Influence of Demographic and Socio-Economic Factors on Trust in Robo- Advisory Services among Russian Individuals
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Abstract 2
Statement of Substantive Character of the Term Paper 3
1. Introduction 5
2. Literature review 8
2.1. Robo-advising 8
2.2. Trust to the industry 9
2.3. The role of help-seeking behavior 10
2.4. Identifying the socio-demographic characteristics of robo-advisory services client 12
2.5. Literature gap & Hypothesis 14
3. Data and methodology 17
3.1 Survey 17
3.2 Model 20
4. Results 22
5. Discussion 32
6. Conclusion, Limitations, Suggestions for future work 38
List of references 42
Statement of Substantive Character of the Term Paper 3
1. Introduction 5
2. Literature review 8
2.1. Robo-advising 8
2.2. Trust to the industry 9
2.3. The role of help-seeking behavior 10
2.4. Identifying the socio-demographic characteristics of robo-advisory services client 12
2.5. Literature gap & Hypothesis 14
3. Data and methodology 17
3.1 Survey 17
3.2 Model 20
4. Results 22
5. Discussion 32
6. Conclusion, Limitations, Suggestions for future work 38
List of references 42
The rise of robo-advisors, or automated online services that employ computer algorithms to manage consumers' investment portfolios and provide financial advice, has significantly changed the financial advice business over the past ten years (Fisch, 2019).
Even though a lot of people and businesses understand the importance of investing and would like to build their own investment portfolio, a lot of people still view investing as a challenging task that is complicated on both the supply and demand sides of the financial asset market. The presence of numerous enterprises from various industries, extensive international trade, an unpredictable political landscape, and a large number of distinct industries have all contributed to the current complexity of the financial markets. Apart from understanding the expanding range of financial products, investors also need to assess risk, the consequences of compounding, the tax implications of various investment options, and the best way to phase out withdrawals from their portfolio over time (Nanjundaswamy, 2023). Due to these factors, people have to turn to the services of financial advisors in order to minimize risks and improve the effectiveness of their investment portfolio.
The robo-advisor is a more accessible and often more convenient alternative to a financial advisor for ordinary people. Based on the information provided by the customer, the robo-advisor utilizes computer algorithms to recommend investments that are considered suitable in terms of asset allocation and diversification. The most common options here are exchange-traded funds (ETFs) and inexpensive mutual funds. Robots allocate the client's portfolio according to the recommended asset allocation, which is usually subject to client modification. Additionally, robots provide continuing portfolio management for their clients, reinvesting dividends, redemptions, and interest payments, as well as automatically rebalancing the portfolio on a regular basis to maintain the appropriate asset allocation. Tax losses in taxable investments are also harvested by certain robots (Ruhr, 2019).
The growing popularity of robo-advisory services is a direct consequence of their advantages over traditional financial advisors, which are as follows. Firstly, robo-advisory services are available 24 hours a day, 7 days a week. Unlike traditional financial advisors, they do not have days off, non-working hours, and fatigue factors. Moreover, the commissions of robo-advisory services are significantly lower than those of financial advisors. Also, many robo-advisory services do not have a lower investment limit, which means it makes advisory services accessible to not only wealthy clients but also investors with lower investable amounts (Jung, 2018). The variability of investment portfolios offered by robo-advisory services and their personalization are also much higher.
Undoubtedly, the decision to invest in itself, as well as the choice between robo-advisory and traditional financial advisors, depends on many individual factors of a person, such as their income level, education, living conditions, age, retirement status, previous investment experience and others (Fulk, 2023). These factors have been examined in sufficient detail for the American and European markets, however, when analyzing the situation in Russia, research gap is revealed, since the influence of various socio-economic and demographic factors on trust and the use of robo-advisory services by Russians has hardly been studied.
At the same time, the Russian population has a large number of differences from the American and European ones, as a result of which it can be assumed that the results will differ. The rationale behind conducting this research is the assumption that Russians differ significantly from the population of Western countries. Consequently, it was deemed necessary to investigate the factors influencing their trust in robo-advisors. In order to address this problem, the following research question was formulated:
What demographic and socio-economic factors influence trust in Robo-advisory services among Russian individuals?
Considering the research question and the previously mentioned context, the goal of the paper can be formulated in the following way. The goal of this study is to examine the impact of socio-demographic and economic factors on the level of trust in robo-advisory services among individuals in Russia, with the aim of identifying the level of influence of each factor on a level of person’s trust in automated financial advisory services.
In order to achieve the goal of this paper, the following research objectives were formulated:
• To identify the socio-demographic factors such as age, gender, education level,
income etc. that might influence trust in robo-advisory services among Russian individuals.
• To identify the economic factors such as employment status, financial literacy, investment experience etc. that might impact influence in robo-advisory services among Russian individuals.
• To recognize the level of influence of each factor on trust in automated financial advisory services in the Russian context.
This paper can be classified as quantitative. In order to achieve the objectives of the work and obtain high-quality results, the research methodology which is described in the following paragraph will be used.
...
Even though a lot of people and businesses understand the importance of investing and would like to build their own investment portfolio, a lot of people still view investing as a challenging task that is complicated on both the supply and demand sides of the financial asset market. The presence of numerous enterprises from various industries, extensive international trade, an unpredictable political landscape, and a large number of distinct industries have all contributed to the current complexity of the financial markets. Apart from understanding the expanding range of financial products, investors also need to assess risk, the consequences of compounding, the tax implications of various investment options, and the best way to phase out withdrawals from their portfolio over time (Nanjundaswamy, 2023). Due to these factors, people have to turn to the services of financial advisors in order to minimize risks and improve the effectiveness of their investment portfolio.
The robo-advisor is a more accessible and often more convenient alternative to a financial advisor for ordinary people. Based on the information provided by the customer, the robo-advisor utilizes computer algorithms to recommend investments that are considered suitable in terms of asset allocation and diversification. The most common options here are exchange-traded funds (ETFs) and inexpensive mutual funds. Robots allocate the client's portfolio according to the recommended asset allocation, which is usually subject to client modification. Additionally, robots provide continuing portfolio management for their clients, reinvesting dividends, redemptions, and interest payments, as well as automatically rebalancing the portfolio on a regular basis to maintain the appropriate asset allocation. Tax losses in taxable investments are also harvested by certain robots (Ruhr, 2019).
The growing popularity of robo-advisory services is a direct consequence of their advantages over traditional financial advisors, which are as follows. Firstly, robo-advisory services are available 24 hours a day, 7 days a week. Unlike traditional financial advisors, they do not have days off, non-working hours, and fatigue factors. Moreover, the commissions of robo-advisory services are significantly lower than those of financial advisors. Also, many robo-advisory services do not have a lower investment limit, which means it makes advisory services accessible to not only wealthy clients but also investors with lower investable amounts (Jung, 2018). The variability of investment portfolios offered by robo-advisory services and their personalization are also much higher.
Undoubtedly, the decision to invest in itself, as well as the choice between robo-advisory and traditional financial advisors, depends on many individual factors of a person, such as their income level, education, living conditions, age, retirement status, previous investment experience and others (Fulk, 2023). These factors have been examined in sufficient detail for the American and European markets, however, when analyzing the situation in Russia, research gap is revealed, since the influence of various socio-economic and demographic factors on trust and the use of robo-advisory services by Russians has hardly been studied.
At the same time, the Russian population has a large number of differences from the American and European ones, as a result of which it can be assumed that the results will differ. The rationale behind conducting this research is the assumption that Russians differ significantly from the population of Western countries. Consequently, it was deemed necessary to investigate the factors influencing their trust in robo-advisors. In order to address this problem, the following research question was formulated:
What demographic and socio-economic factors influence trust in Robo-advisory services among Russian individuals?
Considering the research question and the previously mentioned context, the goal of the paper can be formulated in the following way. The goal of this study is to examine the impact of socio-demographic and economic factors on the level of trust in robo-advisory services among individuals in Russia, with the aim of identifying the level of influence of each factor on a level of person’s trust in automated financial advisory services.
In order to achieve the goal of this paper, the following research objectives were formulated:
• To identify the socio-demographic factors such as age, gender, education level,
income etc. that might influence trust in robo-advisory services among Russian individuals.
• To identify the economic factors such as employment status, financial literacy, investment experience etc. that might impact influence in robo-advisory services among Russian individuals.
• To recognize the level of influence of each factor on trust in automated financial advisory services in the Russian context.
This paper can be classified as quantitative. In order to achieve the objectives of the work and obtain high-quality results, the research methodology which is described in the following paragraph will be used.
...
Trust is a fundamental aspect that facilitates the growth of both an individual company and the industry as a whole. In the absence of trust, it is unlikely that any service, regardless of its advantages, will be able to secure a significant market share or gain a client base of sufficient size to remain competitive. In particular, trust is of great importance to industries that have only recently emerged and have not yet had sufficient time to gain credibility. In Russia, robo-advising, which emerged relatively recently on the country's territory and whose development was significantly hindered by the sanctions imposed on the country and business, can be identified as a representative example of such an industry. Nevertheless, there is every reason to believe that this sector will continue to develop, and therefore it is of the utmost importance for it to gain the trust of clients. Concurrently, no study has been conducted to investigate the level of trust Russians place in robo-advisory services. The objective of this study was to gain insight into the sociodemographic and economic factors that influence a person's trust in robo-advising services. To achieve this, a survey was conducted, and the responses were analyzed. It is this author's firm belief that the results of this study will contribute to the faster development of the robo-advising industry in Russia and will be useful to other researchers and companies that provide such services.
As a concluding remark, it is necessary to highlight the eight principal variables of an individual that directly influence the level of trust placed in robo-advising services in Russia. Out of them, those which increase the level of trust are:
1. Female gender
2. Entrepreneurship
3. Full-time job
4. Person lives in a house which he or she does not pay for
5. Knowledge of terminology related to investing
6. High level of personal investment portfolio diversification
At the same time, those which decrease the level of trust are:
1. Male gender
2. High level of education
3. Good knowledge of news related to investments
At the same time, the level of interest among the Russian population in the functions provided by robo-advising is higher than the level of trust. It can be reasonably assumed that there are additional factors influencing the level of trust in robo-advising services, in addition to sociodemographic and economic characteristics of an individual. In any case, the findings of the study rejected two out of three hypotheses which were based on the results of research conducted in Western markets. Consequently, the following hypotheses were rejected: The first hypothesis (H1) ‘In Russia, the likelihood of individuals to entrust their investments to robo-advisors decreases with age’ and (H3) ‘Russian citizens’ trust in robo-advising services will decrease as their income level rises.’ Both of these variables were found to be statistically insignificant. Conversely, hypothesis H2, ‘Russian citizens’ trust in robo-advising services will decrease as their education level rises.’, was accepted. The results of the study provide more insight into the variables influencing Russian citizens' trust in robo-advising services. This knowledge will facilitate the advancement of this technology, enable more targeted marketing campaigns, create more favorable commercial offers, and provide researchers with more data for subsequent studies.
Considering the limitations of this study and the potential for further research, it is important to note several points. The first limitation of this study is the relatively small sample size of respondents. Although the study was able to collect sufficient responses from the Russian population across a range of social, demographic and economic categories to enable analysis, a larger number of respondents would allow for a more objective picture, especially for categories of respondents whose responses were difficult to collect in this study, such as the military and pensioners. These categories of citizens are of particular interest, as the majority of military workers have experienced a significant increase in capital due to the relatively high salaries caused by SVO. In contrast, pensioners may provide responses that differ significantly from those of younger generations due to differences in life values and experience. Secondly, the topic of trust is of considerable width. Although trust is significantly influenced by an individual's characteristics, it is not the sole determining factor. To gain a more comprehensive understanding of the factors influencing trust in robo-advising, it is necessary to include a wider range of variables in the study. For instance, the company's previous experience, its reputation, specific suggestions for investing money (as opposed to a mere description of the functions of robo-advising, as in this case study), and so forth. This will facilitate a more profound comprehension of the factors that contribute to the trust in robo-advising, thereby enabling the formulation of more effective practical recommendations for companies.
Although the limitations of the study require further research, the results still offer some benefits. The most significant theoretical and practical implications of this paper are following:
Firstly, the findings of the survey conducted as part of this study suggest that robo-advisors have the potential to be a highly appealing proposition for the Russian population. This finding may contribute to further research on this topic in Russia and serve as a signal to financial companies that they should pay more attention to an industry that is not yet well developed in Russia.
...
As a concluding remark, it is necessary to highlight the eight principal variables of an individual that directly influence the level of trust placed in robo-advising services in Russia. Out of them, those which increase the level of trust are:
1. Female gender
2. Entrepreneurship
3. Full-time job
4. Person lives in a house which he or she does not pay for
5. Knowledge of terminology related to investing
6. High level of personal investment portfolio diversification
At the same time, those which decrease the level of trust are:
1. Male gender
2. High level of education
3. Good knowledge of news related to investments
At the same time, the level of interest among the Russian population in the functions provided by robo-advising is higher than the level of trust. It can be reasonably assumed that there are additional factors influencing the level of trust in robo-advising services, in addition to sociodemographic and economic characteristics of an individual. In any case, the findings of the study rejected two out of three hypotheses which were based on the results of research conducted in Western markets. Consequently, the following hypotheses were rejected: The first hypothesis (H1) ‘In Russia, the likelihood of individuals to entrust their investments to robo-advisors decreases with age’ and (H3) ‘Russian citizens’ trust in robo-advising services will decrease as their income level rises.’ Both of these variables were found to be statistically insignificant. Conversely, hypothesis H2, ‘Russian citizens’ trust in robo-advising services will decrease as their education level rises.’, was accepted. The results of the study provide more insight into the variables influencing Russian citizens' trust in robo-advising services. This knowledge will facilitate the advancement of this technology, enable more targeted marketing campaigns, create more favorable commercial offers, and provide researchers with more data for subsequent studies.
Considering the limitations of this study and the potential for further research, it is important to note several points. The first limitation of this study is the relatively small sample size of respondents. Although the study was able to collect sufficient responses from the Russian population across a range of social, demographic and economic categories to enable analysis, a larger number of respondents would allow for a more objective picture, especially for categories of respondents whose responses were difficult to collect in this study, such as the military and pensioners. These categories of citizens are of particular interest, as the majority of military workers have experienced a significant increase in capital due to the relatively high salaries caused by SVO. In contrast, pensioners may provide responses that differ significantly from those of younger generations due to differences in life values and experience. Secondly, the topic of trust is of considerable width. Although trust is significantly influenced by an individual's characteristics, it is not the sole determining factor. To gain a more comprehensive understanding of the factors influencing trust in robo-advising, it is necessary to include a wider range of variables in the study. For instance, the company's previous experience, its reputation, specific suggestions for investing money (as opposed to a mere description of the functions of robo-advising, as in this case study), and so forth. This will facilitate a more profound comprehension of the factors that contribute to the trust in robo-advising, thereby enabling the formulation of more effective practical recommendations for companies.
Although the limitations of the study require further research, the results still offer some benefits. The most significant theoretical and practical implications of this paper are following:
Firstly, the findings of the survey conducted as part of this study suggest that robo-advisors have the potential to be a highly appealing proposition for the Russian population. This finding may contribute to further research on this topic in Russia and serve as a signal to financial companies that they should pay more attention to an industry that is not yet well developed in Russia.
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