From “ROI” to “PHI”: State Street’s Center for Applied Research and CFA Institute Identify a Hidden Variable of Performance

New Research Shows How Closing the Gap between Passion and Purpose Can Improve Investment Outcomes

BOSTON--()--New research published today by the Center for Applied Research, the independent think-tank of State Street (NYSE: STT), and CFA Institute, argues that to succeed, the investment industry and its professionals need to move from a performance-driven culture to one that is purpose-driven to better ensure clients’ long-term goals are met. The research, titled “Finding Phi: Motivation as the Hidden Variable of Performance,” has identified “phi”, a factor that has a positive impact on organizational performance, client satisfaction, and employee engagement.

Phi is the alignment of purpose, habit and incentives at the intersection of the goals and values of the individual, the organization, and the client. The research asked three questions based on motivation theory (self-determination theory) to diagnose phi: what motivates you to perform generally and in your current role? What is the reason that you are still working in the investment management industry? Would you describe your work as a job, a career, or a calling?

The research has found that phi has a statistically significant and positive link to broad performance measures, including client satisfaction and employee engagement, that can sustain the industry and drive client satisfaction for decades to come. A one point increase in phi is associated with 28% greater odds of excellent organizational performance1, 55% greater odds of excellent client satisfaction and 57% greater odds of excellent employee engagement.

“Building a culture and environment with aligned purpose, habits and incentives can give organizations a competitive advantage that is sustainable and will benefit clients, the providers themselves and ultimately society as a whole,” said Suzanne Duncan, global head of the Center for Applied Research, State Street. “When investment professionals are asked to deliver against inappropriate metrics on an inappropriate time horizon, their passion for markets eventually becomes divorced from their true purpose – achieving the long-term goals of the investors they serve. Investment performance today isn’t only about alpha; it must focus on phi: a purpose-driven motivation that represents the greatest potential for performance, across market cycles.”

The results of the research clearly pointed to the existence of phi as a previously uncovered variable that, in addition to motivation, might have an outsized impact on investment performance, as in quantum mechanics, where a “hidden variable” is an element missing from a model that leaves the system incomplete. The research argues that the same is true for the investment management industry: without the alignment of purpose and passion, the industry model is flawed.

“Phi is the variable that’s been missing for too long from the investment management ecosystem,” said Rebecca Fender, CFA, head of the Future of Finance initiative at CFA Institute, a long-term global effort to shape a trustworthy, forward-thinking financial industry that better serves society. “Like any ecosystem, the investment management industry is predicated on a series of intertwined relationships. The research shows that when there’s a lack of purpose to temper passion, the balance and alignment of interests and motivations becomes distorted and ultimately the most fragile things in the environment bear the brunt of the harm. By focusing on phi, investment professionals won’t merely restore balance to our industry, they will make it easier for everything within our ecosystem to find new ways of flourishing, new ways of capturing alpha.”

Purpose Drives Outcomes

  • According to the research findings, maximizing phi among investment management professionals, investment management firms and their clients may be one of the most promising ways of creating value and trust in the industry. The good news for the investment industry is that 53% of the investment professional respondents said they pursued a career in investment management because they are passionate about financial markets, and 40% report that it is an important reason they stay in the industry.
  • Despite this passion, there is a disconnect from purpose. Just 28% of our respondents said they remain in the investment management industry for the purpose of helping clients achieving financial goals, and only 5% to contribute to economic growth.
  • The industry has a significant opportunity to improve phi and it starts with leadership.
    • Only 44% of professional investors believe their leaders articulate a compelling vision.
    • 41% agree that leaders talk to employees about their most important values and beliefs.
    • 3% believe that leaders are spending time teaching and coaching employees.
    • 40% of professional investors think their leaders re-examine critical assumptions and beliefs.

“The research clearly shows that phi is an important variable that can be used to recalibrate the behaviors of investment professionals and leadership plays a pivotal role,” continued Duncan. “By instilling phi, they can move beyond improving their own financial returns and put their clients’ interests first. When they do so, they can increase organizational performance as well as gain the trust and loyalty of their clients and employees. For an industry obsessed with results, we believe this is an extremely compelling discovery.”

About State Street Corporation

State Street Corporation (NYSE: STT) is one of the world's leading providers of financial services to institutional investors, including investment servicing, investment management and investment research and trading. With $29 trillion in assets under custody and administration and $2 trillion* in assets under management as of September 30, 2016, State Street operates in more than 100 geographic markets worldwide, including the US, Canada, Europe, the Middle East and Asia. For more information, visit State Street’s website at

*Assets under management include the assets of the SPDR(R) Gold ETF (approximately $40 billion as of September 30, 2016), for which State Street Global Markets, LLC, an affiliate of SSgA, serves as the distribution agent.

About CFA Institute

CFA Institute is the global association of investment professionals that sets the standard for professional excellence and credentials. The organization is a champion for ethical behavior in investment markets and a respected source of knowledge in the global financial community. The end goal: to create an environment where investors’ interests come first, markets function at their best, and economies grow. CFA Institute has over 140,000 members in 157 countries and territories, including 134,000 CFA charterholders, and 147 member societies. The CFA Institute Future of Finance initiative is a long-term, global effort to shape a trustworthy, forward-thinking investment profession that better serves society. For more information, visit

1 Survey respondents were asked to evaluate their organization on a scale of 1-5 on 10-year organizational performance, client satisfaction, and employee engagement. Performance was broadly defined, not limited solely to investment performance, which allowed for a relative assessment of firms across firm types and investment strategies, though given the industry we expect investment performance to be a primary driver of the responses.

To relate phi to outcomes, the following odds were modeled:

θ1 = prob(score = 1) / prob(score > 1 )
θ2 = prob(score = 1, 2) / prob(score > 2 )
θ3 = prob(score = 1, 2, 3) / prob(score > 3 )
θ4 = prob(score = 1, 2, 3, 4) / prob(score > 4 )

All odds are of the form θy = prob(score ≤ y) / prob(score > y)

The functional form of the model for each outcome, using phi as an independent variable, is:

ln(θy) = αj – βΦ

Using Huber-White standard errors. Incremental percentage improvements in the odds of “excellent” outcomes were derived using an odds-ratio interpretation.

Important Information

Investing involves risk including the risk of loss of principal.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

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State Street Corporation
Anne McNally, +1-617-664-8576


State Street Corporation
Anne McNally, +1-617-664-8576