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.”