Breach of internal trading rules. Theft. Support for a competitor. Pornography. Such allegations usually spell doom for a boutique fund manager.

Integrity Investment Management may boast it has not lost clients as a result of such sordid allegations against its No.2 fund manager Shawn Burns. But Paul Fiani, Integrity’s managing director, may be spending more time than he normally would on reassuring those who have given $4.5 billion to invest on their behalf.

“Clients will want to be mollified. They’ll be asking what went on? Paul will be out there doing a lot of work,” says the principal of an eight-year old boutique with hundreds of millions of dollars under management. “Typically asset consultants will put a firm on hold for quite some time before giving more money.

People in the small boutique funds industry spoke on the condition of anonymity.

Burns, 49, and Fiani, 42, had worked 18 months at UBS AG. Enough time perhaps for Fiani and Burns each to decide whether they could work together and build a business from scratch.

Fiani has characterised his relationship with Burns as strictly professional. Other founders of boutiques say that kind of relationship is not enough.

“You have to know who you are getting in bed with,” says the founder of the near decade boutique. “It’s just like a marriage.”

Burns’s dramatic Integrity departure and subsequent battle in court with his former colleagues is not atypical of a drama that surrounds a boutique.

On December 30 Contango Capital Partners Ltd.’s David Stevens said Stephen Babidge had quit after helping him found the firm in 1998 and acting as its chief investment officer. Peter Morgan founded 452 Capital then quit after being misdiagnosed with terminal cancer. Morgan split with his wife who was a partner in 452. That led to the closure of the firm.

“It’s more than just the integrity of people, if you pardon the pun,” says the founder of a multi-billion dollar boutique. “It’s a matter of whether people will work well together. That’s hard to predict.”

Large companies can give stability to a sometimes volatile mix of personalities. There are more compliance officers, human resources and administrators that can take work and problems off the shoulders of the principals of a boutique and put a hand break on behaviour.

“A small organisation is high risk, high return,” says the founder of a multi-billion dollar boutique.

Partners at boutiques must have good compatibility, a similar perspective, the same commitment to the business and a strict operating parameter. There must be confidence within the firm that if one partner is not at the office others will do their work. Personalities must mesh particularly in the early days when it is emotional, frustrating and expensive.

That goes for new hires. The founder of the eight-year old boutique says hiring can take up to five months, involve multiple interviews, dinners and coffee. The founder of the almost decade old boutique says a management structure that is flat, welcomes input, where different opinions are rewarded and staff are compensated adequately promotes a harmonious environment.

“You have to do things, in particular when hiring people, slowly and carefully,” he says. “There is also a little bit of luck.”

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