Why Advisory Firms Need ‘Real’ CEOs

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.