Why Advisors Need to Put Rules in Place When Hiring a CEO

In addition to clearly understanding the limits of a CEO’s own authority and that of the owner, I recommend a couple more steps.

To ensure everyone is on the same page and that the CEO is guiding the business in the right direction, I suggest mapping out a “vision strategy” (which is different from a “vision statement”) that explains where the CEO wants to take the firm. This should be signed off by the owners.

A good vision strategy is a detailed document that describes what the CEO wants the firm to be, how he/she wants it to change, how he/she wants those changes to happen, and who’s responsible for making them happen. It is a blueprint for both the firm owner’s and the CEO’s commitment to running the firm. It also ensures that the firm is heading in the agreed-upon direction, without confusion.

When we help next generation CEO’s develop these long-term strategies, a good “vision statement” is included (such as “serve X number of clients through fiduciary advice”). This outlines the owner’s and the CEO’s priorities. But a word of caution: If the vision statement mentions money (e.g., “build a $X million company”), it needs to be changed to focus on the clients. Otherwise, you’re running a business that puts shareholders’ needs first and clients’ needs second. That’s not fiduciary duty — that’s Wall Street.

The next step is to reduce conflicts in the CEO’s decisions. To do this, an owner should take profit out of the CEO’s compensation structure.

I get into a lot of heated discussions about this when it first comes up in the client relationship. Most advisory firms are not publicly traded, and compensation based on profits sends the message that financial success is more important than acting in the best interest of the clients, which is what many large brokerage firms and private equity firms tend to do.

Instead, tie the CEO’s comp to operating income and revenue combined and/or valuation.

While it’s difficult to have incentives based on client well-being, a focus on profits can send the wrong message to the CEO about his or her priority. This can be a tough sell to the owner(s); yet, if they don’t change the firm’s focus, it is not truly client oriented.

The financial reality is that the sole client-centered way to increase revenue is to have it come only from the delivery of professional advice, not from sales of propriety products, commissions or other financially incentivized sales. Therefore, don’t put your CEO in the position of generating these types of revenues. Instead, in the vision strategy, have the CEO spell out that the firm just sells advice.

Over the years, I’ve found that one of my firm’s major jobs is to help CEOs make client-centered decisions and communicate better with the shareholders of their firms. Part of a good CEO’s role is to remind shareholders that, regardless of revenue, acting in the best interest of clients is always better for the firm and its shareholders.

A CEO’s No. 1 job is to protect the brand by acting in its best interest, which is serving the client. This enables the firm to attract more clients and to keep its clients.

These days, with so much media coverage about fiduciary duty and the need to act in the clients’ best interest, independent firms can ill afford to get a reputation for acting otherwise. I believe that a major part of a CEO’s fiduciary duty to a firm’s shareholders is to prevent this from happening.

In this era of increasing pressure on independent advisory firms to boost profits, it’s essential for firm owners, shareholders and CEOs to work together to ensure that their firms continue to deliver the highest possible level of client-centered financial advice. It’s by far the best way to protect your brand and to continue growing a successful independent advisory business.

Angie Herbers is an independent consultant to the advisory industry. She can be reached at [email protected].