Phi Identified

A recent article in Financial Advisor magazine asked if advisors are motivated to serve their clients.  The article highlighted research from the State Street Center for Applied Research and the CFA Institute which identified a new variable, phi, that influences investment outcomes.   Phi is an acronym for purpose, habits and incentives.

I was drawn to the study in hopes that phi would measure the hard to quantify alpha that impact investing can offer.   Instead, the study focused largely on the behavior of investment professionals.   “When the phi of the investment professional, the investment firm and their clients are aligned, this represents the greatest potential for sustainable organizational performance – across market cycles – as all are focused on the long-term goals of the client.”

In “Discovering Phi: Motivation as the Hidden Variable of Performance,” the paper’s authors isolated and measured the impact of long-term purpose on the outcomes of investment decision-making.  The study identified a variable with a statistically significant relationship to long-term organizational performance, client satisfaction and employee engagement.

Phi was found through an 18-month study from May 2015 through October 2015 spanning interviews with almost 7,000 investors, investment providers and government officials across 20 countries.

Of note from the report:

  • Among asset owners and wealth managers, 36% of respondents reported that acting in the best interest of their clients implied taking on career risk.
  • Only 17% of investment professionals scored high on phi and 53% scored either low or having no phi.
  • 62% of investment professionals believe their organization is acting in its own best interest rather than the clients.
  • 28% of respondents said they remain in the investment management industry to help clients in achieving financial goals.

These statistics are a poor barometer for the investment industry and serve as a warning, especially to impact investors.   Impact investing utilizes a long-term strategy aligning financial and mission goals.  It would be interesting to see the calculated phi for impact advisors.  Intuitively, given the long-term financial and mission alignment, you would expect respondents to score high on phi.  Let’s hope for the future of impact investing this is so.



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