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.”

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