I have this naïve, idealistic notion that an advisory firm should have a highly engaged owner group with each owner (“partner”) participating in the management of the firm and acting as a leader within their area of practice. The “managing partner” or the CEO will be elected to be first among peers and will (perhaps temporarily) step away from their client responsibilities to steer the firm toward the collective vision of the partners. It sounds a bit like Camelot and the Knights of the Round Table, but as naïve as it may be, I have a hard time letting go of the ideal, and I hope to salvage at least some of it and perhaps persuade you to give it a try.
I believe that we would easily agree that a firm needs management and leadership; the only area of discussion is really where we would find the best managers and leaders. My belief is that when management and especially leadership in a large advisory firm come from the ranks of the practicing partners, who have grown their careers within the firm, the result is more likely to be a powerful representation of the client service philosophy of the firm and its values in the process of guiding the future of the firm. The opposite is also true. When the firm “imports” its future managers and leaders, the result is often a disconnect between the culture of the firm and the people who set its direction.
Defining Our Terms
Before we dive into this argument, we need to carefully define our terms. First of all, I will use the terms “owners” or “partners” interchangeably to refer to those who have a significant share of the firm and who are actively involved in the business. By the nature of their ownership, they are invested in the success of the firm professionally and financially. By virtue of a legal agreement, they can also collectively make decisions and implement any changes in a firm.
“Management” then will refer to the act of day-to-day decision-making that allows the firm to operate. Think of management as driving the car—steering, controlling the speed and making sure the car is operational and safe.
If management is driving the car, then “leadership” is setting the destination or making the very high-level decisions that set the direction of the firm and have long-term consequences. Leadership also communicates the values of the organization to all stakeholders (owners, employees and clients) and continuously promotes those values through word and action.
In the simplest terms, leaders set direction, management drives the car and owners buy the gas (and the car). As simple as this definition may be, there will be some ambiguity in this road trip analogy—as anyone who has taken a family trip will tell you, drivers have as much to say about the direction of the car as the people paying for the gas. Finally, all three groups will be inherently responsible for what happens in the car as their responsibilities inevitably overlap.
A Firm Needs Management
A car without a driver is plain dangerous and so is a firm without management. Management responsibilities can be delegated but not abdicated. Every firm needs to designate its managers, those that will make sure that the daily and monthly decisions are made so that the firm can operate well and serve its clients, employees and owners.
Frequently, the owners of the firm, who are usually professional advisors, have some aversion to management. It is distracting from their professional responsibilities (the “best use of time” concept) and can be quite aggravating particularly in the need to deal with employees and their behavior. For this reason, in many firms the partners wish they could delegate “management” to “somebody else.”
The need to manage also increases with the size of the firm. In a larger advisory firm, management has many aspects and will likely require multiple managers. A firm with more than $1 billion in AUM likely has a chief operating officer (or COO)—58% of the super-ensembles in the Moss Adams survey report having this executive position, while 58% report having a chief investment officer. Forty-five percent report having a chief compliance officer as an executive position (rather than a responsibility).
Finally, a firm should have a CEO. Seventy-two percent of firms report having this position, but in many firms the title indicates only that the individual is simply the largest shareholder—not that he or she is necessarily driving the car. We will later discuss why a CEO is not “a must” and why a good executive committee can provide a similar level of management decision-making.