Kristy LeGrande, a managing director from Cambridge Associates, came through the door at Innovest Portfolio Solutions one day during 2016 looking for a lifestyle change — one that, among other things, did not require such an aggressive travel schedule. Innovest had no positions available, but LeGrande’s personal and professional credentials were outstanding, so the firm hired her anyway to occupy a position that did not exist.
During 2017, history somewhat repeated itself when Innovest client Katherine Sauer, a former economics professor turned human resource executive at the University of Colorado, expressed interest in coming to work for the investment house.
“We loved working with her,” says Richard Todd, Innovest co-founder and CEO, “and she was really impressive.”
Again, there were no open positions, but Todd and his partners at Innovest brought Sauer aboard nonetheless.
Todd points to both as examples of “first-round draft picks” who likely would have become unavailable if the firm had turned them away until a position came open.
They are also examples of attrition-based hiring, a practice introduced to Todd several years ago by his executive coach. Oversimplified, attrition-based hiring works like so: Innovest has about 50 employees and a 10 percent attrition rate (low for the industry), which means it loses an average of five people per year. Attrition-based hiring, in anticipation of those natural annual departures, calls for hiring their replacements in advance of their exit. Attrition-based hiring is a practice that allows an organization to hire the best talent when it comes available, regardless of whether an open position is technically available.
“It was an epiphany,” Todd recalls. “It made a giant difference to our firm. You lose a couple of people and that can be difficult, or if somebody gets sick or needs to take time away, it can throw a monkey wrench into a firm. So we stopped casting the net after a person left and instead built a bench of people. If we found somebody incredible, we would just hire them, get them on the bus, not really knowing where they might fit, but we needed them in our firm. It changed our thinking about the way we hire people. We have a lot more talent because of it.”
The switch to attrition-based hiring also took pressure off team members, reducing their workloads and ensuring the firm experienced no downtime when staff members did leave. Despite the higher payroll, Todd says the practice ultimately improves the firm’s talent and performance and, over the long term, saves on costs as well.
The move to attrition-based hiring was the outgrowth of another major decision made by Todd — the hiring of an executive coach. It started with his membership in an international organization named Vistage Worldwide, which brings together CEOs who help one another with their operational and performance issues. When Todd found the group useful, he asked Mickey Fain, head of the local Vistage group, if he would be interested in working independently with him and other Innovest executives. Fain agreed, and Todd and Innovest team members now spend half a day each month with their executive coach.
One of the major hurdles Fain helped Todd clear was his control issues. Todd admits people become entrepreneurs because they want the freedom to personally make all key decisions, only to discover in hindsight that freedom came from giving others control.
“We are a lot better firm because I don’t have to be the smartest guy in the room,” he says. “It wasn’t until we flattened our firm and made others responsible and accountable that we really were able to grow significantly. I don’t think I would have ever envisioned that. That is part of our reputation. People love working here because they know that they matter.”
The other pivotal decision made by Todd that deeply influenced both his personal and professional lives was joining the Catholic organization Legatus, whose name means “ambassador” in Latin and whose goal is to instill Catholic values in the workplace.
“I thought there might be good networking opportunities, and there probably are, but I really embraced it and spent a large amount of time with members of the organization that are just wonderful business leaders, fathers, mothers, husbands and wives,” he says. “It wasn’t a conscious thing, but it changed the way I live my life and think about other people.”
The ultimate mission of Legatus is stewardship. Simply put, the Catholic interpretation of a steward is a person who puts the interests and advancement of others ahead of themselves. That mission was adopted as the central operating theme by Innovest.
“We are not just an investment firm; we are stewards,” Todd says. “We are legal stewards to our clients, as fiduciaries; we are stewards to our employees and their families; we are stewards to the community; and when we talk about hiring people we ask the question, ‘Are they stewards? Are they men and women for others? Do they think about themselves first, or do they think about themselves last?’ I give Legatus a huge amount of credit for my values but also the values of our firm.”
Legatus, an international organization, was formed by Tom Monaghan, founder of Domino’s Pizza and former owner of the Detroit Tigers. The organization’s largest U.S. chapter is in Denver, headquarters to Innovest. The chapter hosts a monthly date night during which members are joined by their spouses for cocktails and dinner, followed by a guest speaker that might be an author, politician, business executive or other thought leader.
A natural byproduct of that ethos is the philanthropic mission that Innovest pursues. The firm’s mission of choice is to improve the education of inner-city youth.
“We believe education is the great equalizer, and many inner-city poor don’t have the same opportunities,” he says, “so we are involved in organizations that help poor kids get a better education.”
One of those organizations, for which Todd serves as a board member, is Arrupe Jesuit, a high school open only to kids living below the poverty line. Students attend classes four days a week, then help fund the school by working on the fifth day. Innovest has an Arrupe student working at its offices every weekday, and the firm pays their tuition, either in part or entirely.
“It is not just the child getting the benefit. They have made a big impact on our culture,” he says. “We embrace philanthropy here, and my wife and I do personally as well, and a lot of it is educationally oriented, in part because my wife was a teacher.”
HUMBLE BEGINNINGS
Richard Todd was managing director of a consulting department at an investment bank when he made the decision more than 20 years ago to form Innovest, along with co-founder Wendy Dominguez. They had found themselves in that all-too-common situation where the financial interests of the firm conflicted with the interests of its clients. It was not a happy realization for Todd and Dominguez, though it convinced them that if they wanted to be objective advisers to their clients they needed to open their own firm and have control over the organization’s culture, values and decision making.
There were only five staff members and 25 clients when Innovest Portfolio Solutions opened its doors, and the firm was in pure survival mode at the time, obsessing over making the next payroll. Today there are about 50 staff members, 260 clients, and Todd and Dominguez are no longer worried about making payroll. Along the way, the firm has built three lines of business: retirement plans, which includes everything from 401(k) plans to health plans; managing the investment portfolios of foundations and endowments; and a high-net-worth practice, which is the fastest-growing part of their business. The rise of its high-net-worth practice for individuals has been the result of growth experienced in its foundation and endowment practice. Those organizations have boards of trustees filled with wealthy individuals and business leaders, a fair share of whom have been impressed with Innovest’s work and decided to entrust the firm with their own wealth.
Next on the agenda is a to start a family office practice.
“We call it a custom family office,” Todd says. “We would have multiple families for which we would be providing family office services. The family office will come sooner than later. We need to start it relatively soon to meet client and market needs.”
Those needs include the growth of client assets and, despite the thunderous bull market on Wall Street, the current investment environment is widely referred to as “yield starved.” Todd concurs, flatly remarking, “The future is low returns.”
That can be problematic when considering many foundations have charters that require they spend 5 percent of assets annually, making it essential their asset appreciation is 5 percent plus purchasing power, so perhaps another 2 percent.
“You need to make 7 percent to keep your fund growing,” Todd says.
Endowments and foundations might need to reduce their spending and grant making, because of the low-return environment, while in other cases Innovest has talked to organizations involved in development projects — such as universities adding new buildings to their campuses — about raising private donations to meet funding targets. There is also the calculation of whether a client is in a position to take more risk in the hunt for bigger returns.
GETTING STARTED
Quantifying downside risk is pretty much the starting point with new Innovest clients. How big a drop can they endure in their portfolios during a short period of time? Once risk tolerance is understood, the portfolio is built using a combination of equities and fixed income, and different strategies within those groupings. Then come alternatives.
“We believe in alternatives,” Todd says. “We have a real asset allocation, a fixed-income allocation and an equity allocation. Liquidity is important. Some clients need a lot of liquidity, some don’t, and if they don’t we will use real estate as a component. Hedged equity, private equity, private debt — all those strategies can be a big part of a client portfolio.”
Even though Innovest has its methodology and is an exponent of the endowment model of investing, Todd says the firm is not “model based” in its approach. A custom portfolio is constructed for every client.
Also factored into many portfolios are impact investing plays, especially because opportunities for investments geared toward social change or mitigation have become more numerous for the individual and family investor.
“There are great opportunities for family offices, and especially endowments and foundations,” Todd says. “When you’re small, it’s just harder and more expensive to do morally responsible investing or socially responsible investing.”
Much of the impact investing from Innovest clients is geared toward the poor, in part because the firm’s client base includes religious organizations focused on alleviating poverty. Mental health and environmental causes also attract a large share of impact investment dollars, and those dollars can be applied in many forms. Todd cited one client that provided financing for a building for a mental health organization at a more favorable interest rate than available through traditional channels.
PAST IS NOT ALWAYS PROLOGUE
A common practice avoided by the Innovest team is the temptation to chase performance.
“A good example is that, if you would have looked at a lot of research the last year, it said that non-U.S. investments probably are not very attractive relative to U.S. investments because of the strengthening dollar and weakness in Europe and Japan,” Todd says. “And what happened? We have had a very weak dollar, currency translations have been very positive, optimism in Europe is really strong and, while U.S. investments have done well, non-U.S. investments have done exceedingly well.”
The common denominator among successful funds, according to Todd, is a stable team, a consistent strategy, careful risk management, and one other thing.
“The culture,” he says. “That’s what keeps a firm stable. The performance numbers get us interested, but there are lots of products out there with good numbers that we are not going to invest in because we are uncomfortable with the team or the culture, and that makes us wonder if their performance is repeatable.”
Ideally, their culture and people, like that of Innovest, would be stewards rather than what Todd calls “careerists.”
“There are great professionals that went to the best schools and have great experience, but they are very difficult to work with because they are ‘careerists’ who are focused on being elevated in their career,” he says. “Consequently, they step on others on their way up. The steward focuses on pulling people up, and the best way to get promoted is to help the people underneath you. That way, when there is an opportunity above you, there is somebody you have already elevated ready to fill your shoes.”
That philosophy appears to be working on several levels. Innovest’s annual employee satisfaction survey, which aims to assess how its people are feeling about the organization, is getting marks that have continued to improve over the years.
“I believe that is the Catholic way,” Todd says. “We don’t talk about the Catholic way; we talk about pulling people up, we talk about stewardship, we talk about men and women who work on behalf of others.”
Mike Consol (m.consol@irei.com) is editor of Real Assets Adviser. Follow him on Twitter @mikeconsol to read his latest postings.