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Robert Brunswick:
Welcome to our Counting Capital podcast. I’m Robert Brunswick, chairman of Buchanan. It’s my great pleasure today to have Rick Keller with us. Rick is the chairman of First Foundation. We’re going to have a rich-in-content conversation with Rick today about his career and about the evolution of First Foundation, and I know you’re going to enjoy it. So with that, welcome Rick. It’s nice to have you on board.
Rick Keller:
Thank you Robert, pleased to be here.
Robert Brunswick:
We appreciate the time. And I think it would be most appropriate to start off with a little bit about your business career. So, have the group, the audience, get to know you a little bit as we introduce you to everyone.
Rick Keller:
Okay. Well, investing was kind of a hobby through high school and beyond, and I got my degree in finance because I liked investments. And I went into corporate accounting and went and heard a financial planner speak one day and I decided that’s what I want to do. And I went and told my professor that I wanted to do that and he said, “You should become a CFP,” so I had enrolled in USC’s program. And being one of the better students, the instructor asked me to come work for him, and I ended up down here in Newport Beach working with him in 1983. And then subsequently I decided that I didn’t like the ethical commission conflict that went on and so I decided in 1987 to go fee-only.
Robert Brunswick:
So, when you say financial planning or planner, what does that mean to you as you describe that broadly?
Rick Keller:
Sure. Financial planning is kind of like the quarterback of all financial aspects of a person’s life. So, that means passing an exam on estate planning, on income tax, on casualty-type insurance, on life insurance, and then retirement planning and projections, and then investments, which ultimately is probably the most important to most people.
Robert Brunswick:
Perfect. So, let’s go back to 1987. It was a commission-oriented business. You didn’t care for that because you thought there was maybe misalignment, I don’t want to put words in your mouth, and you wanted to go to more of a… Tell us what made you change.
Rick Keller:
So, I went fee-only in ’87 because prior to the stock market crash, interest rates were hitting highs and I had moved 40% of my client’s portfolios into CDs at 10%.
Robert Brunswick:
Those were the days.
Rick Keller:
I wasn’t getting paid, and I decided, well, the step to fee-only wasn’t very far and the market crash occurred when I had 40% in CDs, so my clients made out real well and I decided after that that I’d go fee-only and off I went.
Robert Brunswick:
So, before we get into specifics of the company today, I’d like, so do you consider yourself an entrepreneur or do you consider yourself an investment manager? And I’m sure you’re going to probably say both at some degree because you really have started a business, built a very significant business with your team, but your day-to-day job is investment management. So, help reconcile that for us.
Rick Keller:
Ultimately, an entrepreneur with good ideas has to execute those ideas and really build these into good businesses. And that’s what I realized. So, first going fee-only, and financially it was quite a difficult period to get up to speed because it meant hiring good people and I was paying everybody, including the secretary more than me, as new assets come in on a fee-only business, you’re building that base and you have a book of business or a book of clients that it’s just as important for them to remain with you in year 10 as it is as it is in year one, unlike a commission-orientated business where you’re always looking for the next client. And so my business was to bring in clients and keep them happy for lifelong.
Robert Brunswick:
So, I’m hearing a little bit more, to do that you have to be a good investment manager. You have to provide good returns, predictable returns, not take too much risk, and hold the hand of your clients.
Rick Keller:
Well, because clients can fire you at any time without any cost or obligations. When I first started there were probably only three of us in Orange County, so today it’s a mainstay.
Robert Brunswick:
So, let’s kind of go there for a second if you can. So First Foundation today, when did it start?
Rick Keller:
This corporation we founded January 1, 1990.
Robert Brunswick:
Okay, So, that’s now… What is that? Almost 30-plus years. Okay. You obviously today are a bank, you’re an investment management business, so describe what First Foundation is today.
Rick Keller:
So, we enjoyed a lot of success through the early years and along about 2005 I had six banks come offered to buy us, and we weren’t for sale. And I happened to be having lunch with somebody, Scott Kavanaugh, and I said, “Scott, we’ve had six banks come offer to buy us and we’re not for sale.” And he said, “Rick, why don’t you start your own bank? And I’ll be the CEO.” And I looked to my partner, John Hakopian, who has been with me all these years and I said, “Boy, we didn’t think of that.” So we embarked on this campaign to start the bank, so we put up all the starting capital and then we had to raise money for investors. Unlike a lot of people, we converted all our equity at the same price as all other investors.
We didn’t want to be at a price point advantage for where we’re asking our clients to come in, so we converted at $10 a share. We’ve since split two for one. And we capitalized the bank on October 1, 2007. We opened the bank with about $32 million in capital. And all of a sudden we’re rolling into this god awful recession, but fortunately we had no loans to go bad and we found ourselves being the healthiest bank on the West Coast for the next four years.
Robert Brunswick:
So, when you talk about recessions, you’re talking about ’90s recessions or are you talking about 2007?
Rick Keller:
2008.
Robert Brunswick:
Okay, got it.
Rick Keller:
So, we opened it in 2008, or 2007, October 1, 2007. And the economy as it slid, all of a sudden the door’s ringing on employees and professionals we could hire where it’s very difficult in 2007 to hire anybody.
Robert Brunswick:
So, a good time to differentiate yourself, build a bank, retain human talent.
Rick Keller:
Because we needed to put our capital to work. And we ended up buying $60 or $55 million in mortgages from Citi Group. And that was around August of 2008 and our revenue went bing! So, we’re moving $55 million overnight from Fed funds that was near zero to about five and a quarter, and we were off of the races.
Robert Brunswick:
So, today you’re a bank probably north of $11 billion in assets?
Rick Keller:
That’s correct.
Robert Brunswick:
And you’re an investment management business with about $5 billion in assets.
Rick Keller:
Yeah, $5 billion.
Robert Brunswick:
So, those are distinct different businesses.
Rick Keller:
Yeah. But we have a holding company at the top and the holding company, we took public. It was kind of a soft offering in 2014. And then in 2015, we raised capital and really increased the trading volume in the stocks.
Robert Brunswick:
So, for everyone that is watching here, I’m curious how you might describe a fiduciary, because certainly you have a definite fiduciary responsibility with your investment management business and I’d argue within your banking business also. I mean, that’s just a part of the job criteria if you will. But how do you kind of manage that as you think about conflicts within your world just to kind of touch on it.
Rick Keller:
That’s a good question. So as an RIA, registered investment advisor, you are a fiduciary for your clients under the law, meaning you could only do what’s best for your clients in terms of any transaction with them. And so that means just full disclosure on everything. But as the founder of the company, for instance, I have a conflict if somebody opens a bank account, for instance, because I’m one of the largest shareholders. If somebody takes out a loan through us, there’s a conflict there. And so we have to disclose that to clients that because we’re owner shareholders of the parent company and their sister company, so the holding company owns both corporations, we have to disclose that conflict to clients.
Robert Brunswick:
Sure, so, as you’re characterizing that, and that makes sense, you’re obviously a registered investment advisor, so you’re overseen by the SCC. So, with that being said, though I imagine there’s some benefits to your clients and that’s probably one of the driving reasons you started the bank, for your investment management client.
Rick Keller:
Yes. So, early on, clients would come in and sometimes, because most clients had all their assets with us, so they never qualified for private banking services at their own bank institution outside of us. So, once we had our own bank, then we were able to provide a different level of service for them in terms of their banking. And we had offered stock to our clients, our largest clients, and I didn’t want anybody that was retired because this is a high-risk venture. A lot of our larger clients participated and they are still shareholders today. But in the bank, we were just able to do things that you couldn’t get done through another bank where we didn’t have direct access to chief credit officers and others.
Safety and soundness is paramount in a bank and so we can’t do any risky loans, but we could at least take the time to explain why our client or this loan was helpful for the client. So, I remember having clients where they were victims of fraud for instance, and we were able to get them out of a situation that other banks had declined them. So, it’s been a big help. And remember as people get more and more successful, it’s about ease of life and not having problems and being able to transact things easily for them.
Robert Brunswick:
Ease of process.
Rick Keller:
It’s been a great combination for us over the years.
Robert Brunswick:
Well, of course our company has a nice relationship with First Foundation. You’ve entrusted a number of your investor clients with Buchanan’s products, so we greatly appreciate that. So with that, and I’m a client myself, I’ve had a good chance to get to see the machine work. And I guess, I think for maybe the average person watching, they might think, “Well, how does an investment management firm really differentiate itself? It seems like they all tell you the same story about what products and services that they offer, but really at the end of the day, isn’t it just the market that’s making these things happen and it’s really about how well they allocate.” So, how might you describe your services and your differentiated platform to a prospective client?
Rick Keller:
So, what makes our firm different is we’re both kind of the manufacturer and the distributor. So, if you think of, let’s say the transportation industry, you can be Ford and make cars, which we have our own stock portfolios, but we’re not necessarily experts in real estate, for instance, or international emerging markets, or high-yield bonds and those kind of things, so there we become a distributor. So, having the due diligence team to go out there and evaluate firms in terms of cost benefits, safety, security, and all the things. So, what’s paramount as a fiduciary of your client is don’t lose your client’s money, right? So, we want to eliminate the fraud, theft, embezzlement issues, as well as the high costs that are traditionally associated with the brokerage firms. And so being a fee-only, we were agnostic whether somebody invested in real estate or in municipal bonds. We charged a flat fee based on the value of the account, so if the account went up, our fee went up, account went down, our fee went down, and therefore we were able to grow that model.
Robert Brunswick:
So, amazing career, I mean a lot more to go, but as you think about the favorite aspects of your job today, what do you enjoy doing most? I mean, I think I can guess your answer but I want you to tell everyone.
Rick Keller:
Number one has to be helping clients. I’ve had so many clients that have been with us 20, 30 years now, and I’ve had them come in crying about how thankful they are, and so it’s worked out really well. But that’s my joy. Most people with money, they’re retirees, but I have a significant number of widows that I’m able to protect, and as I tell all my clients, “Let us say no. Let us evaluate; let us say no.” We’ve had family members bring fraudulent things to clients and we’ve said no because we do due diligence.
Robert Brunswick:
You know the questions to ask.
Rick Keller:
Well, and I have an accounting background that helps a lot in terms of looking at source documents and to evaluate statements that are made.
Robert Brunswick:
Rick, I think what you’ve done at First Foundation and the entrepreneurial spirit and the team you’ve built and the metrics of accomplishments is phenomenal, but I think I would ask that you’re probably also very proud of your community work. I mean, I think about the endowment that you’ve overseen and your fiscal and financial capabilities to help an endowment here locally or also just broader philanthropy, giving back. So, touch upon that a little bit because I think that rounds out the superstar that you are and to show some balance to people listening today.
Rick Keller:
Oh thank you. That’s always been really important to my wife and I and the company. I can remember back in the ’90s when I owned 100% of the company, I’d give away about $100,000 a year to local charities and I was driving a car worth about $20,000, I think I sold it for $21,000, and I thought, “Well, maybe I could afford a $100,000 car if I give away $100,000.” So, that kind of changed things a little bit, but I continued to do that. But once we went public, it meant taking almost a 75% cut in pay to grow back. So, you can imagine rolling the dice and betting the farm on the next venture when we started the bank. So, I was on the board of the Performing Arts Center and that was a $50,000 a year gift. I was on the board of trustees at UCI, that was $25,000 a year.
So, I ended up staying on UCI because I could afford that, but $50,000 at the Performing Arts Center was a little high for me and nervous given my pay cut. But we’ve always given back. I was on the board of directors of the Orange County Planned Giving Council, I was in the endowment council at UCI, Performing Arts Center, I was involved with Hoag, and just a bunch of charities. And so I enjoyed that and having the tax background, I was pretty good at evaluating and recommending to clients when this may be appropriate for them.
Robert Brunswick:
Sure. So, I would say it this way: your legacy is amazing, but the legacy is still being written as you think about your life. So, what does that next chapter look like for Rick Keller?
Rick Keller:
That’s a good question.
Robert Brunswick:
Maybe your wife wants to know the answer.
Rick Keller:
Yeah. Well, my wife told me, “Don’t come home and boss me around.” But I consider the current chapter not over. I’m not done with the current chapter. I love what I do, I love helping people, and I discover things with new clients coming in that other people missed. And I just love doing that, being kind of the detective and taking that like a game of chess; you’re trying to move the pieces around to make people better off. And I love the strategy of it all. My son just joined me, so this gives me another five years to hang in there anyway. So, I have no plans to retire, although I have more than enough money and income where I could do that. But I just enjoy coming in, the investment committee’s at 7:30 every morning I got to …
Robert Brunswick:
You got to be prepared.
Rick Keller:
… get my fanny down the office, get on the Bloomberg, get all the current information, so I want to stay relevant.
Robert Brunswick:
Yeah, relevance is very important as we all look at these next chapters. So, I think about my role over at UCI when I was teaching for a number of years in both the undergraduate and graduate, I just loved it, having influence on our next generation. So, a lot of our audience members today are young people just starting out in their career or trying to decide what should they do with their career. So, what advice might you give to them as you have that experience level that you could tell them some things to think about as they look forward?
Rick Keller:
Yeah. I think first and foremost, ethics, you need to never compromise your ethics. Be willing to stand up to people that may not have your best interest at heart. And even if they’re in a position of authority, be willing to stand up and tell what you believe is the right thing to do. The other thing is be reliable. Employers and everybody like people they can rely on day in, day out, year in, year out. Hard work, you have to be a hard worker. Everybody works 8:00 to 5:00, if you want to be different, you got to work from 5:00 to 8:00.
Robert Brunswick:
Right. That’s very good.
Rick Keller:
I remember being on a panel and someone said, “Oh, you can’t possibly read all that stuff.” And this was in the ’80s, a long time ago, and he was managing $30 million. And he came to me and I said, “Well, I manage $300 million and I read all that stuff.” And so it can be done. Yogi Berra had a phrase, “If there’s a fork in the road, take it.” And in business sometimes you have to be different and you want to be smart about it, you want to work hard, and it obviously worked out for me. But be diligent in your research before you go off, but it’s sometimes very rewarding.
Robert Brunswick:
I think everyone is listening quite intently to your great words of wisdom, and we appreciate very much your time today. Thank you Rick so much for being here. It was wonderful. And I’m sure you got some good learning today, so we’ll look forward to seeing you next month. Thank you very much.