave employees incentives to save for retirement privately through 401(k) plans. (401(k) plans allow employees to save pre-tax earnings for their retirement.) These elements prompted an increased focus on long-term savings by individual investors and the formation of what can be described as a private pension fund market.

These fundamental changes created the opportunity for professional groups of money managers to form "specialist" firms to manage individual and institutional assets. Throughout the 1970s and early 1980s, these small firms specialized in one or two investment styles (for example, core equities or fixed income investing). During this period, the investment industry became fragmented and competitive. This competition added extra dimensions to the asset management industry. Investment skills, of course, remained critical. However, relationship building and the professional presentation of money management teams also began to become significant.

The rise of the mutual fund

In the early to mid-1980s, driven by the ERISA laws, the mutual fund came into vogue. While mutual funds had been around for decades, they were only used by financially sophisticated investors who paid a lot of attention to their investments. However, investor sophistication increased with the advent of modern portfolio theory (the set of tools developed to quantitatively analyze the management of a portfolio). Asset management firms began heavily marketing mutual funds as a safe and smart investment tool, pitching to individual investors the virtues of diversification and other benefits of investing in mutual funds. With more and more employers shifting retirement savings responsibilities from pension funds to the employees themselves, the 401(k) market grew rapidly. Consequently, consumer demand for new mutual fund products exploded (mutual funds are the preferred choice in most 401(k) portfolios). Many specialists responded by expanding their product offerings and focusing more on marketing their new services and capabilities.

The year of the mutual fund scandal

Following his high-profile investigation into the research practices of several Wall Street firms in 2002, then-New York State Attorney General Eliot Spitzer began another industrywide probe in 2003. This time, he set his sights on the mutual fund industry, specifically looking into whether fund companies took advantage of inefficiencies in the stock market by quickly trading in and out of their funds to turn a fast buck, a practice hurting long-term fund investors. Spitzer found that many companies had indeed taken part in illegal market-timing practices. As a result, several companies and employees were hit with healthy fines.