A robo-advising platform was found to have some short-term benefits for investors who used it. Diversification improved and the tendency to sell winners instead of losers was reduced. The effect varied by the type of investor. Due to the short-term nature of the study, it is unclear whether the benefits will be lasting.

The robo-advising technology that was analyzed, called Portfolio Optimizer, was introduced by an Indian brokerage firm to its clients in 2015. Unlike the largest robo-advisers in the U.S., Portfolio Optimizer caters to investors wishing to own individual stocks. The study’s authors were able to get detailed information on the brokerage firm’s clients’ holdings and trading activity, providing them with the data necessary to test what effect the tool had over the period of July 2015 through February 2017.

Users of the robo-advising tool were more active, logging into their online accounts more frequently, trading more often and transacting in larger monetary amounts than non-users. Users also had larger accounts and held more stocks.

The number of stocks held by most investors increased once they started using the tool. Investors holding just one or two stocks before using Portfolio Optimizer doubled the number of holdings they owned after using it. A decreasing magnitude of increases was found among other users. Above 10 stocks, investors tended to reduce the number of investments in their portfolio. One reason may have been due to suggestions from the service.

Diversification, as measured by portfolio volatility, improved for most groups. Investors who held diversified portfolios before using the tool did not see any increase in volatility after using it.

A reduction, but not an elimination, of the disposition effect was attributed to the robo-advising tool. The disposition effect is the tendency to sell winners and hold onto losers. The difference between the proportion of gains realized and the proportion of losses realized decreased by about 30%. The reduction was most pronounced among those investors who held five or fewer stocks.

Though this study was specific to an Indian brokerage firm, it was unique in its focus. To date, there has not been much research into what impact robo-advisers are actually having on investor’s portfolios and behavior.

Source: “The Promises and Pitfalls of Robo-Advising,” by Francesco D’Acunto, Nagpurnanand Prabhala and Alberto Rossi; CESIFO Working Paper, February 2018.

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