In the 1980s, Richard Todd was working in cubicles at E.F. Hutton in Denver. He measured his day with stacks of cards. These were the leads he’d use to cold call brokerage clients. Every day, a sheet came around showing who was the biggest producer in the group—for the day, the week and the month. “It was just a massive contest on who could make the most money,” he says. “What can we sell today as opposed to how can we manage a client portfolio?”

He said he was pretty good at selling stocks and bonds, stuck it out after starting at the bottom, and survived where a lot of cube mates didn’t. “Most of the people in my class are not in the investment business anymore,” he says.

However, despite the fact he was good, he decided it wasn’t really his culture. E.F. Hutton was merged with Shearson Lehman in 1988, and the new environment didn’t suit him. He would eventually go on to a regional brokerage firm with a wealth management orientation, Rauscher Pierce Refsnes, in 1990. That firm, which allowed brokers to private brand themselves, went through a series of mergers, too, and that didn’t suit him either.

Nor did it suit the woman he’d hired right out of school, Wendy Dominguez. 

Despite the reputation of the realigned entity, Dain Rauscher, there were still conflicts of interest that rubbed the two colleagues the wrong way. At one point, they had an investment consulting client paying fees. This client had an underperforming manager, but that investment firm was one of Dain Rauscher’s biggest trading partners, and Dominguez and Todd got an icy reception from the home office about cutting the manager. Also, when their old firm had been subsumed into Dain Rauscher, the new rule was no private branding, and Todd’s team had been cultivating their own name. Not good. 

The problem is that in the old world, the mid-1990s, conflicts were everywhere.

That’s when Todd, Dominguez and another partner pitched an idea for a new firm, one offering totally independent asset allocation for a fee, a great pitch especially in the institutional world they wanted to inhabit. They didn’t have to sneak out in the middle of the night from their old firm, they say, but they did have to buy out their old clients, go load up a van with new office furniture from Costco and hit the credit cards. They had young children at the time, and their income was slashed by half, Todd says. 

Their new firm, Innovest Portfolio Solutions, started life mainly as an institutional consultant, competing with the Mercers and Watson Wyatts of the world. Eventually they snagged clients such as a fireman’s pension with $30 million and they were off.

In the last 10 years, the firm has parlayed that institutional focus into a high-net-worth business where the firm provides custom asset allocation strategies and manages managers for wealthy clients, who now constitute a bit under half of its business. The firm now has close to $15 billion in assets under advisement, has 90 to 100 family clients, and has some 41 staff members under its roof. 

Being Fiduciary Before It Was Cool

Since its founding, the Denver company has worked to cultivate a special culture—entrepreneurial, civic-minded, open to the ideas of staff, and less hierarchical. And its institutional consulting business has opened up to include more high-net-worth individuals. Innovest is now moving on multi-family offices, where Todd says there’s an obvious business opportunity. Too many families are trying to do the work themselves, he says.

“We’ve always kind of thought of ourselves as our clients’ chief investment officer,” says Dominguez. “I think this is the way we’ve become their CFO as well, in supporting all their financial decisions.” 

That institutional focus has put them in the catbird seat at a time when new DOL rules are going to have everybody asking questions about how to deal with retirement plans. Innovest boasts that it was always in the fiduciary game.

“It cracks me up a little bit that firms believe they now want to become a co-fiduciary and they suddenly found religion because of the DOL ruling,” says Todd. “We always felt it was the right thing to do.” He says the ruling will flush a lot of people out of the business—many of them simply won’t have the resources to deal with audits. At the same time, with more clearly drawn battle lines, he admits Innovest might face more competition because of the ruling.

“We have a 20-year running start on a lot of these firms going independent,” says Dominguez, though she adds that companies like Schwab offering back-office support have helped level the playing field and get firms started up more easily. Innovest recently had an SEC audit, she says, and whenever regulators come to the office, there is a huge amount of work created. In the era of electronic communications, it’s even more complicated. 

“We spent hundreds of hours just gathering information,” says Todd. “It will be very difficult for a small firm to handle a routine examination. We know how difficult it is for us and we’re considered a big consultant advisor. … Any record you can think of, from conversations to e-mail conversations, to trades to reports to marketing. Gathering that and being prepared to answer for that is very time consuming.” He says it’s especially difficult to get a firm started without a partner. 

Many advisors are most likely going to have to outsource their compliance. “When we did it, we built it ourselves,” says Dominguez.

The economic environment is also challenging to retirement specialists. Interest rates are hugging the floor, so bonds don’t offer the yields retirees counted on before. That’s sent people scrambling to the four corners for riskier, higher-yielding assets, says Todd.

There are so many unfunded liabilities pensions face that some employees (those in the Dallas police pension, for one recent example) are wondering if they will even get their retirement benefits. “The problem is bond yields,” says Dominguez. “Bond yields are low, and it’s been the historical building block for portfolio returns from forever.”

Actuarial models on which most defined-benefit plans were built are using unrealistic return assumptions. “And now [bond portfolios are] going to get you only 2%, 2.5% per year,” she continues. “And the problem that pensions have had is that their actuarial studies are assuming much higher returns than the market will give, at least in the next five to 10 years.”

To meet those funding levels, adds Todd, there’s going to be more adrenaline-fueled investing going on. Plans are going to be positioned much more aggressively, tilted toward equities, which creates more volatility.

“When you have volatility in a portfolio, that creates emotion,” he says. “And ultimately you still have individuals, trustees, making decisions, investment committee members making decisions, in at times an emotional environment. When that happens, they often make mistakes.”

Innovest now deals with 100 retirement plans, about 80% of them defined-contribution plans. One of the firm’s jobs is to quantify downside risk during downturns for clients. 

Choices could become problematic. “A mistake we think investors make is they begin to reach for things because they have expectations that, in some cases, are unachievable,” at least without a lot of extra risk, Todd says. And though the firm preaches diversification, that message has been blunted by diversification’s perceived weaknesses among investors.

“International has been a drag on portfolios, bonds have been a drag on portfolios, so [investors] are looking for ways to ‘fix’ it, and when they try to fix things, they become irrational and they chase investments,” he says.

With DC plans, you are building a menu, Dominguez says. “We think it’s important to have both passive and active mangers represented,” as well small, large and international holdings. 

It’s also Innovest’s job to get participants to save more, which will be the biggest contributor to better outcomes. And the firm will goad plan sponsors to offer better education programs, better matches, easier-to-use enrollment forms.

Dominguez says right now plan participants are asking for more dividend-paying stock funds. “That’s usually a signal to us that that’s the top of the market,” she says. 

Todd adds: “Participants in plans are interested in making defined-contribution plans more defined-benefit plan-like.” That means there are more products appearing with guaranteed withdrawal benefits that you can contribute to on a paycheck-by-paycheck basis. 

“But it sets a high watermark. It’s kind of like an annuity within a defined contribution plan,” Dominguez adds. “The problem with that is that it’s not real portable from a plan sponsor standpoint. So we’d like to see more portability.”

Whenever a DC plan has a big constituency that wants a certain product, Innovest will try to open a brokerage window in the plan. Sometimes the firm will link the plan up with outside advisors. 

Growing Pains

Todd and Dominguez started the firm with another partner whom they eventually bought out when, about 10 years ago, the dynamic and vision of the firm started to change. Todd says, simply put, that there’s a lot of money in proprietary product, and the discussion of creating investment products for Innovest inevitably came up. That led to conflicts about the soul of the firm: Would it continue to burnish its fee-only, advice-driven brand or launch into a lucrative new area?

And that argument, says Todd, led to a bigger issue: Who was controlling the firm?

Todd says he realized something: “I am overbearing and influencing,” he admits. “And I was able to do things pretty much the way I want to do it. And I thought if I had control that meant freedom for me.” But the fact that so few people at the firm had a say—or a career path—was causing high employee turnover, Todd says. The firm was holding on to only 65% of its staff. 

Such stories are common at firms that see rapid growth. The people who succeed early on don’t want to delegate power or chores or spread the equity around because they were in the trenches and feel entitled. But as firms get larger, that attitude becomes less tenable. At Innovest, Todd says, that had led to a lack of direction and a lack of buy-in by employees. (Both Todd and Dominguez describe themselves as fairly competitive, though they have a good brother-sister type relationship with each other.) “We didn’t involve anybody else in our firm,” Todd says. “It was hard for us to trust people. And it was hard for us to keep good people.” The company’s 15 or so staffers at the time, in that situation, couldn’t see a career path or vision.

The firm brought a consultant into the mix who saw the heartache. The advice was that the firm needed to “flatten” its hierarchy. 

“He was trying to flatten our structure and I fought it because of my controlling nature,” Todd says. “I agreed that we would form five committees or departments and that I would not be leading them. And what happened is our firm became a lot better and our growth exploded. We empowered people. And that’s why our reputation is what it is.” 

“We created a lot of buy-in and formal structures for people to give feedback,” Dominguez says. The firm’s current COO, Peter Mustian, started with the firm right out of school some 12 years ago. “He started as an analyst’s assistant, and people see how he’s come through the firm,” Todd says.

The firm now has 13 partners, though the two of them still own 68% of the firm, and Todd owns 48%.

Dominguez is “more of a manager while I’m more of the leader, more of the visionary,” Todd says, stressing that among a lot of analytical people, analysis isn’t his strong suit as much as vision and salesmanship. Knowing people is a great deal of the manager equation, he says.

“We can’t make salespeople into analysts, and we can’t make analysts into managers.” Employee retention has risen to over 90%, and the career paths are clear, Todd says.