The Death of Discretionary Asset Management and Rise of Data-Driven Investment

3 min read

Data-driven services have made the active asset management industry experience a major shakeup, as these investment strategies (especially digital services) continue to grow in popularity. Their lower cost and greater efficiency make them more and more attractive to potential clients.

Discretionary fund management is losing its appeal to investors. These firms typically charge based on a 2/20 structure, while rarely beating the success of index funds. Algorithmic investment models continue to rise because they tend to deliver better yields while keeping costs low. As a result, many traditional investment management firms have transitioned to try to stay competitive.

The growth of data-driven investments has reduced the presence of long-only mutual and hedge funds. The investment strategies of such funds can be copied simply using a dynamic index ETF. Instead, investors looking for superior returns through active management are starting to turn to data-driven models, as they provide more stability, aggressive testing, and are not subject to the pitfalls of discretionary management, including high fees, behavioral biases, and improper valuations.


Robo-investing is one form of data-driven investment management that is exploding in growth. Robo-investment managers are also called robo-advisers, online investment advisers, or automated investment managers. They provide digital investment advice and management with little or no human involvement. Instead, they rely on algorithms for their management strategies. These algorithms are software-based and are, therefore, automated. This allows robo-advisers to manage and divide assets in an optimal way for clients.

Robo-investing entered the market in the aftermath of the 2008 financial crisis as a response to the major changes in the industry. In particular, investors desired to manage their assets in a personal way. Currently, robo-investment services manage more than $60 billion in assets worldwide. That number is projected to reach $2 trillion by 2021. Robo-advisers are most common among American investors, but they have a growing presence elsewhere.

As of 2018, there are more than 100 robo-investment services on the market. This growth is due to robo-investment services’ lower fees and better performance. On average, digital services tended to score higher than human managers in these areas. These price cuts have also enabled new clients to engage with the market. This expands the investor base available to these services.

Robo-advisers consider clients’ willingness to take on risk, making robo-investing popular with middle-class clients who cannot afford traditional managers. They also consider the ways to best achieve the desired goals. Clients can even choose between passive asset allocation strategies and active asset management. These qualities give robo-investing a degree of flexibility and affordability and make it preferable to traditional asset managers.

On top of this, robo-investment services do not need customers to buy a service bundle to access portfolio management tools. This is another important distinction from many traditional investment managers. It is common for traditional managers to only offer their portfolio services as bundles. This puts asset management even further outside the reach of many potential clients.

Robo-advisers also have far lower minimum investment amounts. These can be as low as $500, making them available to middle-class investors looking to grow their portfolios. This opens such services to a whole new segment of the market. It is common for traditional asset managers to have minimum investment amounts of $50,000 or more. This puts them far outside the range of the average person’s investment capabilities.

The Need for Change

Traditional asset managers often charge investors significant fees for their services. These fees have become less reasonable with the profitable and reliable growth of data-driven services. Meanwhile, modern data-driven investment services are often more efficient in choosing smart investments and charge far lower fees than traditional managers. Therefore, traditional investment managers must increase their appeal to justify their higher rates. This means they must change how they operate or what services they offer.

All this indicates that traditional active asset managers are being forced to evolve. Investors have many new expectations. Traditional managers must choose superior performance, competitive pricing, or a superior product.

As data-driven services grow in popularity and prove to be more effective, many traditional managers have cut their prices. Although traditional investment managers can be a good choice if the cost is low enough, many charge fees that make them an unrealistic choice for investors in comparison to data-driven commercial services.

This trend will continue if traditional managers cannot prove they offer superior performance. This will lead many to hire more data scientists and engineers to continue to improve. If traditional managers cannot compete, they may have to offer a different product. This is their only option to remain relevant. It may involve transitioning from liquid to illiquid markets that still require human involvement. In these areas, data-driven services do not have the strong upper hand as with liquid assets. Illiquid assets often require negotiation and cannot be operated automatically.

What is the Bottom Line for Traditional Asset Management?

Many experts deem it unlikely that data-driven services will be the death of traditional asset management. However, it is clear that traditional managers need to adapt their services. This is the only way they can compete and stay relevant. Traditional assets that successfully navigate this market-wide transition will survive. Those that fail will go by the wayside, however.

In the meantime, data-driven asset managers will continue to grow as their superior results and lower costs draw new clients. The rapid growth of data-driven investing shows that these industry changes are here to stay. It is up to traditional investment services to decide if they want to stay, too.

John DeCleene Whilst having spent a lot of his life in Asia, John DeCleene has lived and studied all over the world - including spells in Hong Kong, Mexico, The U.S. and China. He graduated with a BA in Political Science from Tulane University in 2016. Fluent in English and proficient in Mandarin and Spanish, he can communicate and connect with most of the world’s population too, and this certainly helped John as he gained work experience interning for the U.S.-Taiwan Business counsel in Washington D.C. as an investment analyst and then working alongside U.S. Senator Robert P. Casey of Pennsylvania as a legislative intern. He subsequently worked as a business analyst for a mutual fund in Singapore, where his passion for travel and aptitude for creating connections between opportunities and ideas was the perfect intersection of natural ability and experience, spending his time travelling between Cambodia, Hong Kong, and China investigating and discovering untapped investment opportunities. John is a fund manager for OCIM’s fintech fund, and currently progressing towards becoming a CFA charter holder. He loves to travel for business and pleasure, having visited 38 countries (including North Korea); he represents the new breed of global citizen for the 21st century.

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