FinTech, investor sophistication and financial portfolio choices

BIS Working Papers  |  No 1091  | 
21 April 2023



Financial technology (fintech) enables data to be more efficiently used to solve problems related to asymmetric information. In finance, artificial intelligence can be used to increase financial inclusion and reduce the costs of financial services. However, fintech can also lead to discrimination among investor groups, particularly if they have different levels of access to, or use of, the new technology. For instance, fintech can allow sophisticated market players to acquire better data and formulate profitable trading strategies, while less sophisticated ones may lose out. So are advances in financial technology democratising finance and levelling the playing field?


We use a portfolio theory model to analyse the relationship between financial technology advancements, investors' sophistication levels and financial portfolios' composition and returns. The model assumes that investors have different capacities to process information, as measured by their level of financial literacy, and choose which assets to learn about and invest in. We use the model to make predictions about the impact of sophistication levels on investors' shares of risky asset classes and ex post returns. To test our predictions, we use detailed micro-level data from the Bank of Italy from 2004 to 2020.


We analyse the rates of return and portfolio composition of investors with varying levels of financial literacy while controlling for factors such as risk aversion, age, gender, access to remote banking and fixed effects for time and region. We find that as financial technology improves, differences in financial returns and the proportion of risky assets of sophisticated versus unsophisticated investors grow. These differences are reduced only if financial technology is accessible by everyone and if investors have a similar capacity to use it.


This paper analyses the links between advances in financial technology, investors' sophistication, and the composition and returns of their financial portfolios. We develop a simple portfolio choice model under asymmetric information and derive some theoretical predictions. Using detailed microdata from Banca d'Italia, we test these predictions for Italian households over the period 2004-20. In general, heterogeneity in portfolio composition and in returns between sophisticated and unsophisticated investors grows with improvements in financial technology. This heterogeneity is reduced only if  financial technology is accessible to everyone and if investors have a similar capacity to use it.

JEL classification: G1, G5, G4, D83, L8, O3

Keywords: inequality, inclusion, FinTech, innovation, Matthew Effect