Trust is an integral part of the investment management process, and any relationship disruption can have negative consequences. The author finds that mutual fund outflows increase after the announcement of changes in a fund’s ownership (and thus a turnover in advisers), amounting to 7% of assets under management within a year after the change. The author notes that retail investors are responsible for these fund outflows, which tend to be higher if the acquiring firm has legal issues and are more pronounced for higher-expense funds. Each of these findings suggests that investors value highly a trusting relationship.

Investment professionals should recognize that investors have a myriad of available options for investment management services and that numerous factors can influence investors, particularly retail investors, to exhibit certain behaviors. As managers of investments, these market practitioners should know that, in addition to performance, clients expect a certain level of trust and reliability. Portfolio managers should respond accordingly by taking steps to develop a high level of trust and by maintaining a high level of reliability. The author demonstrates that any deterioration of this relationship will probably have adverse consequences. Investment management firms should be aware of the perception of trust when managing their business given the author’s finding that barriers to trust, such as legal issues, can be perceived negatively and can damage a client’s trust in investment managers.

A client’s needs should be of the utmost importance in the investment management industry, and it is imperative to recognize that these needs are broader than just risk and return. A client’s needs include the fostering of the underlying relationship and providing a level of comfort that the client’s interests are being taken care of.

The author uses data primarily from the CRSP Survivor-Bias-Free US Mutual Fund database, annual Morningstar Principia CDs, and the SDC Platinum Mergers & Acquisitions database as well as from the SEC Investment Adviser Public Disclosure database, EDGAR, and Compustat. The mutual fund sample comprises all domestic, diversified, and actively managed equity mutual funds over 1995–2012. Funds are then excluded that are outside the nine main style boxes. Index funds are excluded by removing funds that contain the words index, S&P, Dow Jones, and NASDAQ. Funds with less than $10 million in assets under management are also excluded.

The author then focuses on 185 events covering 843 funds with $587 billion in assets under management at the time of the change announcement. He performs various statistical and regression analyses to determine how fund flows change in reaction to changes in the ownership of the fund’s management company. He further dissects the data to better understand fund inflows versus outflows, the impact of the distribution channel, and the effect of legal controversies. Finally, the author uses a multivariable panel regression to determine that retail investors are slow to react to change announcements.

The author attempts to quantify the impact of disrupting a relationship built on trust. The author’s findings support the notion that investors value their relationship with investment professionals and will invest elsewhere if this relationship is disrupted. I would like to see further research expand on these findings to determine what types of marketing are most effective at promoting trust and reliability.