The Trust Mandate: The behavioural science behind how asset managers REALLY win and keep clients

by Herman Brodie, Klaus Harnack

Overview

This groundbreaking new book answers an essential question: why is it that a fund client selects, or an investment consultant recommends, one asset manager over another when the two are, on paper at least, very similar? Also, why is it that some asset managers maintain their mandates during difficult periods in the cycle and others don't, even though their performances are identical?

Authors Herman Brodie and Klaus Harnack investigated the drivers of these selection decisions and uncovered that so-called 'soft' factors play the primary role - even more so for consultants than for end-clients. They also discovered that these soft factors are essentially the means clients use to judge an asset manager's benevolent intentions, one of the two dimensions of the universal human evaluation more commonly known as trust.

Backed by compelling data and research from multiple disciplines, The Trust Mandate breaks open the science of trust for asset managers, revealing the systematic steps clients take in their search for evidence of good intentions - the essential, but often missing, component in business relationships. It also shows how trusted managers are able to win more clients, keep them longer, merit good recommendations, allowed to take more risks, and justify higher fees.

The clients of trusted managers enjoy reduced anxiety, earn higher long-run returns, and avoid costly and pointless transitions from firm to firm. So high-trust relationships are a genuine win-win situation. Yet the task of initiating and nurturing them falls squarely on the service provider. Asset managers must learn to convey their good intentions. The Trust Mandate shows why - and how - in unprecedented detail.

Product Details

ISBN-13:	9780857196439
Publisher:	Harriman House
Publication date:	04/09/2018
Pages:	250
Product dimensions:	6.44(w) x 9.44(h) x 0.81(d)

About the Author

Herman Brodie spent over a decade in investment banking roles in London, Paris and in Frankfurt. In 2000 he co-founded his first company, Cognitrend, a consultancy to advise financial institutions on the utilisation of behavioural finance research. He has pursued this goal since 2013 as Managing Director of Prospecta Limited. Brodie is a co-author and lecturer of 'A Practical History of Financial Markets', a course aimed at investment professionals,
developed for the Edinburgh Business School's MBA programme, and has penned numerous articles on behavioural finance.

Klaus Harnack received his Ph.D. in social psychology and motivation from the University of Konstanz. He is currently lecturer and academic counsellor for work and organisational psychology at the University of Muenster. Besides his academic work, he provides interdisciplinary knowledge transfer for a wide range of professionals. His utilises psychological insights and strategies to support professionals in their decision-making, negotiation and conflict management skills. He is an author and scientific columnist.

Table of Contents

About the Authors xi

Introduction 1

1 What Drives Asset Flows? 11

Follow the money 14

Getting on the radar 14

Performance chasing 15

Non-performance factors in asset flows 17

Termination decisions 18

Performance does not explain everything 18

Fly on the wall 21

Sponsors' beliefs about future investment success 22

Sponsors' choice of asset manager 23

The impact of investment consultants 23

Consultants drive flows 25

A detour: can selectors pick top-performing managers? 25

Fund sponsors' scoresheet 26

Investment consultants' scoresheet 28

Summary 30

2 Soft Factors in Asset Manager Selection 33

Soft factors in flow of funds data 35

Soft factors in survey responses 36

What do selectors want? 38

What do selectors (really) want? 40

Tell me about yourself 40

Summary 43

3 The Role of Trust in Economic Relationships 45

The logic of good intentions 47

The definition of trust 48

Trust is inseparable from risk 50

No-trust business relationships 51

Social capital 52

Trust and macroeconomic activity 52

Trust and market efficiency 54

Interorganisational trust 56

Trust and microeconomic activity 57

Summary 59

4 Types of Trust 61

System trust 64

System trust in the financial services industry 64

Role trust 68

Role trust and the financial services industry 68

Interpersonal trust 71

Interpersonal trust in the financial services industry 72

Interpersonal trust is a two-way street 74

The interaction between the three types of trust 76

Summary 78

5 Warmth and Competence 81

Dual dimensions of impression formation 84

The evolutionary origins of warmth and competence 87

Stereotypes, emotions, and behaviour 89

Warm and competent 90

Competent but cold 91

Warm but incompetent 91

Cold and incompetent 92

Emotions are difficult to suppress 92

Emotions provoke behaviours 93

Warmth and competence in social perceptions 95

Warmth-competence stereotypes: social groups in the US 96

Warmth-competence stereotypes: the European Union 98

Detour: Brexit 100

Warmth-competence stereotypes: politicians and celebrities 101

Warmth-competence stereotypes: professions 103

Warmth-competence stereotypes: financial service providers 106

In the kingdom of the cold, the lukewarm is king 107

Summary 109

6 Lessons from the Most Trusted Professions 111

A worldwide ranking of trust in professions 114

Politicians are not trusted… 114

…but firefighters are trusted 115

Trust in patient-doctor relationships 117

A parallel between doctors and money managers? 118

How do doctors win trust? 121

Money managers should learn from doctors 123

Summary 125

7 The Foundations of Interpersonal Trust 127

The love drug 131

Trust by physical cues 133

Physical cues: temperature 134

Physical cues: odour 136

Physical cues: the surroundings 137

Trust by social cues 139

Social cues: name similarity 139

Social cues: facial similarity 140

Social cues: gestural similarity 142

Social cues: food similarity 143

Social cues: communication style 144

Social cues: priming 145

Social cues: trust networks 146

Manufactured trust 147

Clients need information to make judgements 149

Summary 150

8 The Curse of Competence 153

Trust in bankers hits new lows 156

The warmth-competence trade-off 159

A worthwhile trade 161

Stop trying to appear competent 161

Downplay one's status 163

Shed the status symbols 165

Concede competence strategically 165

We are only human 166

Detour: A Promotional video 168

An asset manager video 169

Summary 171

9 Developing Interpersonal Trust 173

Value congruence 176

Communication 177

Know your customer 179

Caring 181

How do businesses care? 181

A not-so-random act of kindness 183

Vulnerability 184

Reciprocation 185

The impact of contracts on trust 186

Contractual control and coordination 188

Informal contracts 189

Psychological distance and trust 190

Trust repair 194

Which trust have you lost? 194

Summary 196

10 The Missing 'IT' 199

What we found out on the way 204

Be trustworthy for me 204

Be you for me 205

Care for me 206

Do something 207

Annex 1 209

Trust games 209

Trust around the world 212

Index 217

Editorial Reviews

Too many fund managers ooze competence but lack warmth. Big watches, showing off superior intelligence and bragging about past winning trades put clients off. Instead, we should learn from the firefighters, who are heroic and trustworthy. I have known Herman Brodie for several years, having attended his ground breaking courses on behavioural finance. In this book, he doesn’t disappoint... Genuinely a worthwhile read for investment professionals. And if they all read it, pitch documents would no longer be so bland.” —Charles Morris, Chief Investment Officer at Newscape Capital Group

“One of the Ten Best Business Books of 2018 for Financial Advisors” —WealthManagement.com

““A book I highly recommend”” —Larry Swedroe

“A fascinating subject … I recommend people get hold of this book and read it” —Martin Bamford

From the Publisher