Does FinTech Democratize Investing?

Abstract

We provide evidence that automated asset management affects wealth inequality by reducing a fixed cost of household investment in risky asset markets: account minimums. Using data from a large U.S. robo advisor, we show how an unexpected, 90% reduction in account minimum shifts the wealth distribution of robo investors leftward to become more representative of the U.S. population (i.e. more “democratic”). The reduction increases stock market participation among households from the middle quintiles of the U.S. wealth distribution, raising their risky share by 27 percentage points and their total return on liquid assets by 2 percentage points, relative to wealthier households. However, the reduction has no effect on households in the bottom quintile of the U.S. wealth distribution, suggesting that automation has an ambiguous effect on wealth inequality by favoring middle class households over both the lower and upper classes.

Keywords: FinTech, Stock Market Participation, Financial Advice, Inequality

JEL Classification: G11, G24, D3, O3