One of my favorite investment articles ever, an under-recognized classic, is a piece by Charley Ellis that appeared in the Journal of Portfolio Management in 2001, called “Will business success spoil the investment management profession?“¹
Charley’s point is simple enough: investment organizations need to balance business goals with professional considerations. He concludes “The secret to building a great business is to assure priority is given consistently to the profession.”
But that is a conclusion which requires taking the long term view. Over the short term, the fact is there is often a strain between the business side of investment management and the professional side. As Charley notes, sometimes “investment organizations get too caught up in the often-wondrous near-term economics of expanding the business… [making it] dangerously possible we will concentrate on succeeding with the business aspects of distribution and asset gathering, but unintentionally lose our grounding in the profession.”
So we want to believe his conclusion, but we know it’s not always true. Over the long run, the two aspects do indeed tend to dovetail into one another: true professionalism is a solid foundation for a great business, and strong business practices provide a platform that brings the best out of great professionals. The firms I like and trust the most—and the firms you like and trust the most—are basically the firms we perceive as being the most professional. Being liked and trusted is an asset for any business.
Over the short run, though, it can often feel like the two points of view are in direct conflict. There’s a fundamental difference between sitting down at your desk and thinking “how do I make these investments work better?” and thinking “how do I drive my business forward?” Even though a successful investment management firm needs people thinking about both of these questions, the culture of a firm dominated by the one feels very different from a firm dominated by the other. And in the twelve years since the article was written, business pressures at investment management firms have got considerably greater.
On the surface there’s something of a paradox here: the more attention a firm pays to running its business in the short term, the less likely it might be to succeed as a business over the long term. But I think Charley put his finger on an important truth: there are good reasons for investment firms to be business-like, but if the business side comes to dominate the professional side, they’re on the wrong track.
¹Charles D. Ellis (2001). “Will Business Success Spoil the Investment Management Profession?” The Journal of Portfolio Management Vol. 27, No. 3: pp. 11-15.