Trust in Financial Markets: the Role of the Human Element.

AutorGaspar, Raquel M.

1 Introduction

In the economy, trust can be an important asset (see Fukuyama, 1995; Guiso, Sapienza & Zingales, 2004; La Porta, Lopez-De-Silanes, Shleifer & Vishny, 1997). In the context of financial markets, it is fundamental. When trust is lacking, cooperation and financial operations are reduced and investment becomes scarce (Sapienza & Zingales, 2012). The successive scandals involving players in financial markets (Rezaee, 2005) have contributed significantly to the erosion of trust in these markets (Delis & Mylonidis, 2015; Sapienza & Zingales, 2012). To address this situation, regulators have employed an "old recipe" and have started changing regulations, procedures, and practices (Barth, Caprio & Levine, 2004; Mayer, 2008). Changes such as setting higher minimum values for capital ratios, adopting more restrictive supervisory practices, and attempting to introduce improved and more frequent market information, may lead to a more controlled financial market, but they may not necessarily rebuild investors' trust in it. In fact, these new rules are likely to affect the performance of financial institutions (Chortareas, Garza-Gracia & Girardone, 2012), indirectly affecting their employees (for example, by reducing head count or cutting remunerations), who are the natural interface between institutions and their clients and, thus, the main drivers of trust. By neglecting the role of financial advisors in rebuilding trust in the sector, regulators are possibly undermining the effectiveness of the recent regulatory growth.

In their research, Sapienza and Zingales (2012) identified a severe drop in the levels of trust in the financial market, and found that the most relevant cause for this fall was related to "managers' greed and poor corporate governance" (pp.128). Even more interestingly, they also reported that "while the majority of the respondents favoured government intervention in the financial markets, 80% of the pro-intervention majority thought that the way the government intervened made them less, rather than more confident in the market" (pp. 130).

Tapping into the fundaments of trust allows for a quality improvement in the investor/ financial advisor relationship and may help develop more effective regulations in the future. We look at psychometric conditions, as well as financial literacy scores and the investor's type of relationship with financial markets. Our goal is to understand the conditions, or combinations of conditions, that may lead investors to trust (or not) their financial advisors. From a methodological point of view, this study is one of the first in the financial literature to use qualitative comparative analysis (QCA) methods, and the first to use Butler's (1991) psychometric scale to study investors' trust in financial advisors.

The alternative financial applications of QCA, recently identified by Damian and Manea (2019) and Ott, Williams, Saker and Staley (2019), highlight the broad scope of possible future applications of qualitative methods to finance.

The paper is organised as follows. Section 2 provides a brief overview of the current literature about trust in financial markets. Section 3 presents both the survey design and data collection process. Section 4 briefly presents the data analysis method (fsQCA) and Section 5 presents and discusses the results. Section 6 concludes and discusses the limitations of the analysis.

2 Trust in the Financial System

Trust and trust relationships have been a topic of research in many disciplines for a number of years. Streams of research on trust can be found in the fields of philosophy, sociology, psychology, management, marketing, ergonomics, human-computer interaction, industrial psychology and electronic commerce (Paliszkiewicz, 2011). It is, thus, understandable that the literature on trust is quite extensive.

In this section we focus on the much smaller literature stream about trust in the financial system and its possible connections to the financial literacy literature. We refer readers interested in the broader scope to the survey studies of Bozic (2017), Guiso, Sapienza and Zingales (2004), Wang and Emurian (2005) and Welter (2012).

Intuitively speaking, trust works in the economy the same way that engine oil works in engines. When trust is present, the cost of a transaction drops, organisations perform better and the whole economy operates in a much more efficient manner (Cruciani & Rigoni, 2017; Fukuyama, 1995; Guiso, Sapienza & Zingales, 2009). In the context of the financial sector, particularly with regards to banking services, investors' trust is related to the ability of financial institutions to provide services in an appropriate and competent manner, which encourages the use of banking services (Kim, Shin & Lee, 2009; Lee & Chung, 2009). In its most operational form, trust can be considered as the belief that another person or institution is carrying out actions that are beneficial or at least not harmful to other people, regardless of their ability to audit these actions. Accordingly, trust is a key element in market transactions, especially when one of the parties involved in the transaction--the client-- often has much lower knowledge about the transaction than the other party (Dearmon & Grier 2009; Ennew & Sekhon, 2007; Guiso et al., 2004, 2008; Ferreira, Freitas, Nunes & Giovannini, 2014; Leislier & Pinuer, 2016; Mayer, Davis & Schoorman, 1995).

Studies on the relationship between investors and their financial advisors need to control for financial literacy, given the plethora of works that relate to the two concepts (Cruciaini & Rigoni, 2017; Gennaioli, Shleifer & Vishny, 2015; Guiso et al., 2004, 2008, 2009; Rooij, Maarten & Alessie, 2011). Financial literacy can be defined as being the combination of self-awareness of financial knowledge and financial skills (Xu & Zia, 2012), the ability to manage personal finances, and the skills required to make appropriate financial decisions (Remund, 2010). These notions are associated with an individual's ability to obtain, understand, and evaluate information that is relevant (Calcagno & Monticone, 2015), as well as the idea of planning savings, which can lead to achieving higher levels of financial well-being. Individuals with greater financial literacy are likely to better understand how financial markets operate, but also to be more demanding before trusting financial advisors, than individuals who have a low level of financial literacy (Kersting, Marley & Mellon, 2015; Sarigul, 2014). Consistently, for low levels of financial literacy the relationship between the financial advisor and investor seems to rely mainly on the investor's perception about the advisor's behaviour (Cordell, Smith & Terry, 2011; Guiso, Sapienza & Zingales, 2008), whereas in the case of high levels of financial literacy, the same relationship is also based on the investor's knowledge (Calcagno & Monticone, 2015).

Another aspect that must be taken into account when studying trust is the natural predisposition to trust of each investor. Individuals that have a high predisposition to trust may trust their financial advisors, even in situations of misconduct, and possibly overinvest. For those naturally predisposed not to trust, it may happen that they underinvest. This is in accordance with the evidence that predisposition to trust in advisors affects the likelihood of investing in risky assets (Agnew, Szykman, Utkus & Young, 2012; Georgarakos & Pasini, 2011).

Combining both financial literacy and predisposition to trust, it is easy to understand that individuals with low knowledge but a high predisposition to trust are the investors that are most at the mercy of financial advisors. In this case, if an advisor charges high commissions, it is likely that investors will be exploited on the basis of their trust, taking unnecessary risks (Assad, 2015; Simon, Houghton & Aquino, 2000), and possibly becoming the next "bank victims".

3 Survey and Data Collection

3.1 Questionnaire design

This study is based upon primary data collected directly from investors, via a questionnaire. Its design relied on the following different pre-existing scales: the well-known trust scale of Butler (1991), the predisposition to trust scale of Yamagishi and Sato (1986), and the financial literacy test proposed by van Rooij, Lusardi and Alessie (2011).

Investors' interactions with financial advisors are classified as being either (i) a basic relationship--for individuals who have only deposit, savings and/or loan accounts, or (ii) an advanced relationship--for individuals who additionally invest in financial markets, either directly, or through products managed by third parties. The two samples are treated separately, to enable us to discern the differences that occur between the two groups.

Besides an initial section dedicated to demographic questions, the core of our questionnaire had a total of 41 questions. The first 26 are psychometric questions and invite the respondent to express their level of agreement or disagreement with a statement, using a 1 to 5 Likert scale, where 1 means strongly disagrees, and 5 means strongly agrees. The remaining 15 questions constitute a financial knowledge test, leading to the attribution of a financial score, between 0 and 15, to each respondent.

The overall trust condition of Butler (1991) is used to measure the total degree of trust (trust) present in the investor/financial advisor relationship--which is the key variable under analysis.

The remaining variables can be divided between those that are related to investors' characteristics and those that are related to the behaviour of financial advisors (Table 1).

3.1.1 Investors' characteristics

The investors' characteristics considered here as possible conditions are: the predisposition to trust (prtrust), financial literacy (finlit) and age (age).

We expect the financial advisor's behaviour to play a less important role...

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