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.

Most Managers Should Come From The Inside
There is no reason why some (or many) of the managers in a firm should not come from “the outside.” Professional managers bring specialized knowledge and experience and will help the firm make better decisions. However, imported management has to be balanced by the involvement of the partners and managers who have been grown internally.

If most of the management of a firm comes from the outside, the firm will have an inevitable conflict of values—a conflict that is detrimental to its future. There is a lot of merit in management consisting of people who sit in client meetings and interact with clients daily. In fact, the greatest competitive advantage of independent firms may very well be that the owners and managers of the firms are the advisors of the firms. This means that everyone making decisions has a very clear and recent view of what really matters to clients and what is in the best interest of the client.

If the management of the firm consists mostly of “non-advisors” it becomes very easy to rationalize decisions that promote efficiency but destroy relationships. Such examples are many—from giving small clients a 1-800 number to call (rather than the advisors directly), to over-streamlining portfolios, to outsourcing planning, etc. These may all be good bottom line decisions, but they are very poor client decisions. The voice of practicing professionals in management will provide that balance between efficiency and client interest.

Not every partner wants to manage and not every partner is a good manager, but I will argue that every partner should be involved in management at least to some degree. Managing is like parenting—if you are not involved, you will likely have deep issues with the outcome. You can certainly ask others to participate—there will be teachers and babysitters involved—but at the end of the day, few people will argue that raising children is “best left to the professionals.” Granted, none of us likes to change diapers or discipline children, but if we miss too many of these unpleasant moments, we will not have that deep connection with the result.

Management skills can be acquired, and it is the responsibility of every firm to train its partners how to be managers or at least how to participate in management. In large accounting and consulting firms, such training begins very early in the career path and firms should systematically introduce their future partners to all aspects of running the business. Moss Adams LLP, the firm I grew up in, starts to assign some management responsibilities to professionals at their first promotion.

Participating in management is not a distraction for the partners of a firm—it is part of the experience of being a partner.
“Participation,” of course, is a very broad term. It may mean dedicating a significant amount of time to work or it may mean simply staying informed and providing input when needed. It is very impractical to have every partner involved in every decision all the time. All I am arguing is that a good firm should make sure that each partner participates in at least one management committee, that each partner should have some employee responsibilities and that each partner should follow the work of the “management” of the firm.

Professional management can be very helpful in a firm, but if a car only has “professional drivers,” it becomes nothing but a taxicab.

A Firm Needs Leaders
To be successful, a firm needs not just managers but also leaders. A firm should be governed by a vision—a sense of direction that allows for thoughtful long-term use of resources.
That vision should be complemented by a statement of values and purpose for the firm—one that not only says where the car is going but also why it is going there. The answer to those questions should come from the group of owners/partners to be credible.

While importing management is possible and perhaps productive, importing leadership into a relatively small organization is almost impossible without some significant disruption. Leadership speaks not only to the business plans and use of resources but also to the mission of the firm.

The same is true for a wealth management firm. Chances are the majority of the employees have been long-term members of the team. The founders of a successful firm have also likely left a powerful mark on the firm in the form of their values and the goals they had for the firm. The shared experiences of the staff become the “mythology” of the firm that carries a special importance.

Without sharing that experience and that history and being part of that mythology, the future leaders of the firm will have a hard time establishing their own credibility.

Leadership is a burden—it means providing unwavering belief in the success of the firm, inspiring others even when you may need inspiration yourself and always holding yourself to a very high standard. Only a few are willing to carry that burden. In fact, if only a few partners are interested in management, even fewer are interested in being leaders. Leadership has to come from somewhere though, otherwise the employees and perhaps clients can feel the lack of direction.

A few weeks ago, we were hiking with another family. Our group was made up of four adults and three kids. At one point, we, the adults, started arguing about which direction to go. We had a very sketchy map and a very ambiguous set of directions. We spent maybe 10 minutes in a “friendly” discussion of direction when we noticed that the kids’ faces were getting longer and longer and they started fretting that we were lost and we would never go home. This is what happens when there is no leadership in a firm—the kids get scared.

Leadership does not need to be centralized. Centralizing leadership creates a more decisive organization that can act and react faster. Decentralizing leadership, however, can increase the reach of the organization and make sure that every aspect of the business receives attention. Perhaps you can look at leaders as not just decision-makers but also as ambassadors of the values of the firm. The Knights of the Round Table were a great example—each rode on his quest to spread the values of Camelot. A good firm will find a manner of decisive action but will also ask the partners to be its “knights” and deliver that vision to the rest of the firm.

The Founders
Leadership style is the manner in which a firm answers the question, “Where are we going and why are we headed there?” My experience has been that leadership style in a firm has a lot to do with history. Firms started by a charismatic and empowered founder tend to look for a single strong leader to continue that tradition. Firms that have been created by an involved group of founders tend to emanate that style in the next generation.

Both styles can work well—a more democratic and decentralized group of involved partners can be quite good collective leaders for a firm. So too can one CEO be effective. As long as someone is leading and it is clear who the leader is.

A CEO or managing partner should always be a leader, as the scope and responsibility of their post will necessitate that they participate in articulating the vision of the firm and endorsing its values. A CEO should not be the only source of leadership in a professional services firm, though. Rather, all partners should participate in the process.

The stamp of the founders is always felt—whether they are still part of the firm or not. Some of the habits the founders created may be less functional. Firms where founders were very reluctant to be leaders will likely create future owners who also believe they should not be driving the car. Firms where the founders preferred to drive from the backseat are likely to create a group of future backseat drivers.

In fact, my experience has been that there is no such thing as a founder who is not a leader. There are founders who acknowledge their responsibility to lead and there are those who lead from the backseat, but a founder is always a leader. Some just hate to admit it.

Why Are We Looking To Hire Leaders?
It is worth considering why advisory firms are so attracted to professional “leadership” and why many hire outside CEOs to lead them into the future. The answer probably lies in a combination of things. The firms might be mimicking the way large corporations manage themselves. Many may fail to recognize the difference between this, a professional services business, and the manufacturing or technology companies they are getting their management science theories from.

Large corporations tend to centralize management and rely on professional leaders because they need to put the business under the “supervision” of a group of frequently passive investors.
Without centralization, it is very difficult for the investors to put their arms around the business and oversee its performance.
But the distributed decision-making of a law firm or accounting firm will make it practically impossible for a group of investors to own the business and expect certain results. In fact, frequently the first thing the acquirer of a wealth management business does is centralize the decision-making and remove the co-CEO and partner structures that may have governed the firms up to that point. Centralization frequently improves control, but it does not necessarily improve the result for clients, employees or even owners.

Another reason firms turn to outside leaders is that the “theory” of management is more a collection of case studies than a controlled and repeatable scientific observation. Businesses in these studies benefit from assets managed directly from the top by the business leaders: In manufacturing it is process and production equipment, in retail it is location and inventory, and in technology it is a formula or a code.

Professional services, by their nature, are much more fragmented: Doctors, lawyers, CPAs, dentists and advisors produce an outcome and create value for their clients in a much more decentralized fashion.

That makes it more difficult to scale, and decentralized leadership makes it difficult for owners. Perhaps in this case it’s the broad involvement of the partners producing a result that is good for clients and therefore good for business. Perhaps this balance should not be disrupted, and perhaps the way to manage the outcome is not through centralization of decisions but rather the centralization of cultures. This is the way the largest and most successful accounting firms and consulting firms manage themselves. This is the history of many investment firms as well, with Goldman Sachs providing a good, if perhaps controversial, example.

Where Do Leaders Come From?
As advisory firms grow, many are looking for answers to the difficult questions, “How do we manage this complex business?” and “Who will be our future leaders?” The questions are difficult, and simplistic answers do not work well. Borrowing from the methods of large public corporations and hiring professional leaders is to forgo the top competitive advantage of independent firms.

The biggest competitive strength of an independent firm does not come from its investment methods or superior financial planning—it comes from the sincere and deep involvement of its decision-makers (owners, managers, leaders) in the business of the firm. If you remove that deep involvement, you have nothing more than a small wirehouse, where the advisors work for a group of MBAs that rose to the top through a career in management. Remove the emotional involvement from parenting, and all you have is a day care center.

Instead of looking for ways to abdicate management and leadership roles and leave them to professionals, I hope that each independent firm finds the right people who want to be involved in growing, improving and directing their businesses. If that connection is there, the strength of the firms will be preserved as they transition from one group of owners to another.