Automated Financial Management: Diversification and Account Size Flexibility

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