Advisor Gregory Kasten, a former anesthesiologist, has built a rare fiduciary practice in the 401(k) market.
The most remarkable thing about Gregory Kasten isn't the fact that he is a board certified anesthesiologist. It's that he retired from his lucrative practice of 13 years at the ripe old age of 40 because he believed he could help more people as an investment advisor. Arguably, he does just that by providing tens of thousands of employees with optimized, low-cost portfolios that his firm carefully builds and rebalances.

Read that quickly and it might not register. But the point is a crucial one. Kasten's firm-Unified Trust Company (UTC)-is rare-it's one of the few that offers plan participants active discretionary advice, including automatic enrollment in a diversified portfolio. If that doesn't set the company apart in these days of corporate liability nothing does.

"There's no question that Unified Trust is unique," says Donald Trone, president of the Foundation for Fiduciary Studies in Pittsburgh. "A few years ago, I would have thought they were courting liability."

Today, in the post-Enron environment, it's a different world. "I think that the overwhelming evidence is that the typical 401(k) plan is not operating in the best interest of participants-that we've put too much faith in the ability of participants to make the right decisions," says Trone, who was appointed by the U.S. Secretary of Labor to the ERISA Advisory Council in 2003. "Knowing that, every day we don't take affirmative action to correct the problem places us at more liability as an industry."

While fund complexes, broker-dealers, banks and insurers trip all over themselves trying to sidestep fiduciary liability, Kasten embraced it a decade ago by converting his advisory firm to a trust company. Its  status as a trust company means he can sidestep broker-dealers and go directly to fund companies for offerings.

Equally important to the firm (with more than $800 million in assets under management or advisement), UTC's fee disclosures go directly to clients. And the company has developed proprietary software to track all fees paid by mutual funds and automatically apply them to offset client bills-something that the U.S. Department of Labor isn't requiring of plan providers until 2006. With hidden fees at the heart of numerous DOL and Securities and Exchange Commission investigations, the bright light that Unified Trust shines on fees and conflicts of interest is heartening.

A superachiever even by advisor standards (Kasten was a pharmacist before he became an anesthesiologist, then an advisor and president and CEO of his own trust company), Kasten says his greatest motivation isn't offering investment services but helping people actually retire. He believes the portfolios his firm builds do that for investors-both for the plan participants and the individual investors who work with his firm, many of them doctors and nurses who started investing with Kasten during the six years he wore both a doctor's and advisor's cap.

The hands-off model most plan sponsors use is broken and most advisors know it, Kasten maintains. "You're telling investors, 'You're going to be your own actuary, your own asset allocation specialist, your own fund diagnostic expert,'" Kasten says. "IBM couldn't do that on their own, but somehow we think you, the participant, can do it. And then you'll implement your portfolio, right? The whole notion that we could take this complex system and have investors figure it out based on a brochure is incredibly simplistic."
So not surprisingly, Kasten's firm doesn't just throw mutual fund choices at plan participants and tell them: "Okay, now you choose." In fact, the optimization software that Kasten has developed-it's called the Unified Fiduciary Monitoring Index-chooses funds in the top 25% of their peer groups that has produced average annual returns 3.2% higher than the Standard & Poor's 500 Index over the past three years.

In addition, instead of letting employees get waylaid by their own inertia, Kasten has developed an investment program that puts it to work for them. They're automatically invested in low-cost, risk-adjusted model portfolios that are actively managed and rebalanced. That is, unless a participant takes the time to opt out. So unless an employee says: "No, I don't want that portfolio or that fund," they get one of the appropriate six model portfolios Unified Trust has developed.

Active fiduciary duty, model portfolios and the "opt out" method of helping to ensure that plan participants actually invest are just some of the features attracting advisors like Beachwood, Ohio-based advisor Dennis Tidmore to UTC's door. He was referred by local money managers who just didn't manage 401(k) plans. "I went and visited and had some early 'ah-ha' moments," says Tidmore, who signed on with UTC in 2000 and now services 12 retirement plans with assets of more than $50 million. "First, every institutional fund in the universe was available (which was not the case with the brokerages he talked to). At the heart of the process, not only has Unified Trust created a monitoring index to rank and replace funds, but it is designed to optimize performance and minimize risk and fees." He says clients also like the fact Unified Trust provides a guarantee that they'll only use funds that are within the ranks of the top 25% of performers.

"Kasten is a visionary and this is the right way to do business," maintains Tidmore, who credits Unified Trust with the fact that he is about to land the retirement plan business of more than 100 business members of a national association. "This is truly a turnkey service for advisors."

Pete Swisher, a four-year veteran at Unified Trust, is vice president of wealth management and advisor services. He says that UTC's services are becoming an easier sale with advisors who are looking for the type of hands-on investment management only firm's that accept active discretionary duty can provide to 401(k) plans and their participants. "As one client said to me, 'Everyone else who comes in talks about their funds and their platforms.' You're taking control and giving advice instead of not taking control and advising us not to," Swisher says.

That has made recruiting new advisors a pleasure, says Swisher, who was in Iowa and en route to Boston, New York City and Dallas to meet with advisors when we spoke. The UTC advantages Swisher talks about-open architecture, a formal and optimized investment selection, revenue neutrality, total transparency of fees, 100% pass-through of revenue sharing and fiduciary oversight-have advisors and their clients paying attention.

Still, there are challenges. Just as everyone and their sister wants to be a fee-based advisor these days, UTC's competitors are catching on to the "fiduciary" buzz. "What's getting confusing for clients is that every vendor is rushing to market with so-called fiduciary solutions," Swisher explains. "The difference is, we're a full discretionary trustee. The co-fiduciary models that are popping up still leave investment responsibility with the plan sponsor [the employer]. They really don't have the story to tell but if you say, 'Well be co-fiduciaries,' to a client that may sound the same. The problem is they'll still be on the hook. With our model, we're the ones who are liable."

Unless a firm is a national trust company, they can't offer active fiduciary discretion. Which means that duty resides with plan sponsors, many of which are ill equipped to select or fire fund managers. Which is precisely why a traditional investment advisor model just wasn't going to work for Kasten. "With the advisor model, we were hamstrung," says Kasten, who received his CFP certification and his MBA from the University of Kentucky. "We could not offer active discretionary services. We couldn't pick portfolios. If you want to solve the problem of people not being able to retire and advisors we worked with recognized that the old model is failing you have to be able to control fund selection, create portfolios and manage fees."

Kasten may make starting a trust company sound easy, but it was anything but, says Michele Hardesty. Kasten launched his advisory business in his home's basement in 1985, and Hardesty was his first employee, hired in 1993. Early on, Kasten alternated a week working as an anesthesiologist with a week running his fledgling advisor shop. But he was nothing if not diligent. By 1992, he was overseeing $70 million.

"By that time I had seven years of experience under my belt and could see that this was a viable concept," Kasten says. So he started hiring staff. He also had a mandate from his wife, who told him he had to pick one job and stick with it. He picked his advisory firm. He still manages the money of many of those first clients-the doctors and nurses he would proselytize to about investing.

"I was pretty skeptical at first," says Dr. Wayland George Blikken, a practicing anesthesiologist in Evansville, Ky.
"What does an anesthesiologist know about investing? He used to talk to us and it sort of made sense but I thought, 'This guy is doing medicine and this investing stuff? What the heck?'" But something about Kasten's earnest demeanor finally wore Blikken down. He was a resident in 1989 and has been investing with Kasten ever since.

At age 49, Blikken says that thanks to Kasten, he's on target to meet his goal of retiring in 10 years "if not before. I guess I was pretty lucky he trained at the University of Kentucky. I think it would have delayed my retirement if I hadn't met him. It would have been a pretty long learning curve for me," says Blikken.

"One of the advantages of anesthesia was that I had a fairly controlled schedule," laughs Kasten today. "I knew when I was on call or not. If I scheduled a meeting, I knew I could make it. My first client was a doctor. I still have him after 19 years. His portfolio has grown from about $12,000 to $4.5 million," says Kasten, who still maintains his anesthesiologist's license.

Never one to sit still, Kasten had barely launched his advisory business when he started to chafe at the fact that he had to get his mutual funds through a broker-dealer instead of being able to buy them directly. To gain direct access to the world of funds he wanted, he transformed his firm into Kentucky's first state chartered trust company (he had to help regulators draft the application forms) in 1994. Just three short years after that, he converted the firm into a national trust company-the only model that he believes allows him to shoulder active discretionary responsibility for retirement plan clients nationwide.

When Hardesty joined Kasten, she was technically the receptionist and the firm's only employee. Today, she oversees operations and compliance at the firm. "We have the OCC [the Office of the Comptroller of the Currency] and their auditors in here all the time, which is a huge expense when compared with being an RIA," Hardesty says. The audits cost about $50,000 annually, while four required independent audits cost approximately $120,000 a year.

The firm's biggest expense, however, is technology. But it is also its major selling point. The proprietary software Kasten helped develop allows the company to do 100% pass through of the revenue sharing fees that mutual funds pay his firm for sales. Why is this important? Fund companies either don't track their fees at all or they do it incorrectly about 40% of the time, Kasten says. Equally critical, the Department of Labor says if you take the fees and offer active discretionary investment services, you must disclose all finder's fees and pass them on to the plan sponsor to help them defray costs.

"Unified Trust not only tracks and reconciles these fees, they collect them, too," says Tidmore. "When I was a registered rep, I had no idea that these finder's fees were being paid. But even if I did, I had no way to calculate them or say whether they were being paid correctly or incorrectly. And not only couldn't I do it, neither could the plan sponsor. It's difficult if you're not at the institutional level."

That good news, in an age where hidden fees, especially in retirement plans, are getting insurance companies and others in trouble, means UTC is ahead of the curve. To combat the problem, the Department of Labor will require that all plan providers track and offset finders' fees for clients by 2006. UTC has been using the their fee offset model since 2000.

"In June I was at a conference in Washington, D.C., and folks from the SEC and OCC and Federal Reserve were there describing what they want to see for mutual fund revenue tracking starting in January 2006. A lot of people in the room had no idea where to start. Our system lets us to do tracking and invoicing for both wealth management and 401(k) clients," Hardesty says. "Our job is to give that money back to clients."

Which means running a tight ship-nothing new for Kasten or Hardesty. With 42 employees, net profit margins are running in the 22% to 24% range, though that could increase when they hit the $1 billion mark in the next 18 months. "We're looking for controlled growth, and with the trust company, we have the right model to accommodate it," Kasten says.