The Characteristics of

Successful Investment Firms
Dr. Charles D. Ellis, CFA
It should, in theory, really be quite easy
to develop a first-rate professional firm.
We all know the recipe. Get top people.
Have a clear purpose. Have high professional standards. Take a long-term
view. Always remember that clients
come ahead of the firm. Always remember that the firm comes ahead of the
individual. And always remember, as
an individual, that professional commitments come ahead of the financial
rewards. Maintain discipline at all
times, and you shall succeed. As Mr.
Morgan put it, "Run a first class business in a first class way."
The recipe is the same one for successful
management that Marvin Bowers of McKinsey & Co. wrote about in his book,
The Will to Manage. The title says it all.
There wasn't anything unusual about
what the management of any really
good company was doing. They had the
same recipe every other management
had, but they were doing it. That made all
the difference.
David Ogilvy has written a third book,
Ogilvy on Advertising. It's fun to read,
has lots of pictures-and a good deal of
real insight. He discusses five great advertising agencies, and comes to the conclusion that the principal factor required
for success was-and is-persistence.

One of the problems with identifying
management firms is that most organizations doing very well now will not be
doing very well 10 years from now.
Most of the organizations we admired
most 10 years ago are not those we
would put on our shortest list of the
great successful firms today. I have no
answer for you as to why that should be
the case-except that we are a very
humane and human business. There is
nothing quite so temporary as success
in an intense, dynamic, "people" business like ours.
The Professional Dimension/Business
Goals Conflict
Many observers believe there is a basic
conflict between the professional goals

and the business goals of an investment
management organization, and that
these two spheres work against each
This can certainly be true. There's no
doubt that they will be in direct conflict
if either is mediocre. Any semi-good
professional commitment or semi-good
business goal will sooner or later corrode any organization.
But there is no conflict between really
good business goals and really good professional goals- if each strives for excellence and if the respect for both is
sufficient. For example, it is only business strength that gives professionals
the independence of mind and sureness
of purpose that allows them to do firstrate professional work. Only professional independence is likely to result in the
really good work that is needed to make
a really good business. There is no conflict as long as each is truly strong. Most
organizations, however, find it very
hard to achieve and sustain excellence
in both areas. It is a matter that requires
much attention. The culture or the climate of the organization must always
favor the professional dimension. When
in doubt, lean toward the professional
side. There must be that kind of
The Importance Of Strategic
It's my belief that fees are one of the
most powerful forces in the success or
failure of an investment management
organization. The fee level you set determines the market you will serve. Once
you have chosen the market you will
serve-which you do when setting your
fees-you can then identify the key factors for success, the rules of the game in
that market. Then you can organize to
be successful in that particular kind of
market. For example, if you choose to
charge high fees, you must intend to be
a high-value-adding organization.
In strategy, clarity and simplicity are
clearly critical. 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.

Peter Drucker has a good deal to say on
this. It can be easily summarized. Focus
your attention on areas of excellence; as
professionals, do those things that you
do quite well and try not to waste time
doing the other things in which you are
only moderately good. The internal
focus should be on the things at which
you are really good; the external focus
should be on the major opportunities,
the truly extraordinary opportunities.
With regard to the formation of business
strategy, it is my belief that many organizations fail to recognize that it is a
completely different line of work from
their investment management activity
or their routine business administration. I would urge going to a different environment-in a different time
frame- taking two or three or four days
away from your offices, and clearly
separated from your regular work.
Otherwise, you're almost sure to have
the time-urgent decisions drain away
what time you have for those things
that might be more important.
Identifying The 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
Our People And Our Communications
It was said earlier today, it will be said
tomorrow, it will be said every time we
get together: the most important part of
a very successful organization is firstrate, high-caliber people. However,
most of us do not give enough time and
attention to the truly first-rate young
people in our organizations. It is difficult to give them the environment they
need; and difficult to give them the attention they want. First-rate people are
so wonderfully rare that if we find them
and bring them into our organizations,
we should give them everything they
need to flourish.

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.
I think that the matter of size and
market liquidity is a false issue for most
investment management organizations.
There are some for which it would be
right to say that market considerations
would put constraints on their ability to
manage money. But most investment
management organizations are not constrained externally. They are constrained, instead, by their internal
difficulties, largely their difficulties of
Consider, for a moment, the German
U-boat fleet, which in the early part of
the Second World War was dreadfully
successful. Much as the AmericanBritish navies would like to say that
they defeated the U-boats, the reality is


that the V-boats defeated themselves.
The reason is that the V-boat command
was in Berlin. The original concept was
that all V-boats would look for cargo
ships, and if they found a ship they
would radio back to Berlin, and Berlin
would decide where every V-boat
should go. When Germany had only 50
or 60 V-boats, that system worked very
well. When they got to 400 or 500 Vboats, the deluge of data piling into
Berlin so exceeded Berlin's capacity to
process and organize the data that headquarters' decision making could not
keep up with the demand.
This same problem of data over-load is
characteristic of investment management firms that are in trouble. The enormous volume of data can overwhelm
decision making and make it seem impossible to find time to think. It is a curious reality of our profession that the investment management community in
the Vnited States is now spending $2
billion a year inducing a group of
highly-motivated, very competent individuals largely located in Wall Street to
supply investment managers with further excesses of data. Two billion dollars
is a very large amount of money. Successful firms protect their decision
makers from the tyranny of data and
find ways to control the flow of information coming into their organizations.
They make sure that the research is
working for them-not the other way
around. It does no good to play the
horse to someone else's Lady Godiva.


For internal communication, the great
problem is adding people. As you add
people arithmetically, their relationships go up geometrically. There is a
rapid progression toward decisions that
are social or political, rather than objective and fact-founded; decisions that are
made with inadequate reflection because
so much time is spent talking; and
decisions without clear-cut accountability. Direct, simple, short lines of
communication are wonderfully powerful. One of the great organizations in
the history of the world, the Catholic
Church, has only four levels of communication between God and the average parishioner. That's a model communication system. Most of us can't say
we're very close to it. The closer we get
to simple, clear, direct communication,
the greater our chances to succeed.

Getting Bigger vs. Getting Better
Growth and expansion are entirely different from one another-even though
in the investment field, we tend to talk
about growth as though it were expansion and about expansion as though it
were growth. Expansion is getting
bigger. Growth is getting better.
Getting bigger almost necessarily means
that you will have fewer wonderful
people joining your organization in
larger numbers. It almost necessarily
means that you will be doing more
things for more customers. As you
expand the volume of work, there is a
grim tendency to enter lines of work
that are less value-adding and to serve
smaller clients. As the margin of value
added declines, so does the margin of
profit-but both are hidden in the short
run by expansion's increase in total
profits. Expansion is almost always a decline in quality offset by a rise in
Growth is getting better. Doing more
difficult, more valuable things-often
for more substantial and demanding
clients. I'm for getting better - for
growth. The great enemy of growth is
expansion. Peter Drucker, once again,
says that the easiest way to get hold of
first-rate resources that can be put to
work on first-rate opportunities is to
stop doing things that aren't worth
doing. Stop doing things you don't do
well and devote the liberated resources
to things with which you could succeed
Tenure, Turnover And Structure
balance between
common commitment and diversity
recommends average tenure of professionals between four and six years. To
calculate average tenure, take all the
years of everyone in your organization
and divide it by the total number of
people. Ideally, it will to be somewhere
between four and six years. If it is less
than that, people don't know each other
well enough to really work together
effectively. Beyond six years, they know
each other too well and stop listening
and stop thinking.
This leads naturally to a desire for low
All the really successful

organizations, other than those that are
very new, have low turnover. In some
cases it can mean reaching out to find
extraordinarily talented new faces that
will help bring your average tenure
down into that four to six year zone.
The great silent enemy of a vibrant, effective strategy is its structure. The
reason is that strategy, created to meet a
market's requirement, needs a structure
for implementation. As soon as the
structure is in place, however, it strives
to wrest control of the organization
away from strategy. Structure almost
always wins. Structure resists change. It
holds onto the familiar past and keeps
us from advancing toward our future
with a bold contemporary strategy, if it
Beware the normal tendency toward the
"Peter Principle". Don't take your best
investment manager and make him a
not-very-good organization manager.
Keep the best investment achievers, if
you are lucky enough to have them, free
to invest. Try to make it possible for
them to invest 100% of the time. There
are many more good general managers
than there are good investment managers in this nation. I don't think it's possible to be a good business manager and a
good investment manager simultaneously, because the basic talents that
lead to great success in an investment
manager are not likely to lead to great
success in an organization manager.
Compensation Now-And Later
Compensation is the great driving force
in any organization's strategy. It is not
just the financial compensation that's
important; and most particularly, it's
not the current-dollar compensation.
Do you have distributive justice? If
everybody knew exactly what everybody was being paid, would it make
good sense to them? The best test of that
is, I think, one every organization ought
seriously to consider: total disclosure of
compensation policy. It will cause those
who make the decisions to make them
with great care. Fair play is the essential
factor in compensation. Without fair
play, no organization will be successful
for long.
Beyond current compensation, there is a
looming problem for the most successful

of the independent investment management firms. In many of these firms, a
great confrontation will come between
three generational groups. One group
will say, "We started this firm. We were
here when there was no one here. We
did the first pieces of business. We took
all the risks. It's ours." The next group
will say, "The first arrivals may have
started this company, but it wasn't
much when we got here. We are the
ones who brought in the really big
accounts. We are the ones that made the
really important strategy moves. We are
the ones that made it a really successful
business. It is ours." And the third generation will say, "We are the future. We
are doing all the really good research
and we are moving into more and more
client relationships. If you lose us, the
future will be rough. The firm should be
ours." Those generations will not be
more than ten years apart.
Investment organizations that are part
of a large organization all too often
have their pay patterns set by the pattern designed for the parent company's
important- business. This can cause a
distressing mismatch between the firm's
internal compensation and the norm in
the market. In one form or another,
most investment organizations are
struggling with success. Many are so
successful that their major problem will
be living with that success.
In some cases, very successful firms
have a benevolent major owner who is
increasingly distributing the ownership-and matching the rising expectations of the young. Other firms have a
complete disclosure policy or equitable
sharing - equal pay to all partners. Most
firms do not enjoy such blessed
Stature, respect, acceptance and recognized importance are vital aspects of
compensation. There certainly ought to
be no one in the investment management business inadequately compensated today. The pay is, frankly,
spectacular. The prospects are even
more charming. But there are people
who will be unhappy because they are
not treated with the respect as professionals that they are entitled to. In successful organizations there is a high
level, even a surplus, of respect,
recognition, and admiration among the


professionals. There is, also, quite a lot
of pride-that same kind of pride that
goes with being a good athlete. There is
a total dedication and desire to be very
The Power Of Good Ideas And Good
Most of us go to work every day. We put
in ten or more hours reading and talking
about routine and making unimportant, perhaps even useless, decisions day after day. Only once or twice
a year is there something really worth
doing. Most of us are too busy to notice.
Great organizations must have the ability to recognize a great idea, grab hold of
it and embrace it in a powerful way.
Knowledge is not a constant. Insight is
certainly not a constant. Big ideas of real
value seldom come along. The best investment management organizations
seem to be reasonably good at pausing
reverently before those good ideas and
exploiting them.


An important dimension of successful
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.
Appraising "Success"
What makes for successful firms? Business success in investment management
is not hard to come by. Fees are high.
Costs are relatively modest. Technological risks are minimal. Foreign competition is not consequential. Growth comes
easily. Customers are often docile.
Competition is benign. Demand exceeds
supply. It's a wonderful, easy place to
have a business success.
In terms of professional success, however, I would ask some questions.
First, how many of the really important
developments in investment management have come from within - from

within your own organization or from
within our profession-as opposed to
coming from outside?
Have we, as a profession, truly contributed to our national society? Have
we added net value? I confess to having
some genuine doubts. If you took all
the fees paid to all the investment
managers, added up all the transaction
costs incurred by these managers, and
then compared the total to the riskadjusted returns on the portfolios,
which would be larger?
Have we truly advanced young people
in their professional development?
Have we succeeded in educating our
clients, particularly with regard to the
importance of setting long term policies
on asset mix and risk levels? Have we
taught them how to avoid odd-lotting?
I suspect that, on those dimensions of
professional success, we're not yet very
successful. In the long run, however,
satisfying the real and legitimate needs
of clients will be the best part of our professional success.
Leadership is the final characteristic of
successful firms. To become excellent a
firm needs strong leadership-not an
individual, necessarily, but ideally a
group of leaders-committed to an idea
of real value and able to take the time
needed to pursue that idea. Venture
capitalists say they don't want to invest
in small companies. They want to invest
in small companies in big businesses. It
is my belief that the successful investment management organizations of the
future will be those whose people want
to invest their careers in relatively small
enterprises that engage in important
work on challenging problems for great
It's a wonderfully difficult field in
which we are engaged. Fortunately, it is
an easy place to make a business success
and, therefore, we will be well paid. The
really interesting questions are how to
make a professional success. On that, I
don't think we have the answers. I'm
not even sure we have the questions. It
is our largest challenge.

A brief discussion period immediately
followed this presentation.

Mr. Ellis: One thing that I know is very
much on your minds concerns"The
Loser's Game". Do I still believe in it?
The answer is affirmative.
Let me tell you why. The reason is you.
The talent in this business is too great.
There is no reasonable hope that such a
wonderful group of talents could leave
sufficiently large errors in plain view
for me or anyone I know to find them
and exploit them, if they manage consequential amounts of money.
Question: Would you be more explicit
about the details of the conflict you find
between business and professional
Mr. Ellis: For investment managers the
easy, quick business profits are so great
that it is difficult to justify striving to be
really good at the professional
Those organizations that are most successful at the professional dimension-the development of really clearlyarticulated, mature, supported and
achievable concepts of investment
management-typically are not financially motivated in that work. The attitude that is brought to bear is one seeking fulfillment in the professional
dimension, rather than seeking to make
a business success of it. That gets into a
dangerous conflict when the business
success starts to roll. It is easier for us to
count the jelly beans than achieve the
more subtle things that have to do with
professional excellence.
It's easy to accept business that we
really ought to let pass by. It's easy to
accept the growth in business or the expansion in business that requires us to
add people to undertake more of what
we are doing successfully. I watch outside our field. Look at the great management consulting firms. There are so few
that have done first-rate work for very
long. The greatest failure in the consulting field is certainly Booz, Allen &
Hamilton, which at the beginning of the
Second World War was the largest, best
regarded and probably the most capable
consulting firm in the country. Sometime in the 1950s it was controlled by a
group of people who cared more about
running it as a business. They ultimately
took it public and it failed badly as a
public company. It was bought back by

people who had been there as
professionals. They are still in the process of rebuilding that organization.
During that same time, McKinsey &
Company went from being a fairly
small, inconsequential management
consulting firm to being clearly the consistently best firm. I believe the reason is
that the people at McKinsey have
closed down a series of their activities.
They've really backed away from businesses that do not lend luster to the professional integrity of the firm. It has to
be a business they are proud to do, or
they won't do it.
Ogilvy & Mather has an interesting
requirement: to take on any new client,
first the new client has to be in a different field than present clients. Sometimes a lot of imagination is required to
get differences between kinds of
consumer goods companies! Then it
also has to look like it would be interesting and challenging work. It must be
strongly sponsored by a senior member
in the organization who wants to do the
work. I think that's one of the reasons
they're so successful in their business.
The clients they add are added from a
professional point of view.
Am I being helpful? Let me just identify
what I think is the most professional decision I have ever heard. Peter Drucker's
book, The Concept of the Corporation- written in the middle 1940s
about General Motors Corporation and
very unpopular with the company- explains how in the late 1930s their senior
management came to the judgement
that the world was moving towards a
great and difficult war. And if there
would be a war, there would be a shortage of talented, skilled labor. So they
began to search in 1938 for areas in
which there were large populations of
skilled labor. They deliberately put their
plant locations, to the extent they could,
in those centers of talent. In late 1939 or
early 1940 the executive committee of
that corporation proposed to the board
of directors-and the proposal was
accepted-that if there was a war they
would take no contracts of any kind,
including military work, if some other
company could do that work. They
would only take, as manufacturing
assignments, those things that no one
else could do. That was one of the reasons that this nation was so enormous-


mously successful at staffing its military
capability. General Motors was able
to do things that we really needed to
have done.
Listen to Vladimir Horowitz talk about
his musical performances. Every year
he eliminates two or three pieces he has
mastered because they are starting to
become almost easy. He takes on something he thinks might be very difficult.
For a wonderfully long period he has
been first-rate by keeping himself tested
and challenged.
The great professional of our field is
clearly Ben Graham. I didn't get to
know Ben until he was an older man.
He was 77 when I first met him. What a
thrilling experience it was to watch him
sit in a room with the lions and tigers of
the performance period. Twenty investment geniuses and old Ben Graham.
Ben was the one that had the largest
number of new ideas, was the most interested in the ideas of others, and was
the least sure about the ones he had.
In his last two years he was involved
with a slide rule and an ancient
typewriter. With his delightful Spanish


companion talking with him and encouraging him, he was trying to reinvent investment management. The
Renaissance of Value, published by
The Financial Analysts Research
Foundation, was a preliminary report
on the work that he'd been doing. He
thought that he had found another way
to outperform the market.
That, I think, is where great professionalism comes from. It's an inner
drive; when you find it, support it and
nurture it in any way you can.
Jack Hogge asked today, "What should
you do if you can only do one thing?" A
good answer is one that was given, "I
hope to tell each person working for me
exactly how I think they are doing,
always." My own answer would have
been, "I hope to find wonderful talent,"
because there's so little more we can do
after we've done that. The wonderful
talents are the geniuses behind all the
really successful firms. The extremely
successful firms are the ones who don't
mess this up. They give talent the room
to do first-rate work and encourage it.
That's a very delicate process.

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