Disruption and Competition in the Financial Advisory Market

Antje Berndt and Sevin Yeltekin
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Antje Berndt: Australian National University
Sevin Yeltekin: Carnegie Mellon University

No 1585, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We propose a model of entry and competition in the financial advisory market. Firms are heterogeneous with regard to the level of customization they offer to their clients. Customization measures advisors’ capacity to tailor their services, including the frequency of human interactions, towards individual clients’ needs. Low-customization firms such as robo advisors specialize in fully automated portfolio investing, whereas high-customization firms offer a higher level of human touch and provide more comprehensive and tailored wealth management services. Our model is able to generate stylized market features which we document, including high levels of concentration and low market participation in the absence of innovation and better price-quality tradeoffs and higher market participation when innovators enter. We use our framework to discuss the welfare implications of new digital technologies emerging and new entrants—such as RoboAdvisors—disrupting the market.

Date: 2019
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