September 29, 2009

Top Wealth Managers: A "Game of Inches"

When I looked at the latest list of Top Wealth Managers that Wealth Manager published in July, I was happy to recognize many firms that I have worked with as a consultant. It is always a great feeling to see your clients succeed. At the same time, I couldn't help but wonder what happened with the firms that used to be on the list but are no longer there. Going through that list, I wondered whether there was a common denominator. After all, each of those firms was successful at one time. They were doing many things well, but at the same time, something was missing: Either they let the industry speed past them, or something went wrong and they took a step back.

What surprised me is that there was almost no case that I could think of where the firm did something dramatically wrong. There was no single reason why they used to be a top firm and somehow let that slip away. Instead there were a number of small issues that eventually compiled to create a more serious problem. In one of my favorite speeches in the movie "Any Given Sunday," Al Pacino is talking to the football team he coaches, before a critical playoff game, and tells them that "Football, just like life, is a game of inches..." The small mistakes and little compromises eventually weigh a firm down just like the small victories and good habits carry it forward and keep momentum.

Many of the small compromises that can hurt your business in the long term are quite natural and not necessarily harmful for a smaller business. Most of them are common in the early stages of development of a firm. However, with growth and development beyond a "practice," a wealth management firm has to consider getting rid of them.

My catalogue of compromises is not complete, but it includes many of the most common issues I have encountered working with advisory firms:

Compromising with People
Even the largest wealth management firms rarely exceed 50 persons, so they tend to be small employers and recruit relatively infrequently. The temptation to compromise with levels of experience or formal qualifications is tough to resist. After all, one of the beauties of owning a business is the ability to balance personal and professional life, so it is a very natural reaction for business owners to try to accommodate people. As a result I often find that firms hire:

  • Staff who lack formal experience and training
  • Staff who are good at some aspects of the job but with serious shortcomings in other areas
  • Staff who have the skills necessary for the current level of business but cannot meaningfully participate in the next stage.

The effect of compromising on experience or skills is felt long-term and sometimes becomes part of the DNA of the firm. I sometimes see firms whose entire organizational chart is out of alignment because "Joe is a great analyst but he just can't work with clients." The result is a firm that has to hire someone to fill in for Joe with clients so that Joe can be an analyst. Unfortunately often that's a firm that does not even have an investment research department so it is not even clear what Joe's role is. The net result is an unhappy Joe, twice the compensation cost and possibly further morale issues.

There is nothing wrong with accommodating valuable employees in terms of tailoring their goals and responsibilities to their interests as long as those interest are within the strategy and framework of the business. It is the responsibility of the firm to create opportunities for its talented staff but they also have to be opportunities that fit the firm.

It is also common to hire under-qualified staff--not because of the lack of candidates as much as the lack of recruiting due diligence. The effect is often felt by the better-qualified employees who have to cover the missing skills and are occasionally even labeled "difficult to work with" because of their resentment over sweeping up behind another employee.

Finally, the employees that fit a small firm are not always perfect for a bigger one. In particular that is true for the internal positions--IT, accounting, office manager, COO and even CEO. The skills necessary to build and implement a strategic plan for a multi-billion dollar firm are different that those needed to grow a $100 million dollar firm. As a result, some of the founders and long-time employees have to either quickly upgrade their skills or potentially find themselves in difficult situations.

Leadership by Example
The behavior of a firm's partners sets the tone for every other employee. If the partners are very client-focused and dedicated to their clients' needs, the employees will, over time, tend to exhibit similar characteristics. If the partners tend to be disorganized, the entire firm will be disorganized. If partners tend to downplay or neglect internal management responsibilities, employees will not be focused on internal tasks either.

Example is a powerful tool for communicating what's important. As firms grow, however, the partners often have a hard time adjusting to the higher level of scrutiny that comes with the job of running a bigger firm. Small details such as: language, dress code, time in and out of the office, tone of e-mails, diligence of notes, taking the time to listen to employees, attending staff meetings, etc., tend to percolate into the culture of the office. When partners skip staff meetings, staffers start doing that too. When partners never take notes, neither do the associates, etc.

Partner Relationships
The single biggest reason why good firms go bad is the deterioration of the relationship between the partners. Partners who do not "like" each other, who do not work together, who do not share information or make decisions together are ultimately destroying their firm. That is not to say that all partners should be friends, but any firm in which one partner frequently criticizes other partners--implicitly or explicitly--is likely to suffer from cultural and growth issues. It is impossible to grow a business with someone you do not respect and enjoy working with.

Compliance and Services
Larger firms eventually come to the conclusion that they cannot customize every service for every client, and start understanding the liability that comes with making exceptions. For example, in a smaller firm with 100 clients, it might be OK to invest one client in a market-timing strategy because the client believes in market timing. In a larger firm however, there is usually an understanding that doing so will create potential issues from an operational perspective (not working with that manager regularly) and potentially from questions about why this one portfolio is violating the firm's investment philosophy.

Exceptions become part of the firm over time and are difficult to deal with. As a result, it is not uncommon to see problems implementing new technology or new processes because they don't work with that one client who uses a small custodian or this one portfolio that is held with an obscure manger, etc.

Agreements and Legal Paperwork
Almost every firm I have worked with has a number of "verbal" agreements, between the partners or between the firm and vendors or with employees, which have not been captured on paper--with the help of a law firm. This is not an issue until the day the employee or the partner leaves--or the vendor goes bankrupt--and the firm realizes that its interests and those of its clients are not protected and often unclear. Most often this happens with compensation arrangements between partners, and that leads to bitter disputes. An omission of non-solicitation agreements with employees--who may leave and take clients with them--is another common problem.

Financials and Recordkeeping
Finally there is a tendency for wealth management firms to have incomplete or inaccurate financial records. Many firms also continue to mix discretionary and business expenses, pursuing every cent of tax advantage possible. The result is often an unclear profitability picture and difficulty making timely financial decisions. Often this also affects the options available for employee incentive compensation or promotion to ownership.

This list may not seem all that important--a few lunches written off, a dirty joke in an e-mail and a couple of accounts at a small custodian--what's the fuss? However, as they say in my native Bulgaria: "It is the small rocks that turn over the cart." Trust me, we Bulgarians have turned over many carts and know something about it. When I wonder, "what happened to this firm?" The explanation always has to do with a large number of small and persistent issues--the kind of issues that take away from the enthusiasm and motivation of the team, result in awkward and suboptimal organizational structures and ultimately leave their mark on clients and staff.

Philip Palaveev is President of Fusion Advisor Network. He can be reached at
ppalaveev@fusionadvisornetwork.com.

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