Top Wealth Managers: A "Game of Inches"

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
[email protected].