When we looked at the data from the latest compensation survey produced here at the Ensemble Practice LLC, we found that the second most common job in the advisory industry is “CEO.” Nearly every firm in the survey had a CEO. Yet when we speak with the partners (owners) of advisory firms, most tell us that there are very few “real” CEOs in the industry.

Clearly, being a CEO involves more than just being the founder and putting that title on your business card. We believe that the emergence of a generation of CEOs is critical for the continued success of the advisory industry, and we wanted to explore what it means to be a “real” CEO: What do they do, and why do firms need them so much?

We strongly believe that every advisory firm needs a functional leadership model. While not every leadership model involves a CEO, for most growing firms the key to executing their vision lies in identifying and empowering one. Simply stated, leadership means “making difficult decisions with the long-term strategy of the firm in mind.”

It is the difficulty of the decisions that favors the emergence of a single leader and the reason larger firms are gradually converting their governance model from a partnership to a more corporate structure—and that’s a good thing. In our experience, lack of effective leadership is the root cause of stagnation and friction in those large firms seeming to “stall” after reaching a certain size.

When we ask firms how they make decisions, we usually get one of two answers: “We sit down as partners,” or “We are a benevolent dictatorship” (no one ever claims to be a non-benevolent dictatorship). The first statement describes a family-like culture of consensus decision-making, while the second describes a paternalistic founder. Very rarely will a firm describe its model of governance as “run by a CEO and a team of executives.”

Clearly, the reality of the advisory industry is one of “distributed” leadership and management. However, if we consider all the companies surrounding the advisory industry—custodians, broker-dealers, investment companies and technology companies—we find that they are without exception run by a CEO. In fact, advisors frequently discuss the strengths (or weaknesses) of the leaders of their business partners.

Does A Firm Need A CEO?
A CEO is the leader of a firm, who has been tasked with executing the strategic plan. To be a “true” CEO, such a leader needs to have the strategic plan to be executed and the authority to make and implement decisions. Both are necessary for the leadership model to function, and in the absence of one, the advantages of the CEO leadership model can quickly turn into dysfunctions.

Leadership by definition is goal oriented—an airplane sitting on the ground does not need a pilot. A firm needs a leader only in the presence of a vision and the determination to pursue that vision (strategic plan). Leaders emerge in the context of the goal to be pursued, and a good leader is defined by that goal, not in absolute terms: Steve Jobs sounds like a horrible choice to lead a third grade camping trip, but he was certainly the right person to take a technology company to success.

Note that the CEO does not have to necessarily define the vision. Sometimes it emerges from the collective ambition of a broad partner group. In fact, ideally, the vision of the firm is developed and shared by all the owners and other stakeholders. The vision should be democratic, but the implementation should be decisive.

To be decisive, a CEO needs to be empowered to make decisions and given the resources to implement those decisions. Time and again, we see struggling CEOs who simply can’t do their jobs because they have no authority to act. Requiring the CEO to seek the consensus of all the owners before hiring an operations person, for example, not only makes the decision-making cumbersome but defies the purpose of having a chief.

The test of a real CEO is ultimately his or her ability and authority to create discipline in the partner group. If the CEO’s actions are limited to those that don’t bother, inconvenience or threaten the partners, the firm will find itself paying for an executive and getting no leadership. CEOs who have to appease every partner are a lot like race car drivers at the wheel of a taxi—their talents are not effective when the passengers are telling them where to go.

So again, the firm that needs a CEO is one with a clear vision, one that gives the CEO authority to make decisions and one that’s ready to hold the partners accountable. It does not take a very large firm to require leadership.

But what kind of firm can afford a CEO? We can’t really answer that question without first answering another question.

What Does A CEO Do?
At the end of the day, a CEO must prioritize the management of a firm and not let her (or his) leadership responsibilities fall by the wayside because of, say, client responsibilities if we are talking about an advisory firm. In some of the largest firms in the industry, CEOs continue to spend time with clients. Such meetings give executives important perspective and connect them with the client base. But the CEO job is a big job. Consider this list of responsibilities:

• They must execute the vision and maintain the competitive advantage of their firms by managing resources at the highest level. (This is strategic leadership.)
• They must set an example and provide clarity in maintaining the culture of the firm (This is cultural leadership.)
• They must work with the owners, lead the executive committee or board of directors and help set the agenda and priorities of the board.
• They must communicate to the owners and other stakeholders the state of the firm and the progress on the strategy.
• They must set and oversee the general structure of partner accountability, including the management structure and departments/committees.
• They must assemble and manage the executive team, including the COO, CCO and other leaders.
• They must work with the partners to prepare and execute a budget and manage the financial health of the firm, including its profitability and uses of capital.
• They must lead the negotiation and establishment of key contracts and strategic partnerships, including those with custodians and other entities.
• They must sign contracts on behalf of the firm for those things that will have the greatest economic impact and strategic importance, as set by the executive committee.
• They must represent the firm in any strategic negotiations.
• They must develop community and industry relations that serve the long-term strategy of their firms.

Timothy Chase, CEO of WMS Partners and one of the true leaders in our industry, helped us develop the list above, as well as a more detailed CEO job description available at our Web site, www.ensemblepractice.com.

The list is long and the burden is heavy. Being the CEO may in fact require a leader to leave behind his or her entire life’s work. Jim Gaffney—a former managing partner of the Moss Adams office in Portland, Ore.—describes having to pass all of his client relationships to other partners in order to assume the leadership role. In Jim’s words, “It is really difficult because you have put a lot of time and effort and heart in those relationships, and it is something you know you are good at, while there is a part of you that wonders if you will be good at the leadership job.”

Where Do CEOs Come From?
Many of today’s CEOs are founders of their firms. Their names are on the door, and they have been unquestioned leaders from the start. They defined the first vision when they started the firm, and they have recruited and groomed the firm’s other partners. However, this is not always the case. Many successful CEOs are one of several founders and have not always been the clear leader. Instead, they reached their position as the top executives in the firm because of their passion for making the business better. In other cases, CEOs are hired externally in order to bring experience and expertise in leadership—experience that perhaps was missing on the inside.

The ability to identify and develop future leaders is critical for the continued success of any firm. This generation of CEOs will likely retire in the next five to 10 years, and the task of identifying future leaders may be even more pressing than the development of advisors who can handle relationships and business development. In fact, our experience shows that while larger firms have done a good job of training the next generation of advisors, they are missing the next generation of leaders.

Part of the problem is that leadership is a bit like driving a car—you have to do it in order to learn it. Much has been written on leadership, and many programs are designed to teach it, but the reality is that you can’t learn to drive by watching your dad drive the car (trust me on this one). Sooner or later, future leaders must grab the wheel.

Leadership opportunities on the inside offer valuable learning opportunities. A future leader can develop necessary experience by chairing committees, leading departments or managing offices.

CEOs who come from the inside have a natural advantage. They know the firm, understand and live the culture and are accepted and known by their colleagues and partners. Sometimes, however, they may have trouble asserting their authority. As they say in Bulgaria, “No one is a prophet in their own village,” and a firm may have a hard time seeing CEO potential in the professionals who grew their careers in the same office, particularly if the CEO has to lead the firm through a lot of change.

The advisory industry does not have a lot of second-generation CEOs because many of the industry’s firm founders have not yet retired. But firms that have gone through internal changes frequently hire their CEOs from the outside. Those outsiders come with experience and credibility, having done the job before, and perhaps the knowledge to change a firm. But they can be harder for insiders to accept, and they raise issues about culture.
The original leadership models in human history were the biggest dudes good with clubs. We later understood that successful leaders must derive their authority from a group. Similarly, future CEOs will not be the biggest shareholders, but those empowered by the people they lead.

There are reasons to hire from the outside and reasons to groom from the inside, and a firm has to keep asking itself where future leaders will come from. Of course, “the firm” is a nebulous concept. It helps to ask more specifically: Who is responsible for identifying the future CEO?

The CEO And The Rest Of The Firm
A CEO cannot work in isolation or lose connection with the owners of the firm and other stakeholders (advisors, employees and, of course, clients). Ideally, a firm has a functioning executive committee (or board of directors) that represents the owners of the firm and stays awake at night thinking about the future ownership.

A good CEO needs to have an executive committee. Because an unchecked CEO can turn into a dictator and lose the hearts and minds of the other partners, an executive committee can offer balance. A CEO needs to hear and understand the thoughts of the other partners and consider them in decision-making. A strong board can also hold a CEO accountable—after all, we all need accountability.

Ideally, the CEO is also surrounded by other executives who are able to provide management and leadership in their respective roles. In advisory firms, these executives include the COO (chief operating officer), CCO (chief compliance officer) and CIO (chief investment officer). An executive team allows the CEO to maintain strategic focus and avoid becoming entangled in the daily battles of managing operations. Once again, the executive team also provides the necessary information and perspective.

It probably strikes you that we are now describing a very large firm: an executive committee, all these executives and tons of overhead! Perhaps the entire structure requires a very large firm, but consider the fact that the largest advisory firms in the industry are easily exceeding $15 million in revenue and 100 employees. More important, consider all those structures as emerging. Perhaps your current board is “all partners,” but as long as you prepare thoughtfully for the day when the board will not include each and every partner, you will find this to be a natural evolution process.

As Tim Chase, CEO of WMS Partners, puts it: “You have to plan your governance structure for the future of the firm. The earlier you adopt the governance structure that will sustain you as a $20 million or $30 million revenue firm, the less friction you will experience as you grow.”

Compensating CEOs
According to Bob Bunting, former CEO of Moss Adams, “The economic impact of the CEO’s work vastly exceeds the impact of almost any other activity. The CEO can complete an acquisition that dramatically increases the size of the firm and enters new markets. The CEO can also recruit a new partner with new services and skills. The CEO can also help deal with an underperforming partner. The impact of the CEO on the firm is dramatic.”

Measuring that impact in compensation, however, can be notoriously difficult. We have some data from advisory firms suggesting that CEOs receive total cash compensation between $350,000 and $550,000, with bonus compensation between $50,000 and $150,000. It is our experience that much of the compensation information is influenced by the fact that the CEO is often the largest shareholder.

Against intuition, the CEOs we work with in the industry often choose to underpay themselves for the CEO job. They are either confident that the profits of the firm will reward them more than fairly, or they are simply passionate about the business and not too worried about the compensation.
Each firm should create its own philosophy for executive compensation, but there are some universally important questions to ask:

• Should the CEO be the highest compensated partner?
• Should there be a CEO bonus?
• What percentage of the profits of the firm should go to executive compensation?
• Can equity compensation play a role in compensating the CEO? (It certainly does in public company executive compensation, and for good reason.)
•  Can the current partner compensation system be modified to allow for CEO compensation?

Changing
The presence of a CEO does not mean that the rest of the partners can remove themselves from management responsibilities. In fact, involving all partners in managing is the first step toward establishing strong leadership. Much how a democracy requires everyone to participate and understand what they are voting for, an executive leadership model requires owners to understand the decisions facing a firm. Otherwise, the outcome is frequently a CEO without a budget or authority—a general without an army.

A CEO should not be a CEO for life. As a firm changes, the vision may change and, of course, the effectiveness of the CEO may change. It is probably best for each firm embarking on the process of empowering a CEO to establish a (term) limit of service and a mechanism for renewing the office or changing leaders.

A decisive leader must make the difficult decisions that guide a firm toward its vision. To be successful, a CEO needs the support of his or her partners and the authority to act on their behalf. While very few firms in the industry today have individuals who function in such a role, it is our belief that the successful, large and growing firms of tomorrow will all follow a strong leader—a true CEO.