Analyzing the Impact of Financial Robo-Advisors on Retail Investors’ Behavior: The Mediating Role of Digital Trust and Financial Literacy
Keywords:
Robo-advisor, retail investors, digital trust, financial literacy, investment behavior, algorithmic decision-Abstract
This study aimed to analyze the influence of financial robo-advisors on retail investors’ behavior, with particular attention to the mediating roles of digital trust and financial literacy in investment decision-making. This qualitative exploratory study was conducted among retail investors in Tehran, Iran. Participants were selected through purposive and snowball sampling based on their direct experience with robo-advisory platforms, algorithmic investment tools, automated portfolio recommendation systems, or AI-based financial decision-support services. Data were collected through semi-structured interviews. Theoretical saturation was reached after 22 interviews. All interviews were transcribed verbatim and analyzed using thematic analysis supported by NVivo software. Credibility and trustworthiness were strengthened through member checking, peer debriefing, audit trail documentation, constant comparison, and reflexive memo writing. Four main categories emerged from the analysis: reconfiguration of retail investors’ decision-making patterns, conditional formation of digital trust, the interpretive role of financial literacy in accepting or resisting algorithmic advice, and behavioral consequences of using robo-advisory services. The findings indicated that robo-advisors influence retail investors by reducing emotional decision-making, structuring risk assessment, simplifying financial information, and improving comparability across investment alternatives. However, investors’ trust in robo-advisors was not unconditional; it depended on algorithmic transparency, explainability, perceived performance, data security, platform reputation, and the availability of human oversight. Financial literacy shaped how investors interpreted algorithmic recommendations, with more literate participants using robo-advisors as decision-support tools rather than as substitutes for personal judgment. Financial robo-advisors can guide retail investors toward more disciplined, data-driven, and less emotionally reactive investment behavior. Nevertheless, their effectiveness depends on the interaction between digital trust and financial literacy. The study suggests that transparent design, investor education, regulatory oversight, and accountable algorithmic governance are necessary for the responsible development of robo-advisory services in capital markets.
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