New Research Shows How Closing the Gap between Passion and
Purpose Can Improve Investment Outcomes
New research published today by the Center for Applied Research,
the independent think-tank of State Street (NYSE: STT), and 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’ long-term goals
are met. The research, titled “Finding 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% greater odds of excellent
organizational performance1, 55% greater odds of excellent client
satisfaction and 57% greater odds of excellent employee
engagement.
“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
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,” said Rebecca Fender, CFA, head of
the Future of Finance initiative at CFA Institute, a long-term
global effort to shape a trustworthy, forward-thinking financial
industry that better serves society. “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.”
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 investment industry is that 53% of the
investment professional respondents said they pursued a career in
investment management because they are passionate about financial
markets, and 40% report that it is an important reason they stay in
the industry.
- Despite this passion, there is a
disconnect from purpose. Just 28% of our respondents said they
remain in the investment management industry for the purpose of
helping clients achieving financial goals, and only 5% to
contribute to economic growth.
- The industry has a significant
opportunity to improve phi and it starts with leadership.
- Only 44% of professional investors
believe their leaders articulate a compelling vision.
- 41% agree that leaders talk to
employees about their most important values and beliefs.
- 3% believe that leaders are spending
time teaching and coaching employees.
- 40% 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.”
About State Street Corporation
State Street Corporation (NYSE: STT) is one of the world's
leading providers of financial services to institutional investors,
including investment servicing, investment management and
investment research and trading. With $29 trillion in assets under
custody and administration and $2 trillion* in assets under
management as of September 30, 2016, State Street operates in more
than 100 geographic markets worldwide, including the US, Canada,
Europe, the Middle East and Asia. For more information, visit State
Street’s website at www.statestreet.com.
*Assets under management include the assets of the SPDR(R) Gold
ETF (approximately $40 billion as of September 30, 2016), for which
State Street Global Markets, LLC, an affiliate of SSgA,
serves as the distribution agent.
About CFA Institute
CFA Institute is the global association of investment
professionals that sets the standard for professional excellence
and credentials. The organization is a champion for ethical
behavior in investment markets and a respected source of knowledge
in the global financial community. The end goal: to create an
environment where investors’ interests come first, markets function
at their best, and economies grow. CFA Institute has over 140,000
members in 157 countries and territories, including 134,000 CFA
charterholders, and 147 member societies. The CFA Institute Future
of Finance initiative is a long-term, global effort to shape a
trustworthy, forward-thinking investment profession that better
serves society. For more information, visit
www.cfainstitute.org.
1 Survey respondents were asked to evaluate their organization
on a scale of 1-5 on 10-year organizational performance, client
satisfaction, and employee engagement. Performance was broadly
defined, not limited solely to investment performance, which
allowed for a relative assessment of firms across firm types and
investment strategies, though given the industry we expect
investment performance to be a primary driver of the responses.
To relate phi to outcomes, the following odds were modeled:
θ1 = prob(score = 1) / prob(score > 1 )θ2 =
prob(score = 1, 2) / prob(score > 2 )θ3 = prob(score = 1, 2, 3)
/ prob(score > 3 )θ4 = prob(score = 1, 2, 3, 4) / prob(score
> 4 )
All odds are of the form θy = prob(score ≤ y) / prob(score >
y)
The functional form of the model for each outcome, using phi as
an independent variable, is:
ln(θy) = αj – βΦ
Using Huber-White standard errors. Incremental percentage
improvements in the odds of “excellent” outcomes were derived using
an odds-ratio interpretation.
Important Information
Investing involves risk including the risk of loss of
principal.
All information has been obtained from sources believed to be
reliable, but its accuracy is not guaranteed. There is no
representation or warranty as to the current accuracy, reliability
or completeness of, nor liability for, decisions based on such
information and it should not be relied on as such.
State Street Corporation, One Lincoln Street, Boston, MA
02111-2900
© 2016 State Street Corporation - All Rights Reserved
10/31/17
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State Street CorporationAnne McNally,
+1-617-664-8576AEMcnally@StateStreet.com@StateStreet
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