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Centre for Applied Research and CFA Institute identify hidden variable of performance

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Research published by the Centre for Applied Research, the independent think-tank of State Street, and CFA Institute argues that the investment industry and its professionals need to move from a performance-driven culture to one that is purpose-driven to better ensure clients’ long-term goals are met.

The research, titled “Discovering Phi: Motivation as the Hidden Variable of Performance,” has identified “phi”, a factor that has a positive impact on organisational performance, client satisfaction, and employee engagement.
 
Phi is the alignment of purpose, habit and incentives at the intersection of the goals and values of the individual, the organisation, and the client. The research asked three questions based on motivation theory (self-determination theory) to diagnose phi: What motivates you to perform generally and in your current role? What is the reason that you are still working in the investment management industry? Would you describe your work as a job, a career, or a calling?
 
The research has found that phi has a statistically significant and positive link to broad performance measures, including client satisfaction and employee engagement, that can sustain the industry and drive client satisfaction for decades to come.
 
A one point increase in phi is associated with 28 per cent greater odds of excellent organisational performance, 55 per cent greater odds of excellent client satisfaction and 57 per cent greater odds of excellent employee engagement.
 
“Building a culture and environment with aligned purpose, habits and incentives can give organisations a competitive advantage that is sustainable and will benefit clients, the providers themselves and ultimately society as a whole,” says Suzanne Duncan (pictured), global head of the Centre for Applied Research, State Street. “When investment professionals are asked to deliver against inappropriate metrics on an inappropriate time horizon, their passion for markets eventually becomes divorced from their true purpose – achieving the long-term goals of the investors they serve. Investment performance today isn’t only about alpha; it must focus on phi: a purpose-driven motivation that represents the greatest potential for performance, across market cycles.”
 
The results of the research clearly pointed to the existence of phi as a previously uncovered variable that, in addition to motivation, might have an outsized impact on investment performance, as in quantum mechanics, where a “hidden variable” is an element missing from a model that leaves the system incomplete. The research argues that the same is true for the investment management industry: without the alignment of purpose and passion, the industry model is flawed.
 
“Phi is the variable that’s been missing for too long from the investment management ecosystem,” says Rebecca Fender, head of the Future of Finance initiative at CFA Institute. “Like any ecosystem, the investment management industry is predicated on a series of intertwined relationships. The research shows that when there’s a lack of purpose to temper passion, the balance and alignment of interests and motivations becomes distorted and ultimately the most fragile things in the environment bear the brunt of the harm. By focusing on phi, investment professionals won’t merely restore balance to our industry, they will make it easier for everything within our ecosystem to find new ways of flourishing, new ways of capturing alpha.”
 
According to the research findings, maximising phi among investment management professionals, investment management firms and their clients may be one of the most promising ways of creating value and trust in the industry. The good news for the investment industry is that 53 per cent of the investment professional respondents said they pursued a career in investment management because they are passionate about financial markets, and 40 per cent report that it is an important reason they stay in the industry.
 
Despite this passion, there is a disconnect from purpose. Just 28 per cent of our respondents said they remain in the investment management industry for the purpose of helping clients achieving financial goals, and only 5 per cent to contribute to economic growth.
 
The industry has a significant opportunity to improve phi and it starts with leadership.
 
Only 44 per cent of professional investors believe their leaders articulate a compelling vision.
 
Some 41 per cent agree that leaders talk to employees about their most important values and beliefs, while 3 per cent believe that leaders are spending time teaching and coaching employees, and 40 per cent of professional investors think their leaders re-examine critical assumptions and beliefs.
 
“The research clearly shows that phi is an important variable that can be used to recalibrate the behaviours of investment professionals and leadership plays a pivotal role,” says Duncan. “By instilling phi, they can move beyond improving their own financial returns and put their clients’ interests first. When they do so, they can increase organisational performance as well as gain the trust and loyalty of their clients and employees. For an industry obsessed with results, we believe this is an extremely compelling discovery.”

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