1. The Continued Success Fallacy
The investment industry is predisposed to viewing past success as an indicator of future success. Reasoning tells us that firms that have generated winning returns in the past have the talent, mindset and resources needed to generate high returns in the future. This bias, however, can be misleading. Continued success is never guaranteed in the investment industry, and could even be considered a liability. People are innately fallible, and investment firms are run by people—who are prone to the familiar trappings of success: apathy, entitlement, hubris and being lulled into complacency by the inertia of the past. The world is full of parables about the many perils of success, and human nature is always at the center of those failures.
The Chinese proverb “The spectators see more of the game than the players,” highlights the dangers of tunnel vision and why it is wise to consult outside opinions. Relying solely on proven resources can lead to an echo-chamber of the same strategies, attitudes and insights over time. The investment industry’s tendency to view past success as an indicator of future success is an understandable, but precarious, bias. Replicating effective strategies is a formula for obsolescence in an industry that is constantly evolving. In contrast, underperformers keenly aware of their shortcomings are always thinking about new opportunities on the horizon. Experienced CIOs who have witnessed the inherent dangers of presumed continued success are more inclined to value a focus on inventiveness and creating the future. Just look back at how much the investment industry has changed over the past ten or twenty years. Change never stops.
2. The Complacency Trap
CIOs must exercise due diligence on behalf of their stakeholders when evaluating the perceived benefits of working with currently successful investment firms. Complacency is a very strong and common psychological pitfall. After all, if the clients are happy and value is being created, why change? But complacency is deceptively quiet; it creeps in unnoticed over time, almost imperceptibly, and becomes part of a firm’s culture and operational routines. Complacency, as the byproduct of success, can masquerade as success itself and take root as soon as a firm begins patting itself on the back—and showcasing its latest industry awards beneath the bright lights of their lobby display box (you’ve seen them!).
The antidote to complacency is vigilance, humility and action. Investment firms must seek out groundbreaking or contrary ideas and learn to leverage evolving technologies and new regulations. Successful firms may ignore the inevitability and sweeping power of change because they are blinded by the glow of their current fortunes. What worked yesterday will certainly work today and probably tomorrow, they think. All investment firms—regardless of their prevailing circumstances—need to focus on what comes next. Firms that experiment with strategies and mechanisms that might give them a competitive advantage are more likely to stay ahead of change instead of chasing it. Investment firms with something to prove to themselves and the market, embrace change as opportunity.