Automated Financial Management: Diversification and Account Size Flexibility

Journal of Investment Management 17(2):1-13

21 Pages Posted: 21 Nov 2016 Last revised: 4 Sep 2019

See all articles by Michael Reher

Michael Reher

University of California, San Diego (UCSD) - Rady School of Management

Celine Sun

Wealthfront, Inc.

Date Written: February 2019

Abstract

We study the value added of automated financial management (AFM) services along two dimensions: diversification and account size flexibility. First, using a company-specific experiment with matched AFM and traditional portfolios, we find AFM portfolios are significantly better diversified. Underdiversified investors are more likely to set up an AFM account, with a 1 standard deviation increase in underdiversification raising the probability of doing so 3 percentage points. Next, we study account size flexibility using an exogenous reduction in minimum account size. The reduction led to a net increase in total deposit inflows and disproportionately raised new account formation by less-wealthy investors.

Keywords: Portfolio Choice, Financial Advice, Household Saving, Financial Innovation

JEL Classification: G11, G23, D14, D18

Suggested Citation

Reher, Michael and Sun, Celine, Automated Financial Management: Diversification and Account Size Flexibility (February 2019). Journal of Investment Management 17(2):1-13. Available at SSRN: https://ssrn.com/abstract=2872134 or http://dx.doi.org/10.2139/ssrn.2872134

Michael Reher (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Celine Sun

Wealthfront, Inc.

900 Middlefield Rd
Redwood City, CA 94063
United States

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