Practice Management

Investment Industry Must Double Down on Fairness and Transparency

In the retirement planning and investment industry of the near- and long-term future, providers’ motivations will play a deep role in determining success.

By John Manganaro | December 08, 2016
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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 performance potential.

“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 concludes.

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