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.”

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