Peter Harrison, former global chief investment officer of Deutsche Asset Management, on why boutiques will continue to win the war for talent
A strange thing was reported recently. A successful portfolio manager was leaving a boutique hedge fund firm to return to a traditional asset manager owned by a mega-bank. It is an almost daily occurrence to watch the traffic going the other way, and for good reason. Was this move an aberration, or are we seeing the beginning of a switch back to traditional firms?
Boutiques are a better model for professional services firms, particularly asset managers, for a whole host of reasons. In most professional firms, it is people and culture, not process, structure or planning, which are the keys to long-term success.
Boutiques enjoy a strong partnership culture, where clients' interests are aligned with those of partners. They enjoy a longer-term outlook and low staff turnover. No wonder they are favoured by investment consultants. Many are attracted to work there by the opportunity to participate in the equity value they create; within a large investment house, the only way the vast majority of successful managers can impact the value of the business is probably by committing fraud!
Boutiques are also very focused on results, rather than inputs: they are generally very capable of accommodating the lifestyle issues of partners. Talented professionals dislike being managed. They demand a participation in the firm's governance and will tend to thrive in loose, flexible business structures where initiative matters.
It seems inevitable that we will see many, many more talented individuals leaving big companies to join boutiques. However, many move for the wrong reasons in the hope of quick riches, and they will be disappointed. Those that are below average in ability will find the greater transparency quickly highlights their weaknesses. Boutiques require everyone to pull their weight and contribute. Sadly we all know there are many people hiding within the processes of big companies who don't really add value: they go through the motions, often talk a great game, but either trade off the efforts of others or simply participate passively.
Other people are simply risk averse. Many take great comfort in process. They will hate living with the real downside risks and the less-developed structures that characterise many boutiques. They have grown very accustomed to a standardised bonus culture, with limited volatility in earnings, offered by well-diversified large organisations. Finally, the most successful have accumulated significant pots of deferred compensation, which they will need to walk away from to join a smaller company.
It surprises some that more people are not rushing back to big firms. However, most of those that are surprised still work for big firms. Most have not felt the real sense of achievement in creating something real and tangible, where they can do whatever it takes to be successful, and be within a culture where everyone is focused on sharing knowledge. Nor have they enjoyed a compensation structure genuinely aligned with the firm's long-term success, which is not compromised by hangers-on and bureaucratic structures.
Yes, there is a price to pay in leaving a big firm. Giving up the downside protection is not for everybody, but for those willing to commit fully there is no going back. Boutiques will continue to drain the very best talent from bigger firms.