The investing industry and its professionals need to move
from a performance-driven culture to one that is more purpose-driven to better
ensure clients’ long-term goals are met.
That’s the consensus of a handful of retirement industry
professionals interviewed recently by PLANADVISER and/or cited in newly published
research: Wanting to do the right thing is slowly but very surely becoming a prerequisite
for business success under the Employee Retirement Income Security Act (ERISA).
According to the CFA Institute and the State Street Center
for Applied Research, which recently released a joint study on the topic, “Motivation
as the Hidden Variable of Performance,” short-term thinking has woefully disconnected
some providers from their “shared purpose of achieving clients’ long-term goals
and in turn contributing to economic growth.”
This will probably be a familiar charge for defined
contribution (DC) industry advisers, who have seen their motivations questioned
harshly by Department of Labor (DOL), other regulators and, increasingly,the plaintiffs’ bar.
Amid this environment, organizations that are able to “go
back to basics and rediscover their purpose … should be able to perform better in
any return environment.”
“We need to embed in our habits and incentives the
connection to purpose,” the report argues. “As in quantum mechanics, where a ‘hidden
variable’ is an element missing from a model that leaves the system incomplete,
we find the same situation in investment management … There seems to be an
intangible factor that has not previously been quantified.”
The researchers call this variable “phi,” but it could just
as easily be called “the will to do the right thing.” Researchers suggest “phi”
can actually be quantitatively derived from the “motivational forces of
purpose, habits and incentives that govern our behaviors and actions.” The phi motivation is distinctly different from the short-term outperformance
motivation or asset gathering focus of our industry, researchers explain.
“The results of our analysis were exceptional: A one point
increase in ‘phi’ is associated with 28% greater odds of excellent organizational
performance, 55% greater odds of excellent client satisfaction and 57% greater
odds of excellent employee engagement,” the report concludes.
Further, according to State Street and the CFA institute, research
based on “Self Determination Theory” has found the best work climates generate
the additional skills the investment industry needs to fully realize individual
“Cognitive flexibility, creativity, ownership and
citizenship. In the context of finance, these sound rather esoteric, but given
the disruptions occurring in today’s environment, this is precisely the time
when these new skills will separate the winners from the losers,” the report
reform portends deeper changes