A NEW DIMENSION IN THE PURSUIT OF PERFORMANCE By Nigel Aston, Head of European Defined Contribution, State Street Global Advisors For the retirement savings industry, helping clients and plan members to achieve strong and durable financial outcomes is a fundamental objective. Robust investment products and processes, strong governance and intelligent, experienced people are amongst the myriad of inputs working together towards achieving that goal. New research from the Center for Applied Research (CAR), an independent think-tank founded by State Street, adds a fascinating dimension to that equation. The research concludes that understanding what truly motivates an organisation, and nurturing positive behaviours and structures, are crucial components of longterm success that have a distinct and, now, quantifiable impact on a business s performance. 22 State Street Global Advisors Research
THE PHI-AGNOSIS CHALLENGE 05 Alistair Byrne Senior DC Strategist, State Street Global Advisors Understanding the motivations that drive organisations towards their goals can go a long way to helping to achieve them. Put another way, a blinkered focus on outputs like financial gain or investment returns alone is less likely to deliver sustainable results than when organisations, and their employees, are driven by a more defined higher purpose. Put simply, if you care more, you perform better. CAR, in partnership with the Chartered Financial Analyst (CFA) Institute, spent 18 months collecting qualitative and quantitative insights from investors around the globe to devise a way to measure this previously hidden variable of performance. What motivates us Purpose, Habits and Incentives (or PHI) has a measurable impact on organisational performance and client satisfaction. Why PHI? The research sought to answer a fundamental question: How can the investment industry leverage motivation to achieve better financial outcomes? It concluded that to succeed, the industry and the professionals within it need to rediscover their core purpose and motivation that is, move from an individual output-driven culture to one that is purpose-driven. Understanding the impact of purpose-driven performance and the factors that contribute to it provides a foundation for organisations to reconsider how aspects of their purpose, culture and structures can be better channelled. These include aligning individual purpose with values, and supporting employees to be guided by good habits and the right incentives. So, while an objective might be strong investment performance and great financial outcomes for clients, a focus on what motivates a firm to work towards these objectives can drive more sustainable results. Realigning in this way facilitates a shift from short-term thinking to achieving collective long-term goals. As an asset manager, it s imperative we reach beyond a quest for investment outperformance or growth. These are indeed crucial objectives for us as part of our aim to deliver better financial outcomes for our clients. However, it s vital to embed into our activity, structures, culture and leadership an understanding of our core motivation. This is as important as the mechanism or objective of any investment strategy we build and run. For us, that means ensuring we fully appreciate that at the end of the DC investment process there is a real person. So our motivation is to strive for stronger retirement outcomes for those people, not merely the performance of investment products in and of themselves. That is the Job to Get Done it s a crucial difference. The CAR study provides a foundation for quantifying motivations within our business and people. We ve embarked on our own PHI-agnosis, working with CAR, with a view to developing a picture of the factors that motivate our team so we can work towards even greater alignment with our true raison d etre. Our initial score shows we have a strong foundation to work from! 1.68 1.49 Average PHI for DC team Average Asset Manager PHI Contribute A New Dimension in the Pursuit of Performance 23
Motivation Measured Motivation is the rationale for people s actions, desires and needs. Sustainable motivation, or PHI as defined by the research team at CAR, can be quantified through an analysis of individuals propensity to deliver performance driven by purpose embedded by their habits and incentives. The CAR study calculated the PHI scores of the individuals surveyed through an analysis of the following factors: 1 PURPOSE 2 HABITS 3 INCENTIVES What motivates you to perform? Money Personal Performance Clients Society Why do you continue to work in the Investment Industry? Job Satisfaction People Money Family Status Society Markets How do you think of your work? Job Career Calling Those working in the service of Those with personal goals aligned something larger than themselves. with their organisation and end clients.! PHI was shown to have a statistically significant relationship to long-term success and end-client satisfaction of the asset managers and financial service providers studied. In aggregate, those with a 1 point increase in higher PHI were shown to be: 28% 55% demonstrate excellent organisational performance Source: Centre of Applied Research. 57% demonstrate excellent employee engagement Reaching for High PHI exhibit excellent client satisfaction Quantifying PHI is just the start. It means that organisations can revisit their environment to identify factors that can help improve employees focus on the firm s core purpose and motivation. Purpose, Habits and Incentives can be cultivated. CAR outlines some simple recommendations for organisations seeking to enhance their PHI factor: 1 PURPOSE A well-articulated and shared purpose is a key ingredient. Organisations, driven by strong leadership, can create opportunities for their investment professionals to better understand how their actions impact their clients lives through: Strongly articulated vision Shared values and beliefs Goals connected to purpose Coaching employees Revisiting critical assumptions 2 HABITS Where PHI is low, custom and habit may be encouraging a diversion from the organisation s core purpose. It is important to identify habits that detract from purpose, while developing and reinforcing new productive habits. Strategies to effect change include: Communication to encourage decision making driven by core motivations Efforts to break habits triggered by fear; good habits are more beneficial if they are easy to adopt 3 Those who view work as a calling rather than a job.!! INCENTIVES Incentive and compensation structures that facilitate longer-term thinking can be important for aligning to the broader mission. They should be aligned to individual, organisational and client goals and values. 24 State Street Global Advisors Research
PHI and DC Plan Members The CAR research showed that quantifying PHI also has direct application for retail investors, including those DC members who actually make their own choices about how their savings are invested. It provides a basis for understanding how members can be motivated to be better investors and more focussed on behaviours that support their long-term goals. In the study, individuals motivated by purpose and goals, as opposed to fear of loss, were shown to have more favourable investing habits. When the PHI of the investment professional, the investment firm and their clients are aligned, this represents the greatest potential for sustainable organisational performance. Mimmi Kheddache Jendeby, CAR The Future for PHI in Pensions So, how might PHI be used to build better performance within the pension savings sector? A commitment to understanding your organisation s PHI factors is a start. The researchers at CAR can help businesses gain deeper insights into the motivational factors at work in their organisation. And who knows, perhaps PHI will feature as a point of difference for plans in their search for investment managers and providers with an edge in performance. It s a great ambition! If we as an industry can help individual investors fulfil these needs in the context of investing we will have more motivated end investors that feel a higher level of trust and take more responsibility for their long term savings plan. Mimmi Kheddache Jendeby, CAR Among the more favourable behaviours demonstrated by those motivated by goal setting and attainment were a greater likelihood to consider a financial advisor, understand what they pay in fees and avoid excessive trading. Conversely, those with a lack of purpose or fear of investing were avoid thinking about saving for the future or unnecessarily avoiding risk. They are buy something over saving, buy an investment after it has gained significant value, and sell after a significant loss. We know that individuals with retirement anxiety are less likely to save and plan for the future and exhibit patterns of inertia or avoidance engaging in long-term investment activities. As an industry, it confirms the need to help members overcome those fears and avoidance and provide a safety net for those for whom it remains entrenched. Auto-enrolment has formed a key part of that process in the UK. Building engagement with DC plans can also seek to address the detrimental impacts of negative motivational forces. And there is a role for the products we devise. Target retirement funds for example, are designed specifically as an easy to adopt default asset allocation solution for those unable or unwilling to make such choices themselves. About CAR The Center for Applied Research (CAR) conducts targeted research designed to provide clients with strategic insights into issues that will shape the future of the investment industry, including asset allocation, gender diversity in financial services, regulation and environmental, social and governance investing. The research featured in this article was carried out May 2015-October 2016. Based on interviews with 200 global industry leaders and a survey of 3300 investment professionals and 3600 individual investors in over 20 countries. READ MORE To read the full paper Discovering PHI, visit statestreet.com/ideas/applied-research. CAR can also work with you to discover insights into your organisation s PHI factor. Contact your SSGA representative. Contribute A New Dimension in the Pursuit of Performance 25
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