Rapid adoption of financial technology by financial sector firms in recent years has warranted the need to understand their effect on the responses of other markets in the players. Robo-advisor is a financial technology that is provided as a new product to consumers. The purpose of this study is to understand their impact on the evolution of the financial advisory market.
I use novel hand-collected data on robo-advisors to study the empirical patterns among various players (firms that offer robo-services vs firms that do no offer robo-services) in this market. Using a simple extensive game model, I propose a channel through which the observed market evolution can be explained. I further use empirical analysis to confirm the implications of the model.
I find that in response to the entry of robo-advisors incumbent firms adopt robo-advisory technology. I also find that in response to the incumbent firms adopting robo-advisory technology, the already existing robo-advisory firms increase their number of financial advisors. I also show that a demand expansion for financial advisors is induced due to the advent of robo-advisors – and this explains the observed responses by various players.
To my knowledge, there is no paper that has examined the responses of various players in the market due to the adoption of financial technology. Understanding the evolution of the market and the responses of players is the first step in estimating the evolution of various market-level variables, like market power. Understanding the responses of various players is important as this would guide policy makers to create an optimal policy that would improve the welfare of various players.
