Broad-Scope Trust and Financial Advice

Abstract

In this study, we investigate how two key dimensions of trust formation, i.e. interpersonal trust in the advisor (narrow-scope trust) and broader trust in the business context in which the advisor operates (broad-scope trust), impact households’ overall trust in financial advice. To capture the potential influence of broad-scope trust, we make use of novel survey data obtained from the Panel on Household Finances (PHF) and contrast households’ propensity to trust financial advice provided by advisors employed at community banks versus large banks, which have been shown to feature fundamentally different trust profiles. We document that financial advice provided by large-bank advisors is significantly less likely to be trusted, i.e. rejecting the notion that trust in financial advice is essentially equivalent to trusting one’s financial advisor. Instead, we provide strong evidence in support of an integrated conceptualization of clients’ trust in financial advice, which highlights the importance of establishing broad-scope trust.

Keywords: Financial advice, trust, household finance, Panel on Household Finances (PHF)

JEL Classification: D12, D14, G20