The Utilization of Robo-Advisors by Individual Investors: An Analysis Using Diffusion of Innovation and Information Search Frameworks Lu Fana and Swarn Chatterjeeb This study examines the roles of internal and external search characteristics and attitudinal factors in investors’ decisions to utilize robo-advisor-based platforms. Using the 2015 state-by-state National Financial Capability Study and Investor Survey, this study finds that the need to free up time, higher risk tolerance, higher subjective financial knowledge, and higher amounts of investable assets were positively associated with individual investors’ adoption of robo-advisors. Additionally, the results from the interaction model indicates that individuals under 65 with a higher risk tolerance and greater perceived investment knowledge were more likely to use robo-advisors. Implications of the key findings for scholars, practitioners, and industry leaders are included. Keywords: financial literacy, fintech, financial planning, information search, investment knowledge, robo-advisor ntense debates continue about the comparisons between However, it is notable that some robo-advisor features, robo-advisors and traditional human financial advi- including easy accessibility, automated operations and port- Isors. Robo-advisory services (also referred to as robos) folio management, portfolio recommendations, low human have become increasingly popular and have continued involvement, and the digitalized financial technology, may to increase in number since 2008. The economic recov- be attractive to different groups of users and contribute to ery from the recent financial crisis has paved the way the diversity of the financial planning and wealth manage- for financial technology (fintech) and financial digitaliza- ment industry in terms of service delivery and investment tion to make financial services and products more cost- digitalization. efficient and accessible for the majority of investors. The competition resulting from the emergence of robo- In general, robo-advisors are computer-automated invest- advisors has catalyzed a lower-fee environment and forced ment platforms. A typical user completes a question- many traditional financial services firms to consider revis- naire regarding the investment time horizon, goals, and ing their fee structures or integrating robo-advisory plat- risk tolerance. The robo-advisor then incorporates these forms into their offerings to remain competitive in the answers into a complex programmed algorithm to generate market. an optimal customized portfolio for the client. Currently, U.S.-based robo-advisors, such as Betterment, Wealthfront, Meanwhile, traditional human financial advisors face chal- Schwab Intelligent Portfolio, and others are being utilized lenges brought about by the increasing presence of robo- by early adopters, due to their lower cost compared to tra- advisor-based services. Successful traditional client-facing ditional human-involved financial advice systems (Rosen- financial advisors develop deep relationships with clients berg, 2018). over time, invest more time in providing services, and also utilize quality administrative and executive support to One key reason for the fast-growing robo-advisor plat- manage and operate their advisory firms (Kitces, 2018). forms is the comparatively lower costs associated with their aAssistant Professor, Department of Personal Financial Planning, University of Missouri, 239 Stanley Hall, Columbia, MO 65211. E-mail: [email protected] bRedwood Professor, Department of Financial Planning, Housing and Consumer Economics, University of Georgia, 205 Dawson Hall, Athens, GA 30602. E-mail: [email protected] Pdf_Folio:130 130 Journal of Financial Counseling and Planning, Volume 31, Number 1, 2020, 130-145 © 2020 Association for Financial Counseling and Planning Education® http://dx.doi.org/10.1891/JFCP-18-00078 services. Using a dataset with 250 global robo-advisors, (b) annual management fees, (c) investment products and researchers showed that the average annual fee for tradi- asset allocation in the portfolio, (d) tax services, (e) goal- tional financial advisors was 0.7% of assets under manage- based planning, and (f) automation (Ludwig, 2018; Phoon ment; whereas by comparison, fewer than 20% of the robo- & Koh, 2017). Several U.S.-based robo-advisors have also advisory companies charged fees higher than 0.7%, and begun providing tax planning services to their clients along none of the robo-advisors that charged the higher fees were with sophisticated tax planning strategies such as ”tax loss located in the United States. Additionally, robo-advisor uti- harvesting” (Phoon & Koh, 2017). Tax-planning features lization has been associated with increased investment con- and goals-based investment advisory styles have also con- fidence among the participating investors (Phoon & Koh, tributed to robo-advisors’ popularity. 2017). Some features and functionalities offered by robo- advisors, such as automatic deposits, rebalancing, tax-loss Successful robo-advisor platforms provide automated port- harvesting, and asset allocation of the portfolio, and so forth. folio allocation techniques at a cost lower than the more simplify investment and portfolio management for users. In conventional human interaction-based investment advisory fact, according to a recent LendEDU report, almost half of services (Phoon & Koh, 2017). There are other benefits of millennials are intimidated when it comes to engaging with robo-advisory platforms as well. For example, Salo (2017) a human financial advisor (Brown, 2017). Therefore, robo- summarized that robo-advisors usually offer more consis- advisors are expected to play an even larger role in the future tent and neutral investment recommendations than those by effectively attracting potential new investors and, in the offered by human advisors, as human nature may cause process, increasing the general financial advisory service bias and inconsistency. Ease of use is another advantage inclusion, especially for segments of the population in their that robos provide over human advisors. First, most robos prime stage of wealth accumulation. require minimum information input and less frequent infor- mation update from clients. This format may be more con- However, limited research to date has investigated robo- venient for those who wish to save their time. Additionally, advisor adoption behavior. This study therefore addresses robos provide easy accessibility to users, meaning that users the need for a systematic framework to understand robo- can monitor and manage their portfolios via their computers advisor adoption and utilization among individuals and or mobile devices without any time or other limitations. households. The diffusion of innovation theory (Rogers, 1962) and the information search model (Beales, Mazis, There are, however, some factors preventing people Salop, & Staelin, 1981) provide theoretical support for the from adopting robo-advisors. For example, according to analysis of the new developments in financial technology- a research poll conducted by LendEDU, although it is based platforms and help understand the importance of believed that millennials are the targeted users of robo- information sources as they relate to the robo-advisor uti- advisors, the majority (more than 75.7%) reported not hav- lization decision-making process. ing worked with any type of robo-advisor. The biggest rea- son behind this was that most millennials had never heard Literature Review and Hypotheses of robos, followed by their fear that robo-advisors may Previous Research not be as efficient as human advisors in preventing poten- There have been various definitions of the term “robo- tial losses (Brown, 2017). In the same report, those who advisor.” For example, Sironi (2016) clearly defined robo- showed a favorable attitude toward robos believed that the advisors as “automated investment solutions which engage most important advantage stems from the easiness of initi- individuals with digital tools featuring advanced customer ating the investment process with robo-advisory platforms, experience,” and robo-advisors are “conveniently supported followed by their constant accessibility, cost-efficiency, by portfolio rebalancing techniques using trading algo- technology, and tax-efficiency. Moreover, LendEDU doc- rithms” (p. 8). Fein (2015) depicted robo-advisors as “a umented in another report that there might be some over- growing number of Internet-based investment advisory ser- optimism among millennial robo-advisor users (Hamory, vices aimed at retail investors” (p. 2). Investors typically 2018). Interestingly, almost half (42.25%) of participat- need to consider several factors when using financial advi- ing millennial investors expected robo-advisors to outper- sors,Pdf_Folio:131 including (a) minimum initial investment amount, form the market. Since most robos recommend portfolios Journal of Financial Counseling and Planning, Volume 31, Number 1, 2020 131 consisting of Exchange-traded funds ETFs and use passive the portfolios generated by these robos, based on a moder- management, it is more likely that the portfolio would track ately risk-tolerant user, were focused on short-term returns or sometimes even underperform the market. It is also sur- (an average of 3–5 years) rather than long-term accumu- prising to see that most participants reported their invest- lations. Moreover, they also found that the average user’s ment horizon using robo-advisors as falling