Starting and growing a business takes a leap of faith. It is often said that MBAs never start a new business because, upon close analysis, new businesses make no sense.
So clearly entrepreneurs are special types. They create something out of nothing but an idea, a spreadsheet and perhaps some capital. They believe that opportunity will turn into success and risks will turn into fun memories. They aren’t afraid to make that leap. In a way, to truly understand entrepreneurs, one has to become one—at least for a day.
Together, Fidelity and the Ensemble Practice attempted to do just that in a business simulation that asked 80 relationship managers at Fidelity to walk in the shoes of an entrepreneur and run a fictional business for a year and a half. This simulation may tell us something about the lessons that the next generation of leaders inside RIAs will need to learn in order to truly become entrepreneurs.
The independent RIA industry was created by entrepreneurs—people who took a leap of faith to create a business out of their skills and passion. If all of us who consult with and service RIAs are to truly understand them, we have to understand their experience. What is it like to chart a vision and recruit people to that vision? How does one make difficult decisions about compensation? How do partners communicate with one another while keeping an eye on the bank account, trying to perfect client service, serving as leaders and examples, connecting those cables under the desk and worrying about all of the other things business owners deal with daily?
As part of the project, Ensemble and Fidelity created 10 true-to-life RIA businesses and asked Fidelity relationship managers to oversee them. Each RIA had a history, an income statement with profits and expenses, clients and assets, a website, a payroll, a list of looming issues and a few attractive opportunities. Each manager was assigned a character role. Some were CEOs and others COOs. Some were partners or partners-to-be. Some were founders and some were successors. All were asked to be leaders.
Our simulation was similar to a large-scale sociology study wherein academics observe and study group behavior. We had a chance to see what experienced professionals would do if they were given the opportunity to get behind the wheel of a business and drive. This glimpse gave us many rich insights into what the next generation of leaders in the RIA industry will do when they take over. Members of this next generation closely resemble our friends and colleagues in the Fidelity relationship management ranks—skilled, passionate and experienced professionals who have not yet run a business. Here is what we learned.
There Is An Entrepreneur In Everyone
Running a business is exciting, and this excitement can be addictive. It is like driving a sports car: It’s a little scary getting behind the wheel, but once you get going, you don’t want to stop. In the case of our simulation, what was meant to be a “training game” quickly turned into a very realistic experience. Participants in our group were spending a lot of time brainstorming ideas, looking for better ways to accomplish their goals and researching possibilities. This was time they spent above and beyond their day jobs, time carved away from family and hobbies and put to work toward something they became very passionate about. That’s how a business starts.
It is a little counterintuitive at first to be a business owner. When you grow your career inside an established organization, you must often ask, “Who is responsible for this?” When you become an entrepreneur, you realize that the answer to this question is always the same: You are responsible. This is a lesson that the next generation of leaders inside RIAs are learning.
Theory and Practice
As Einstein once observed, “In theory, theory and practice are the same. In practice, they are not.” We see that every day in our work with RIAs. The theory of managing a business is often quite different from the reality of working with the people and resources available. The group quickly learned that information is never sufficient. Analysis is not always conclusive and clear. People are never as predictable as we would like. And changing behavior—including your own—is very difficult.
Making real-world decisions also means affecting the lives of real people, which puts a heavy psychological burden on the shoulders of business owners. It is easy to make compensation changes in a spreadsheet, but it is very difficult to sit across from someone and explain that her income will change, and why you believe the change is necessary and positive.
Feedback
Our simulation had a judge’s panel comprising experienced entrepreneurs who had started several of the most successful RIAs in the country and others (they included John Waldron, Adam Birenbaum, Laura Kogen, Bob Glovsky, Tom Goyne, John Morris, Rick Buoncore, Russ Hill, Tim Kochis and Brandon Odell). The authors also participated.
Every fictional RIA created a business plan and presented that plan to the panel. Each judge contributed a score for the plan and influenced the next step in the simulation.
The judges often disagreed about the best course of action. Making business decisions is never clear cut, and there are always differences of approach, style and opinion. In any business situation, there are different directions possible. An entrepreneur must choose one and take responsibility for that choice.
Teamwork
The teams consisted of six to eight members. While everyone was assigned a fictional title, the hierarchy of the participants did not match the hierarchy of the simulation. In other words, the teams had to define their own leadership style and organizational culture. The resulting team structures tell us something about the RIA industry.
One is that there is no single optimal organizational structure for making decisions. Some teams chose to be very hierarchical while others stayed flat. Some chose permanent leaders and others rotated the position of power. Some completed assignments in close collaboration; others preferred to “divide and conquer.” The success of the team did not depend so much on the chosen structure, but rather on the team’s ability to clearly define that structure and find consensus about it. Teams that spent time early on discussing how they would communicate and make decisions did better than teams that waited for a structure to emerge.
Financials Matter
The income statement (P&L) of a firm is a vital management tool for a business owner, and one that those who have spent their careers in established organizations often forget about. The next generation of leaders are capable managers, but they tend to overlook this important tool, basing their management on concepts rather than the P&L. While this may be something of an overstatement, we do find that managing the P&L to balance opportunities and ideas with the financial resources of the firm is a crucial skill that future leaders must learn.
The Power of Partnerships
Most successful RIAs today are partnerships. They may not call themselves partners and may think of the firm as a corporation, but at the end of the day their firms are powered by the skills and talents of a well-organized group of individuals. This group may be large: Some RIAs have 50 or more owners (partners). Whatever their titles may be, the spirit and culture of the “partner” group is critical to the success of the firm.
The key factors for success include the relationships among the owners, the culture of the ownership group, the owners’ compensation and the leadership style of the group. Our simulation participants witnessed firsthand how important it is to consider the nature of the ownership group.
Difficult questions about ownership include:
• Who should be the owners of the business?
• What does it mean to be an owner, and what do we expect of owners?
• How can we motivate owners?
• How can we compensate owners?
• How do we succeed founders?
These questions have no clear answers, but the success of the firms depends on them. Answers emerge out of healthy and thoughtful dialogue among the firms’ leaders. The best answers are those that keep the owners engaged and passionate about the business.
We believe that the lessons we learned in this simulation mirror the lessons the next generation of leaders are learning as they take over advisories. G2 leaders are talented and skilled. They lack only the experience of what it really feels like to “drive the car.” The reality is perhaps different than expected, but it can also be more exciting than imagined. As Mario Andretti says, “If you think you are in control, you are just not driving fast enough.”
Bob Oros is executive vice president–head of sales and relationship management for Fidelity Investments.
Philip Palaveev is CEO of The Ensemble Practice, a consulting firm based in Seattle.