• Published on 12 December 2016
• 1663 Views
• Print

From “ROI” to “PHI”: State Street’s centre for applied research and CFA Institute identify a hidden variable of performance

A new research published by the Center for Applied Research, the independent think-tank of State Street Corporation and the CFA Institute, argues that to succeed, the investment industry and its professionals need to move from a performance-driven culture to one that is purpose-driven to better ensure clients’ longterm 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 organizational 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 organization, 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 percent greater odds of excellent organizational performance, 55 percent greater odds of excellent client satisfaction and 57 percent greater odds of excellent employee engagement.

The Asia-Pacific (APAC) region has the second highest phi globally after the Americas. Within the region, asset managers are leading the way in phi, followed by asset owners and insurance firms.

“Building a culture and environment with aligned purpose, habits and incentives can give organizations a competitive advantage that is sustainable and will benefit clients, the providers themselves and ultimately society as a whole,” said Suzanne Duncan, global head of the Center 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 purposedriven motivation that represents the greatest potential for performance, across market cycles.”

The results of the research clearly point 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,” said Paul Smith, CFA, president and chief executive officer 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.”

In Singapore, while investment management professionals are driven by their passion for the financial markets, short-term pressures seem to be felt by the industry, with 67 percent of respondents citing pressure from members of their board and management team as negatively affecting decision making. This also translates to concerns about losing their job after a short period of underperformance, with 33 percent of respondents citing career risk concerns as a short-term pressure in Singapore, versus 26 percent in the APAC, 11 percent in the Americas and 16 percent in EMEA.

“This finding especially resonates with the Singapore investment community which has one of the most competitive workforces in the world,” said Tan Lay Hoon,  Board Member and CoChairperson of Advocacy Committee at CFA Society Singapore, a member society of CFA nstitute in Singapore. “It calls for a culture change in the local investment management industry, which will be made possible by having well-trained professionals with a deeper sense of purpose.”

Purpose Drives Outcomes

• According to the research findings, maximizing 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 Singapore investment industry is that 57% (55% regionally) of the investment professional respondents said they pursued a career in investment management because they are passionate about financial markets, and 52% (46% regionally) report that it is an important reason they stay in the industry.
• Despite this passion, there is a disconnect from purpose. Just 23% (24% regionally) of APAC respondents said they remain in the investment management industry for the purpose of helping clients achieving financial goals, and only 3% (5% regionally) to contribute to economic growth.
• The Singapore investment industry has a significant opportunity to improve phi and it starts with leadership.
• Only 47% (44% regionally) of professional investors believe their leaders articulate a compelling vision.
• 44% (42% regionally) agree that leaders talk to employees about their most important values and beliefs.
• 28% (33% regionally) believe that leaders are spending time teaching and coaching employees.
• 44% (42% regionally) 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 behaviors of investment professionals and leadership plays a pivotal role,” continued 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 organizational 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.”

Re-disseminated by The Asian Banker