As investors, why do we go to work every day? What motivates us?

CFA Institute recently partnered with State Street’s Center for Applied Research to try to answer these questions. In their report—“Discovering Phi: Motivation as the Hidden Variable of Performance” —the authors sought to answer the following question: How can we leverage motivation to achieve better financial outcomes?

While some of the report’s findings were what we expected, some of them surprised us, and might surprise you as well. We summarized a few of them below, but for a deeper look at the full report, go to CFAInstitute.org.

The Current State

First, the good news. The report revealed that professional investors have a lot of passion for what they do. More than half (53%) of respondents chose investing as a career because they love markets, and 40 per cent said they stay in the industry because of that passion. Not a bad start.

However, while the passion may be there, the report suggests that “the industry appears disconnected from its purpose.” In what is quite a disheartening statistic, the report revealed that just over one-quarter (28%) of investment professionals remain in the industry to help clients achieve their financial goals. The report suggests that most professionals are more interested in returns and the thrill of competition than in delivering outcomes for clients.

The Future State

While the current state of motivation in our industry is quite wanting, from the perspective of the report, improvements can be made. The authors propose a framework based on their novel concept of phi (purpose, habits, and incentives). They argue that investors who are driven by a belief that they’re working in the service of something larger than themselves (those who have high levels of phi) should be able to deliver more sustainable results and perform better in any return environment.

The Recommendations

The report offers three main recommendations on how investment leaders can create a better environment that will lead professionals to focus on outcomes for clients.

1. Purpose: “We suggest that organizations create opportunities for investment professionals to understand how their actions impact their clients’ lives.” In contrast to other industries like healthcare or construction, investment professionals are often several steps removed from seeing the fruits of their labour. This can have the effect of hiding the purpose of the work and burying what should be the true motivation: helping clients achieve their financial objectives. (Details of five concrete actions leaders can take to help achieve this can be found on page 35 of the report.)
2. Habits: Part of the message of the report is the need for investment professionals to develop new habits to help keep behavioural biases in check. Specifically, “we need to break the habit of having fear trigger action” and instead build new routines where “we objectively learn from success or failure.” While there’s no doubt this is easier said than done, it’s a reasonable objective to create working environments that minimize fear and promote level-headed rationality.
3. Incentives: To help align investors with their clients, the authors suggest we “eliminate short-term contingent rewards wherever possible.” In particular, they recommend that “firms experiment with new incentive structures that will facilitate longer-term thinking.” One concrete suggestion is to move to two- to five-year bonus cycles, a change that almost 40 per cent of respondents supported.

The leadership required to implement these recommendations will be substantial. However, if the payoff described by the report—achieving clients’ long-term goals—is the result, it will surely be worth the effort.

Cold Hard Facts

Some sobering statistics from “Discovering Phi: Motivation as the Hidden Variable of Performance,” a joint report from the CFA Institute and State Street’s Center for Applied Research.

• 52 per cent of respondents believe they would be fired after 18 months of underperformance
• 36 per cent report that acting in the best interest of their clients actually implied taking on career risk
• 25 per cent feel pressure to replicate exposures in their benchmarks
• 62 per cent believe their organizations are acting in their own best interests rather than their clients’