Three Characteristics of a Successful Investment Firm

“Most organizations are uncomfortable identifying what they will not do. It is not what you are willing to do, but what you will not do that most clearly defines what you really are.” – Charley Ellis

When I first got my start in the investment industry I was consumed with figuring out everything there was to know about the markets. I read about all of the all-time great investors. I studied financial market history, learned about the various investment strategies and tried to understand how the markets and human nature function.

All of this learning helped me become a better investor and decision-maker, but it took me another couple of years to realize that I was still missing the final piece of the puzzle — I was underestimating the importance of the business side of the equation. I would see all of these brilliant investors with successful track records who couldn’t gain traction in terms of bringing in new clients because they didn’t understand how to grow a business or service their clients. Then I would see these enormous fund firms with mediocre track records bringing in client after client because they had talented sales and marketing teams.

In this business it’s never going to be as simple as have a great investment process and success will be sure to follow. Performance and good advice helps, but they’re certainly not everything. There are so many other important facets of the investing business you have to consider — sales, marketing, client communication, career risk, employee retention, hiring the right people, managing expectations, running the day-to-day operations, etc. I’ve witnessed a handful of very talented portfolio managers fail because they could never figure out how to run a business and it was always interfering with their investment results.

I’m not suggesting that it has to be an either/or scenario between having a solid investment process and understanding the business side of the equation. There is a happy medium somewhere in-between the two, but it’s not an easy place to get to as an organization. This is why I’m constantly thinking about how to strike the correct balance between the two.

I was recently sent* a copy of a speech given by the legendary investor and author Charley Ellis in 1984 that addresses many of the traits of a successful investment firm. There were three really big ideas that stood out to me from his talk. Here Ellis talks about the importance of taking time for big decisions:

We never take too much, or even sufficient, time for the big decisions. I don’t mean those big decisions that are abundantly evident and show themselves with great force and drama. We recognize these decisions-whether tremendous problems or great opportunities- and they do get our time. Instead I mean those soft, delicate, subtle, avoidable, easily postponed decisions on basic policy and strategy that can and will lead to very hard decisions later on if they are not attended to when “soft.” The “soft” decisions are not easy. They are very difficult because they are the things of basic value: the selection of young people and the training, coaching, hope and trust that you put in them; decisions on which areas of development to give special emphasis; on the quality of the commitment you will make to your clients. It is in these areas of “softness” that all the really important decisions will be made, and they cannot be made wisely and well in the press of our daily activity.

Strategy formation is not planning. It is my strong belief that planning is a negative function. Planning can be very useful, but it is negative in the sense that its whole intention is to eliminate errors, reduce uncertainty, and avoid mistakes. If we were so good that we could plan the right things ahead two or three years, wouldn’t we simply do them now? Firms that are successful do understand the value of a planning discipline, but it’s a discipline against negatives.

When I made my career change, there were two important factors that I looked for in a new firm: (1) the right people (2) with the right values in place. Here’s Ellis on this:

Successful firms have a tremendous consistency on basic values. The really “interesting” discussions seldom take place-because they are not needed. The organization that has deep agreement on the most important philosophical matters does not have “interesting,” crisis discussions. The best firms will enrich that consistent set of core values with a wonderful diversity of experience and orientation, ways of thinking and articulating, and personalities-all with deep mutual respect. It is out of that kind of common weal that an aristocracy of talent is likely to come forth.

Finally, one of the most under-appreciated aspects running an investment firm is working with the right clients:

An important dimension of successful investment management organizations — true of great organizations in many fields — is having great clients. If you have clients you do not enjoy or admire, or clients that do not expect much of you, you should seriously consider terminating the relationship with them. They will hold you back. If you have great clients, wonderful clients, reach out to them and ask them to demand even more of you. The great role of the client is to challenge you to be the very best you can be.

I think this is where most financial firms go wrong. They look at their clients like a number or a cog in the machine. Or they ignore their current clientele in hopes of landing new clients. Or they put up with terrible clients simply because they’re willing to pay them fees. It may sound like a novel approach, but the best way to retain current clients and bring in new clients is to actually take care of your current clients.

The entire Ellis talk is worth your time:
The Characteristics of Successful Investment Firms

Further Reading:
The Difference Between an Investment Firm and a Marketing Firm

h/t to @letsgrowmoney for sending me this one.

Now here’s the stuff I’ve been reading lately:



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