The Hidden Variable of Investment Performance

At our conference last week I moderated a panel on the topic of organizational alpha. This is the idea that adding value to an investment portfolio goes far beyond trying to outperform the market.

Traditional alpha is a finite resource and can be fleeting. Organizational alpha is something that every individual or firm can adopt to add value through intelligent planning, cultivating the right type of culture, creating a thorough decision-making process and understanding who they are (strengths, limitations, resources, etc.).

John Bowman from the CFA Institute was on this panel and shared some new research that the CFA recently finished with some help from State Street. They interviewed thousands of investors and investment firms across the globe to try to quantify these qualitative factors and the impact they can have on both an organization and their results.

They came up with a variable — “phi” — that can help explain which investors are successful and why. Phi stands for purpose, habits and incentives.

The goal of the study was to figure out what motivates people to perform in their careers, why they work in the investment management industry in the first place and whether they think of the job as a career or a calling.

A few stats from their findings:

  • A one point increase in phi is associated with 28% greater odds of excellent organizational performance, 55% greater odds of client satisfaction and 57% greater odds of employee engagement.
  • Only 28% of respondents said they remain in the investment industry to help clients achieve their goals. This one is depressing but not surprising.
  • Nearly two-thirds (62%) of investment professionals believe that their organization is acting in its own best interest rather than the client’s. Also depressing.
  • More than half (54%) of retail investor respondents said they believe that financial institutions are likely to offer products and services in the firm’s own best interest versus that of the client.
  • Less than one third (32%) of retail investors surveyed attribute their long-term financial planning success to an advisor or other investment provider. They were more likely to credit themselves (55%) or friends or family (38%).

And here’s the main takeaway:

When the phi of the investment professional, the investment firm and their clients are aligned, this represents the greatest potential for sustainable organizational performance – across market cycles – as all are focused on the long-term goals of the client. Furthermore, phi drives the behaviors and attitudes individual investors must develop to reach higher levels of engagement and progress toward long-term goals.

This stands in stark contrast with the short-term nature of the investment business which is often more focused on quarterly performance numbers or asset gathering. Many in this industry are more worried about the competition and outperformance rather than helping their clients achieve their goals. It’s misdirected attention.

Qualitative factors can be difficult to quantify, but here are a few things to look for when assessing the phi of an investment firm:

  • Organizational culture
  • Solid leadership in place
  • Buy-in from employees
  • A shared vision and defined set of values and beliefs
  • Looking at clients as people and not numbers
  • Emphasis on continued learning, education & coaching
  • Self-awareness and humility
  • Effective communication skills
  • Both giving and accepting of feedback
  • Implements a fair, transparent incentive structure
  • Stated goals and mission
  • Process-oriented

These ideas obviously extend beyond investment management into other fields so I think this concept is something that people and organizations from many different walks of life should find helpful.

Read the entire report on the concept of phi here:
Discovering Phi: Motivation as the hidden variable of performance (CFA Institute)

Further Reading:
Investment Management vs. Financial Advice

If you’re interested in learning more about motivation, this is my favorite book on the topic:
Smarter, Faster, Better: The Secrets of Being Productive in Life and Business

Now here’s the stuff I’ve been reading this week:


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