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What drives robo-advice?

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  • Scherer, Bernd
  • Lehner, Sebastian

Abstract

The promise of robo-advisory firms is to provide low-cost access to diversified portfolios built according to academic literature on normative portfolio choice. We investigate the extent to which robo-advice aligns with normative advice. Using web-scraped portfolio recommendations for 151,200 investor types from a major US robo-advisor, we find that investment goals and time horizons significantly influence recommended equity allocations, while Merton-type hedging demands are largely ignored. Our results suggest that commercial robo-advisors prioritize simplicity and client perceptions over complex, normative models. By integrating data from the NFCS survey, we further explore how demographic factors influence the likelihood of using robo-advisory services. This study provides empirical evidence on how closely robo-advisory services align with normative portfolio theory, highlighting the practical compromises made in the pursuit of broad market appeal and user-friendly solutions.

Suggested Citation

  • Scherer, Bernd & Lehner, Sebastian, 2025. "What drives robo-advice?," Journal of Empirical Finance, Elsevier, vol. 80(C).
    • Handle: RePEc:eee:empfin:v:80:y:2025:i:c:s0927539824001087
    DOI: 10.1016/j.jempfin.2024.101574
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    Cited by:

    1. Christian Fieberg & Lars Hornuf & Maximilian Meiler & David J. Streich, 2025. "Using Large Language Models for Financial Advice," CESifo Working Paper Series 11666, CESifo.

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    More about this item

    Keywords

    Robo-advice; Portfolio theory; Merton hedging demand; Behavioral finance; Demographic factors;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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