Trust within Investment Decisions and Advice

Abstract

Behavioral economics can be understood as a paradigm change within economics. The impression of revolution is especially apt in finance, where the participation of individuals has been omitted from the equation for too long. The collapse of Lehman Brothers seriously damaged trust in financial institutions: The stock market crisis became a trust crisis highlighting the significance of trust within investment decisions. Advisors work to create trust for potential investors, while institutions offering this service play an important role within investment decision-making. However, bad decisions ultimately damaged trust in advisors. Here the model of trust intermediaries by Coleman is transferred to investment advisory services.

TOPICS: Wealth management, long-term/retirement investing

Key Findings

• • Investment decisions are both emotional and rational (as known from behavioral finance), but there is also an often disregarded relational aspect.

• • Invest advisory service is more than a specialist consultancy containing only objective facts, it is trust intermediation as modeled by James S. Coleman.

• • Investment advisors play an important role in the process of trust repair after financial crisis.