RESEARCH

What the ‘Phi’ is wrong with investors?

The lead author of a major global study into how the motivations of people in the investments industry are linked to their performance has argued that annual bonuses should be dumped.

A staggering 76 per cent of investment professionals surveyed admitted to letting pressure from members of their board and management team negatively affect their decision-making.

And it has them worried; 17 per cent of investment professionals said they believed their job would be at risk after a short period of underperformance.

“What money does to your brain is detrimental,” State Street Center for Applied Research global head Suzanne Duncan says.

Globally, the majority of investors included in the study believed they would be sacked after 18 months of underperformance. This fear of losing their jobs, along with anxiety about earning short-term bonuses, is causing investment managers to behave in dysfunctional ways, she says.

Boston-based Duncan spoke to Top1000Funds.com as she launched the report, titled Discovering Phi: Motivation as the Hidden Variable of Performance, which was compiled by State Street Corporation’s research arm in conjunction with the CFA Institute. The research is based on a survey of roughly 7000 investment professionals in 20 countries.

The authors of the report state that they have developed a method for quantifying an elusive factor they call Phi, which has a positive impact on organisational performance, client satisfaction and employee engagement.

Phi is an acronym for purpose, habit and incentives – as well as a nod to the 21st letter of the Greek alphabet.

The report concluded a one-point increase in Phi was associated with 28 per cent greater odds of excellent organisational performance, 55 per cent greater odds of excellent client satisfaction and 57 per cent greater odds of excellent employee engagement.

Massive disconnect from purpose

To be a successful investment manager, individuals need a high degree of skill and competence, but they also need the right motivations.

“Why we do something influences how well we do it,” Duncan says.

The researchers found that organisations and teams they rated as having a higher Phi score were significantly more likely to deliver superior long-term investment returns. However, only 17 per cent of investment professionals globally had high levels of Phi.

The report’s underlying data shows why.

Phi is a “socially contagious” quality and spreading it “starts with strong leadership”, Duncan explains. “It is a nature and nurture situation. We need to recruit for Phi, we need to foster it, and we need to pay for it.” Yet the survey responses show this is often not happening.

Just 28 per cent of respondents worldwide said they remain in the investment management industry to help clients achieve financial goals. Also, only 44 per cent of professional investors surveyed believed their leaders articulated a compelling vision and just 40 per cent said they believed their leaders re-examined their own critical assumptions and beliefs.

A mere one-third of respondents believed leaders were spending time teaching and coaching employees.

Incentives are all wrong

Duncan says that despite investment professionals being well paid compared with workers in most other sectors, money is the “number one de-motivator” for the industry. This is because pressure to make short-term incentives leads to high stress levels and reduces the motivation to work in a client’s best interests.

Close to half of all investment professionals surveyed globally reported being treated for a medical condition related to work stress in the past year.

“Thinking about making money narrows the thought process and reduces overall thought power,” Duncan says.

She argues that bonuses needed to be re-designed to make sure they are structured in a way that is fair, transparent and controllable. She praised a trend among some Australian super funds to dump annual bonus structures in favour of five-year incentives.

Young and Phi

Worldwide, workers from the millennial generation recorded markedly higher Phi scores than their older colleagues.

Duncan rejected the idea that this merely reflected the idealism of youth, insisting there is “something different” about what motivates those born in the 1980s and 1990s that she tips to persist as they age.

Looking at another age group, Duncan says there seems to be “an inflection point” at age 51, where Phi scores also dramatically increase.

“I think you get to that point in life and realise it’s not all about you,” she says. “Having children has a similar effect on most people, leading to increased empathy and altruistic motivation.”

The report’s conclusions about how altruistic motivations improve investment outcomes fly in the face of the traditional perception that top-performing fund managers are ultra-competitive and hyper-focused on profits.

At the Investment Management Consultants Association annual conference in Sydney, Australia, in November 2016, P/E Investments managing director Australia and New Zealand, Andrew Harrex, said half-jokingly that he suspected there was “a correlation between arseholes and good fund managers”.

“I’d love to see the analysis,” he said. “I suspect there is a correlation, because you have to have a big ego to say ‘I am right and the market is wrong.’ ” In a sense, the new State Street research is analysis that shows exactly the opposite.

Duncan explains: “That type of individual often outperforms on a short-term basis but it is rare that they continue to outperform on a long-term basis, and our research backs that up. Big egos tend to get caught up in their own behavioural bias and a high degree of confidence in oneself can often lead to a failure to sell when you should.”

Social context

While low levels of Phi are a problem across the industry worldwide, investment professionals in Scandinavian countries reported the highest scores, followed by Australia and Canada.

Duncan says this is a reflection of the “welfare state” mentality in these countries.

“The US is the complete opposite of that … It’s a free-for-all where you look after yourself,” she says.

Duncan explains that while Wall Street is unquestionably the global heartland of financial markets, she doesn’t consider her home country a leader when it comes to long-term investment management.

From 2017, State Street will offer the Phi score assessment tool for all of its clients to use internally and with their external providers.

CFA global president Paul Smith says: “Phi is the variable that’s been missing for too long from the investment management ecosystem. The research shows that when there’s a lack of purpose to temper passion, the balance and alignment of interests and motivations becomes distorted.”