A purpose-driven performance metric for asset management?

Asset owners can help improve their managers’ performance by pushing firms to increase their “internalised purpose”, according to research. 

The Center for Applied Research (CAR), a think tank linked to State Street, and the CFA Institute claimed this was “a hidden variable of performance”, and named it ‘phi’.

The research report referred to phi as capturing “the motivational forces of purpose, habits, and incentives that govern our behaviours and actions”, adding that it was “distinctly different from the short-term outperformance motivation or asset-gathering focus of our industry”.

The organisations behind the research claimed that phi had a “statistically significant and positive link to broad performance measures that can sustain industry and drive long-term client satisfaction”.

They argued that a one point increase in phi is associated with 28% greater chance of “excellent organisational performance”, 55% greater odds of “excellent” client satisfaction and 57% greater odds of “excellent” employee engagement.

A statement about the research said: “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 economics of the industry we expect investment performance to be a meaningful driver of organisational performance.”

Suzanne Duncan, senior vice president, global head of research at State Street Center for Applied Research, told IPE that secondary research and empirical data collection suggested that organisations with excellent long-term organisational performance also deliver higher investment returns – whether they were asset owners or providers.

“The reason ‘phi’ works,” she added, “is because why we do something influences how well we do something, and it’s the ‘why’ piece that’s missing for many of the investment professionals in the industry.”

The research was based on a survey of just under 7,000 investors, investment providers, government officials, and regulators in 20 countries, including 727 financial professionals in the Europe, Middle East, and Africa (EMEA) region.

Survey respondents were asked to evaluate their organisation on a scale of one to five on 10-year organisational performance, client satisfaction, and employee engagement. 

The research was originally published last autumn, but is now being disseminated with a focus on the EMEA region, which Duncan said scores lower than the global average on “phi”. 

According to one statistic, only 15% of investment professionals in the region remain in the industry to help clients reach their goals, and 6% to contribute to economic growth.

Duncan said the statistics were “pretty alarming”.

Rebecca Fender, head of the Future of Finance initiative at CFA Institute, said that although there was a strong passion for the markets in the investment industry, connecting that with a purpose serving the end client is what distinguishes a “great” investment firm from merely a good one.

Asset owners’ ‘phi’ appetite

Duncan said asset owners can develop ‘phi’ more easily than other investment institutions, as they are typically closer to the end investor. Investment managers experience more disintermediation through the involvement of consultants or advisers, she said.

According to Duncan, asset owners could instil or cultivate ‘phi’ by ensuring they have a clear vision and purpose, and taking the time to articulate this and associated values and beliefs to employees. This could also lead to less behavioural bias and, ultimately, higher performance, she argued.

Fender added: “Culture is the new competitive advantage for the industry and there’s a huge opportunity for asset owners to exert influence to increase ‘phi’.

“We’ve seen how asset owners have worked to make changes in the industry and we at CFA Institute expect to see more of that going forward. Asset owners will demand that asset managers have improved culture and that it’s more client-centric, and phi is the formula for that.”

The report, “Discovering Phi: Motivation as the Hidden Variable of Performance”, can be found here.