Robo-Advisors and Investment Behavior: A Comparative Analysis

Abstract

The rapid growth adoption of digital technologies into the realm of financial services has reformed the attitude of people towards investment. One of the most well-known new innovations is robo-advisors, which are automated sites that use algorithms to offer portfolio management and financial advisory without much human contact. The paper focuses on how robo-advisors have an impact on investment behavior relative to the conventional models of advice. Major dimensions studied in the research are accessibility, cost effectiveness, predictive risk, decision making styles, and trust. The paper, through a comparative context, shows how robo-advisors are democratizing investing by lowering the bar to entry and the provision of customized advice at lower rates when compared to the traditional advisor who has an advantage to being able to give customized advice in volatile market conditions and complex financial planning. The behavioral dimensions of investor confidence, reliance on automation and exposure to market bias are examined in an effort to determine the implications of technological mediation on the attitudes towards risk and return. The results offer some indications that, whereas deep-pocket investors are attracted to the robo-advisors with their focus on investing to younger, technology-savvy, and budget-conscious investors, traditional advisors that emphasize interpersonal trust, assurance in a more emotional context and subtle financial analytic skills still appeal to those who may be less cost conscious and
more verbal in their hip pocket demands. Finally, the paper points to the complementary nature of the two respective advisory solutions, noting that hybrid models have tremendous potential to be able to achieve a balance between efficiency and personalized service. This analytical comparison serves the purpose of the current discussion on the future of financial intermediation to provide advice to regulators, financial institutions, and investors who want to maximize on advisory services amid the current digital environment.