Trust vs fees: What drives investor behaviour and decisions?

Trust influences investor decisions, with research showing that trusted money managers drive higher-risk investments despite higher fees

In medicine, patients don’t just choose any doctor – they seek out those they trust, confident that their doctor’s advice will guide them safely through health challenges, even if the treatment protocols are often standard. The trust that patients place in their physicians helps alleviate the anxiety and uncertainty that comes with illness. Similarly, in finance, investors often delegate their investment decisions to so-called “money doctors” – money managers, advisors, and other financial professionals who provide that same sense of reassurance.

Investors aren’t solely focused on beating the market; much like patients, they value the peace of mind that comes from knowing a trusted expert is handling complex decisions on their behalf. This trust reduces the psychological burden of risk, enabling investors to commit to strategies they might otherwise avoid, even if it means paying higher fees. In both fields, trust transforms an otherwise daunting decision into a manageable one, highlighting the critical role of personal reassurance over mere technical skill.

A registered investment advisor could be one example of a “money doctor” in action. Another scenario might involve a mutual fund family that offers actively managed funds with relatively high fees, where investors choose these funds because they trust the fund managers to steer them safely through volatile markets – despite the fact that these funds tend to underperform passive index funds on a net-of-fee basis.

The critical role of trust in financial relationships and the role of money doctors were the focus of recent research published in the Review of Finance. The study, Trust and Delegated Investing: A Money Doctors Experiment, was conducted by Benjamin Loos in the School of Banking & Finance at UNSW Business School, together with researchers Maximilian Germann from the European Central Bank, and Lukas Mertes and Martin Weber from the University of Mannheim.

Where the trust game meets the money doctors

The study involved three separate experiments with different participant pools to test how trust influences investment decisions. In the first experiment, participants played a trust game followed by investment decisions. “For our baseline experiment, we opt for a standard trust game to induce a trustworthiness differential for two reasons,” said Prof. Loos, who explained that, firstly, the results of the trust game are derived from actual human interaction.

Second, the trust game is a well-studied game in the economics literature. “In the trust game, a sender (trustor) is endowed with an amount X. The sender can transfer any amount between 0 and X to the receiver (trustee). The amount sent to the trustee, S, is then tripled. The trustee then has the choice to reciprocate by returning any amount between 0 and 3S. Because trustees are not obliged to return anything, self-interested trustors should not send anything in the first place. Results from the trust game, however, show that trustors usually send part of their endowment and that trustees usually reciprocate to a certain extent,” said Prof. Loos, who added that several studies show that there is variation in the amounts sent and the amounts returned in the trust game.

The second experiment used the trust game data with a different subject pool to minimise reward motivation. The third experiment utilised pictures of money managers to elicit trust judgments.

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A 2015 theory paper published in the Journal of Finance proposed a model that explains higher fees as a trust premium voluntarily paid by investors. “The core prediction of the model is that differentials in trustworthiness between investment managers allow more trusted investment managers to set higher fees for their services. There are two critical assumptions behind the model: trust in the intermediary reduces the perceived volatility of risky investments made with this intermediary, and investors are too anxious to invest on their own,” said Prof. Loos.

“Therefore, investors are better off investing with their trusted investment manager despite being charged higher costs as they will take more risk and earn higher returns. The Money Doctor model can, therefore, also explain why individual investors seek costly help of brokers and financial advisors, even though conflicts of interest and incentive issues lead to financially disadvantageous advice.”

Empirical settings do only reveal the direction in which trust affects mutual fund flows and investor behaviour, respectively, but Prof. Loos noted that they do not allow for a quantification of trust or a measurement of the trust-cost relationship. The assumption that investors balance trust against investment fees, however, is at the core of the money doctors theory. “We therefore wanted to conduct a controlled experiment to shed light on whether individuals balance trust against investment fees. By doing so, we will be able to contribute to the understanding of the mechanism of the money doctors theory,” he said.

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How trust influences investment behaviour

The researchers found that the more trust investors place in a money manager, the more confident they are in taking risks. Their experiments revealed that investors increased their risky investments with money managers they trusted more, even when those managers charged higher fees.

The research demonstrated that investors substantially increase the share invested risky with more costly money managers when they are more trustworthy. In fact, investors invest a lower share risky with high-cost money managers than with low-cost money managers when they are equally trustworthy, and investors invest a higher share risky with high-cost money managers when they are more trustworthy than low-cost money managers are.

The research quantified this relationship in precise terms, showing that the share invested into the risky asset in the treatment group is, on average, 17 percentage points larger for a more trustworthy money manager than for a less trustworthy manager. This finding proved particularly significant given that more trustworthy money managers are assigned twice the costs (1.5%) of less trustworthy money managers (0.75%). The research revealed that this wasn’t just a marginal effect – up to a third of the absolute difference in trustworthiness translates directly into an increasing risky share. These findings demonstrated that trust serves as a powerful counterbalance to fee considerations, fundamentally changing how investors evaluate the trade-off between cost and perceived trustworthiness in their investment decisions.

The trust premium in action

The research revealed that investors were willing to pay substantially higher fees to work with more trustworthy managers. On average, investors accept costs of 1.95%, or almost a third of the risky asset’s return, for a more trustworthy money manager when the less trustworthy money manager charges only 0.75%. This willingness to pay more wasn’t arbitrary – it increased systematically with greater differences in trustworthiness between managers.

The study provided compelling evidence that this trust premium was consistent across different experimental conditions. When examining cases where managers charged equal fees, the research showed that “investors invest a similar share risky with each money manager when money managers have equal trustworthiness and equal costs. If only costs are equal, investors continue to invest more risky with the more trustworthy money manager.” This demonstrated that trust, rather than fee structures alone, drove investment decisions.

Key implications for financial services professionals

For financial advisers and wealth managers, this research highlights the business value of building genuine trust with clients. The findings suggest that trust isn’t just about client retention – it directly influences how much risk clients are willing to take and the fees they will accept.

The implications extend beyond individual adviser-client relationships. Investment firms face practical challenges in institutionalising trust, particularly when key advisers leave or retire. The research findings suggest firms should focus on building organisational trust through consistent service delivery, transparent fee structures, and ethical business practices.

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In volatile market conditions, trust becomes even more critical. Firms that invested in building strong trust relationships proved more resilient during market downturns, with research showing trusted advisers retained more client assets during periods of market stress. This highlights the commercial importance of trust as a business stabiliser and risk management tool.

For investors, while trust plays a vital role in investment decisions, the research suggests the need for a balanced approach. Higher fees from trusted advisers should be evaluated against measurable value delivered through services, investment performance, and risk management. Investors should seek advisers who demonstrate trustworthiness through actions and transparency, not just relationships.