Julie R. Agnew is the Richard C Kraemer Term Professor of Business at the Raymond A. Mason School of Business of the College of William & Mary. Michael J. Gropper is an assistant professor of finance at the Leeds School of Business at the University of Colorado at Boulder. Angela A. Hung is a Deputy Assistant Director in the Office of Research at the Consumer Financial Protection Bureau. Nicole Votolato Montgomery is the F.S. Cornell Professor of Commerce at the McIntire School of Commerce at the University of Virginia. Susan Thorp is Professor and Head, Department of Banking and Finance, Monash Business School, Australia.
The financial industry’s reliance on trust is hiding in plain sight: it lives in brand names like “Truist” and in bank taglines such as “Trust Is Everything.” This is no accident, since research is increasingly showing that trust is foundational to financial decision-making. Our recent work shows that organizational trust can distort perceptions of risk and return and cause people to invest differently in otherwise identical funds whose names imply different levels of trustworthiness.
Our Study
We examine these effects in an experiment administered through the Understanding America Study (UAS), a nationally representative US panel. Participants in our experiment choose investments in a fictitious retirement plan that offers index funds and money market funds. The experiment uses an increasingly common feature of real-world retirement plans, namely “white label” funds. These funds are generically named investment options constructed by retirement plan sponsors from a tailored mix of underlying funds, often sourced from multiple managers. Because white label funds frequently appear on investment menus alongside branded investment options, they offer a natural setting for isolating how organizational identity, and the trust it carries, shapes investor beliefs and portfolio choices.
Depending on the experimental condition, participants in our study chose either from a menu pairing a white label fund with a financially identical counterpart labeled with a highly trusted asset management organization, or with a less trusted organization. A control condition presented a menu of white label funds alone, providing a baseline in which organizational trust was not in play.
Trust Influences Perceptions of Risk and Return
Our results clearly show that organizational trust shapes what investors expect from a fund before they invest a single dollar. To capture these expectations rigorously, we ask participants to allocate 100 balls across bins representing a range of possible outcomes for a $100,000 investment over one year. This approach is methodologically superior to asking individuals directly for statistics such as expected return, volatility, or probability of loss, since recent research has shown that people often struggle to understand probability distributions.
The results were striking. Respondents assigned a five to seven percentage point higher probability of losses to low-trust funds, while simultaneously expecting two to three percentage points lower returns from them. These distorted expectations, in turn, predicted allocation decisions in the expected direction: higher anticipated returns and lower perceived risk translated into greater investment, in many cases. This documents what we call an indirect pathway through which organizational trust shapes behavior: trust shapes beliefs, and beliefs shape choices.
Trust Influences Allocations Independent of Beliefs
Nevertheless, distorted expectations alone do not tell the whole story. Even after accounting for differences in expected payoffs, respondents in our experiment allocated significantly more of their portfolios to high-trust funds (by 5-13 percentage points). The direct effect, where trust influences allocations independently of expected payoffs, is consistent with previous experimental work and supports the “Money Doctors” theoretical framework devised by Gennailoi and colleagues. In this framework, investors were found to delegate financial decisions to advisors they trusted, independent of their underlying return expectations.
Quantifying the Economic Cost of Organizational Trust
To evaluate what this trust-driven behavior actually costs investors when the fund options are equivalent, we embed our results in a standard model of investment decisions. Using this model, we estimate a statistically significant “trust premium” of approximately 5 percentage points. The trust premium is interpreted as the expected return that investors are willing to forgo, to allocate to a high-trust fund instead of an otherwise identical low-trust fund. We find that the long-run costs can be substantial.
Consider two index funds identical in every respect except for the name on their labels. Using the lower bound of the 95 percent confidence interval for the trust premium in our results, suppose investors were willing to give up 1.5 percentage points in annual return to invest in the high-trust fund rather than the low-trust fund. A plan participant contributing $5,000 annually for 40 years, assuming a 10% baseline return, would accumulate approximately $2,212,963 in the low-trust fund. The same participant investing in the high-trust fund, earning just 8.5%, would accumulate only $1,478,413, for a difference of over $734,000. Trust, in other words, can carry a six-figure price tag over a working lifetime.
While trusting a well-known organization may be rational when the name genuinely signals superior investment skill, trust becomes costly when used to choose between funds that are otherwise identical. In those cases, organizational trust leads investors not toward better outcomes, but simply toward more expensive ones.
Why This Matters
Our findings shed light on some puzzling results in the prior academic literature. For instance, research has shown that simply including a fund management company’s name in a fund’s title can significantly impact fund flows, and that a scandal affecting one fund within a fund family can trigger outflows across the entire set. These patterns have been difficult to fully explain, yet our results offer a potential explanation: organizational trust. When a name evokes greater or lesser trust, it directly distorts what investors believe about a fund’s risk and return, which in turn influences allocations. Furthermore, a strong direct effect, where trust influences investments independently of beliefs, amplifies this further.
When fund names are, themselves, directly influential, fund flows will be affected by the trust signals embedded in their names, for better or for worse. This carries practical implications for plan sponsors, policymakers, and investors. As plans expand their use of white label funds, and therefore increasingly choose fund labels, their choices are not neutral, having implications for participants’ behavior. Labels that include organization names can unintentionally steer investors toward costlier options by evoking greater or lesser trust. Plan sponsors should therefore consider carefully how menu construction and option presentation shape participant behavior, with the goal of ensuring that investment choices reflect sound financial principles rather than the pull of a trusted brand.
Views of our Guest Bloggers are theirs alone, and not of the Pension Research Council, the Wharton School, or the University of Pennsylvania.
