Advisors spend so much time on “how” to do their jobs – but the “why” might be just as important.

Recent research from the State Street Center for Applied Research and the CFA Institute has identified a new variable that impacts investment outcomes: Phi, a measurement of motivation.

“We’ve discovered that why you invest has a big influence on how well you invest,” says Rebecca Fender, head of the CFA Institute’s Future of Finance initiative. “We call phi a ‘hidden variable’ of performance, it’s an aspect of the client-centric culture at certain investment firms that actually produces better results. We think that this will be a key ingredient to success for the industry going forward.”

In “Discovering Phi: Motivation as the Hidden Variable of Performance,” the paper's authors were able to isolate and measure the impact of long-term purpose on the outcomes of investment decision-making.

Phi is not just a Greek letter like alpha, the measure of an investment’s ability to outperform a benchmark, or gamma, Morningstar’s measure of the impact of financial advice on returns – it’s also an acronym for purpose, habits and incentives linked to the performance of long-term investments.

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 greater odds of employee engagement.

“This is the fourth wave of investment variables represented by Greek letters,” says Suzanne Duncan, global head of the State Street Center for Applied Research. “The first wave was alpha generation, then we quickly moved thereafter to the quantification of cost savings through beta replications. More recently, Morningstar ushered in gamma, the value-added service proposition. We believe that phi is the most important letter of all. If you have high phi, you beget high beta, alpha and gamma.”

Phi was found through an 18-month study using surveys of 3,600 investors and 3,300 investment professionals across 20 countries, and in-depth interviews with 200 global industry leaders.

The good news, according to the research, is that advisors are motivated – more than half of investment professionals in the survey said that they were in the industry because they were passionate about finances. However, 92 percent of investment professionals reported being demotivated in some way, and only 28 percent said that they were in the industry to help clients achieve their financial goals.

“This is a lo-phi industry,” says Fender. “Fifty-seven percent of investment professionals, are low-phi or no-phi. It’s interesting because motivation is one of the reasons that people join this profession, and when you think about who you want managing your money, you want someone who is competitive and who loves the markets – but you want them to love to win for you. That motivation has to be directed towards a purpose.”

The industry appears disconnected from its purpose, the researchers warn. When asked, a majority of professional investors give their firms low ratings for being able to articulate a clear vision for the future, for being prepared to adapt their vision over time, for being able to talk to their employees about their values and beliefs, and for taking the time to imbue that vision in their employees through teaching and coaching.

Just 15 percent of investment professionals strongly believed that their leaders were able to articulate a compelling long-term vision.

Indeed, out of 13 industries examined for phi, financial services ranked 12th, leading only retail. The industries with the highest phi were industrial production services, infrastructure and technology, and telecommunications.

“When we asked c-suite leaders questions around what is their purpose, there was a great deal of hesitation around answering the question,” Duncan says. “People said that focusing on motivation was not on their to-do list, but motivation needs to be directed because that’s where firms will find superior performance.”

Fender says that the financial services professions should look at it as a “calling” similar to “helping” careers in education or health care.

Asset owners, asset managers and wealth managers all report that certain short-term stresses are driving their decision making. For more than one-third of asset and wealth managers (36 percent), acting in their clients’ best interests implies taking on career risk – these industry participants are expected to make decisions based on clients’ long-term time horizons, but are being assessed base on performance over much shorter time periods.

That means the industry is cognizant that short-term losses may drive investors to terminate relationships with managers, even if they’re benefiting from the management in the long run. Almost one-in-four of the managers (24 percent) feel organizational pressure to take too little risk, and another 25 percent feel greater pressure to simply replicate the exposures of their benchmark, even when they believe they are suboptimal investments.

“When money is on your mind, it does destructive things to your cognitive functioning, it narrows your thought processes so you can’t engage in things like creative and deep problem solving,” Duncan says.

Short-term self-interest often seems to drown out phi when investment decisions are being made. Nearly two-thirds of investment professionals (62 percent) believe their organization acts in its own best interest rather than that of the clients.

Even retail investors sense the prevalence of short-term selfish interests – more than half of the retail investor respondents believed that financial institutions were more likely to offer products and services in the firm’s best interest rather than in the interest of the client. Fewer than one-in-three retail investors (32 percent) attributed their long-term success to an advisor or an investment provider, they were more likely to credit themselves (55 percent) or their family and friends (38 percent).

Successful firms create an environment where advisors and support staff can develop additional soft skills that positively impact their abilities to make good decisions, including cognitive flexibility, creativity, a feeling of ownership and corporate citizenship.

Further, researchers found that when the phi of the advisor, the firm and the client are aligned, all enjoy the greatest potential for success across market cycles.

“The individual client’s perspective is important,” Fender says. “We find that individual investors are often prompted by fear, they’ll react to market news or buy high and sell low.” A high phi investor or advisor would break this habit cycle by being reminded of long-term goals, instilling habits directed towards achieving those goals, and using incentives to re-enforce those habits.

Most importantly, said the researchers, while trends in alpha and beta are largely out of the control of investment professionals, phi is not. Thus the ability to provide and demonstrate phi is a value-add to potential clients.

If firms want to offer their clients more phi, the researchers recommend starting from the beginning and creating a long-term vision for the firm – but that vision need not come from a firm’s leadership, and it might take a long time to clarify.

“High-phi organizations have clear and distinct purposes that are understood externally and internally,” Duncan says. “It’s more than a mission statement, 98 percent of mission statements are exactly the same.”

Leadership at firms need to become more flexible and to break down old habits and learn new ones – particularly around decision-making. Firm decisions should be driven more by phi than by concern for short-term performance.

The financial industry should also change its incentive structure towards wealth and asset managers to eliminate short-term contingent rewards wherever possible. Any type of incentive contingent on performance should be determined on a longer cycle.

“This is really a self-actualization phenomenon,” Duncan says. “We’re looking at a brand-new industry, it was formed just 50 years ago, and there’s a continual effort to determine what is the industry's’s real identity. It’s not automatic that an industry knows what its purpose is, you have to work in the space and then go back and re-evaluate what your purpose should be. Other sectors have been able to gain that self-actualization. Now, for the financial industry, this is a huge opportunity to move forward.”