Meet the Newest Measure of Manager Performance: Phi

 In Retirement Planning & Wealth Management

In October 2016, the CFA Institute in collaboration with the State Street Center for Applied Research issued a report titled “Discovering Phi: Motivation as the Hidden Variable of Performance.” The report is based on an 18-month study and surveys of over 3,300 investment professionals and 3,600 investors across 20 countries. The report finds that Phi, which attempts to quantify the combined motivational forces of purpose, habits and incentives of investment professionals, has a positive correlation to performance.

The authors contend that the motivation and purpose factors that embody Phi are vastly different from the typical motivation to achieve short-term outperformance relative to an index or benchmark. Phi takes a long-term view, and aligns the motivation of an investment professional and investment firm employees with the long-term goals of clients.

Based on the report’s findings, a one-point increase in Phi has been linked to a 28% increase in organizational performance, a 57% increase in employee engagement, and a 55% increase in client satisfaction. Of those surveyed, only 17% of investment professionals score high in Phi, while 53% score low or have no Phi at all.

In a changing regulatory environment that is seeking to put clients’ interest first, it will be interesting to see whether advisors and other professionals begin to adopt Phi as part of their manager due diligence process, similar to more traditional performance measures of alpha and Sharpe.

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