In large organisations, responsibility can drain into accountability sinks. In boutiques, there is no place to hide, which changes decision-making in ways investors should care about, argues Tom Caddick, Managing Director at Nedgroup Investments
Asset management has never had more governance, and yet rarely felt less accountable.
Over the course of my career, I have seen responsibility drain into what might be called accountability sinks.
Decisions pass through rulebooks, procedures, committees and dashboards until, when something goes wrong, it becomes difficult to identify who truly owned the call. It is a wicked form of institutional autopilot.
This matters in investing because active management is essentially a decision business. And decision businesses live or die on accountability: who makes the call, who bears the consequences, how quickly errors are recognised and what changes when disagreements arise.
I believe this is where boutique managers have a crucial edge.
How big firms manufacture places to hide
Large asset managers have good reasons to build layers. They run multiple products, serve multiple channels, answer to multiple stakeholders, manage brand risk and operate under significant regulatory scrutiny.
Yet those same layers create issues in that responsibility becomes a group activity and subsequently gets diffused.
Decisions are typically made by committee, accountability is shared and internal audit’s sway on incentives becomes overbearing. It’s a classic “bystander effect”: When everyone has input, the decision becomes nobody’s.
We all know what this looks like from the inside: a world in which success depends less on truth-telling and more on navigating an organisation’s shifting coalitions and incentives. People try to avoid being blamed rather than doing the right thing.
Asset management is especially vulnerable to these issues because successful outcomes are not always tied to the quality of inputs.
The further the decision-maker is from the end client’s lived experience, the more that plausible excuses exist, and the easier it is to confuse activity with progress.
Metric tyranny and the economics of hiding
An obsession with measurement can help create even deeper accountability sinks.
Over time, I have also seen firms become exceptionally good at measuring the things they can control, even when those measures say surprisingly little about the outcome the client actually experiences.
The danger is that people begin optimising for the metric rather than the mission.
The parallels in asset management are obvious. Firms create internal scorecards, risk targets, tracking-error tolerances, style purity monitors, ESG checklists, drawdown guardrails and so on.
None of these are inherently bad; the problem arises when they become substitutes for accountability.
Metrics create a very particular kind of hiding place: proxy success. The portfolio may have “done what it was meant to do” in the firm’s internal language – stayed within risk bands, adhered to guidelines and maintained factor exposures – even when the client experience is disappointing, confusing or not worth the fee.
The problem becomes more acute as ownership, investment decisions and client outcomes move further apart. The client experiences the result directly.
Inside a large firm, the same result is filtered through a different set of concerns: career risk, brand protection, revenue stability and internal governance. Monitoring and incentive schemes can narrow that gap, but they cannot remove it entirely.
In a large asset manager, the chain between decision and consequence can be long.
Portfolio managers are employees; products are business units; business units sit inside platforms; platforms answer to shareholders; clients are served by distribution teams that may not sit close to investment teams.
At each layer, incentives shift subtly. Career risk, brand risk and the desire for revenue stability all congeal to become stagnating forces.
Boutiques behaving differently
Boutiques are not immune to politics, ego or error. But their structure can help mitigate many of the effects and significantly cut the distance between decision and consequence.
When a firm is smaller, the portfolio manager is automatically more visible to clients and prospects.
And when ownership is concentrated, reputational and economic consequences attach more directly to outcomes. These factors force a higher-touch, more relationship-driven approach to winning and retaining business.
In boutiques, the consequences tend to be harder to escape. When the people making investment decisions also have meaningful ownership in the firm, their exposure is not limited to the upside.
Reputation, economics and client relationships are all tied more directly to the outcome. In my experience, that changes behaviour – it becomes harder to hide behind process, easier to confront uncomfortable decisions and more natural to think like a principal rather than an employee.
Active management is ultimately at its best when it is willing to look wrong before it looks right. Large organisations can absorb blame and diffuse it and yet boutiques don’t have the same luxury – either you have a view you can defend and own, or you shouldn’t be charging for it.
Feedback loops and accountability hoops
True accountability is all about feedback. If signals arrive too late, are filtered through too many layers or can be too easily explained away, the organisation cannot learn.
I have seen firms respond to this problem by adding more reporting and process, creating the appearance of control without necessarily improving the quality of the next decision.
Big firms can design themselves to be more accountable and adaptive. But it is hard, and requires fighting the default tendencies of large systems.
By virtue of being smaller and closer to consequences, boutiques have tighter feedback loops and get some of that design automatically built in.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The writer’s views are their own and do not constitute financial advice.
This information should not be relied upon by retail clients or investment professionals. Reference to any particular investment does not constitute a recommendation to buy or sell the investment.
Main image: investors, m-ZzOa5G8hSPI-unsplash
