Why Professional Management Fails for RIAs
March 17, 2019, by Matt Sonnen
We have written much about the benefits of professional management for RIAs. By bringing in professional management, the owners/advisors of the firm are availed of the day-to-day burdens of running the business, which allows them to focus 100% of their efforts on what they do best: spending time with clients and prospects (or other advisors, if the firm is pursuing an inorganic growth strategy). This should unlock a bottleneck for the firm, leading to increased growth, which turns the professional manager from being viewed as a cost center to a revenue-generating role within the organization.
If only it were that easy.
Last week, I had the privilege to share the stage with Abby Salameh of Private Advisor Group, Rush Benton of CAPTRUST, and Bob Oros of HighTower for a panel discussion at the BNY Mellon Pershing Elite Advisor Summit in Ft. Lauderdale. We discussed several trends impacting the RIA industry, but the topic that was most near and dear to my heart was the need for professional management at RIAs, and it was truly fascinating when the discussion turned to how often professional managers often fail in their role.
As I said on stage, being a former Chief Operating Officer, I gravitate toward the COO title, but the professional manager can hold any number of titles at an RIA: CEO, President, Managing Director, Director of Operations, etc. The key to this role, regardless of title, lies in the fact that their primary function is not business development, but the day-to-day administration of the firm. This person should be charged with executing the owner’s vision through people, processes, and technology. As such, they should be focused on Human Resources (hiring, training, and retaining top employees; developing written career paths within the organization), and Workflow Improvements (managing vendor relationships and overseeing the firm’s technology stack used to deliver the client experience). However, most importantly, while advisors should be focused solely on top-line revenue, this person should be managing the firm’s bottom-line profit margins.
My fellow panelists discussed that oftentimes when an RIA owner decides to bring in professional management for the first time, they say all the right things during the interview process, but in reality, aren’t ready to hand the reins to someone else. “We really need someone to come in here and manage the business. I’m just too busy with my client responsibilities,” they tell an eager job candidate, who then believes they will be joining a firm that will allow them to get their hands dirty and foster some real change across the organization. Once they arrive, however, they find it harder to affect change than they had anticipated.
One anonymous professional manager that I spoke to for this article called it the “Founder’s Bias.” “The founder of the business has spent 10, 15, maybe 20 years building a successful business; they say they want to bring someone in to add efficiencies and drive the firm into the next decade, but in reality, they are really just looking for someone to come in and affirm the decisions that have already been made.” And if the founder begins to push back on the recommended changes this newly-hired manager is suggesting, the staff quickly realizes the manager has no real authority, and no one accepts any of the proposed initiatives. Things can unravel very quickly for the new hire.
Other managers struggle with the internal communication that has, or oftentimes has not occurred before they arrive. “When I showed up on Day 1,” said another person interviewed for this article, “half the staff had no idea who I was or why I was there. The founder had made certain promises and assurances to several staff members about their roles within the organization, without giving me a heads up. When I tried to reconfigure the org chart, all hell broke loose!”
Some professional managers blame the expectation of unrealistic timeframes for their ultimate demise. “15 years of inefficiencies compound over time and get deeply ingrained in the company culture. I was given 6 months to repair everything that was causing pain at the organization, and when massive progress hadn’t been made, I became the scapegoat for everything that was wrong – from the technology at the firm to the number of parking spaces allocated in the office lease, which had been signed two years prior to my joining the firm.”
As discussed at the opening of this article, by hiring a professional manager, the owner should be able to focus 100% of his or her energy on growth. Because this propeller of growth is so valuable to the organization, professional managers can command a high compensation package on the open market. “I will pay for myself several times over if the RIA experiences only a fraction of the growth you are projecting after I join your firm!” the thinking goes. But what if, instead of focusing his/her energy on growing the firm, the owner takes the first extended vacation they have allowed themselves to take since launching the firm? While there is absolutely nothing wrong with this, as a much-needed vacation can be priceless, the owner of the RIA must be present to empower the newly-hired professional manager to make the changes they were hired for. Even more so, the owner must enable the manager and be humble enough to relinquish control of what they built in order for it to keep growing and prospering. This will prevent the owner from wondering “What am I paying you for?” six months after they’ve made this very costly hire.
As with any relationship, the key always lies in the level of communication between the owner and the newly-hired professional manager. When expectations for both parties are not fully articulated, and if both parties cannot be honest with themselves (or each other) around capabilities to relinquish control and capabilities to run with the responsibilities placed on their shoulders, disaster can strike hard and often, as witnessed by the failure rates currently seen in our industry. But if both parties are headed in the same direction, with clear roles and responsibilities for both individuals, and the staff is fully informed of the changes on the horizon, the professional manager will be the catalyst for the change that the owner desired.