Automated Financial Management: Diversification and Account Size Flexibility

Volume 17, No. 2, 2019
Michael Reher and Celine Sun

We study the value added of automated financial management (AFM) services along two
dimensions: diversification and account size exibility. First, using a company-specific
experiment with matched AFM and traditional portfolios, we find that 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.