After a spinal cord injury in 2006 left him partially paralyzed, Matt Busick was forced to re-evaluate his hard-charging lifestyle as an investment adviser for a major national firm. Four years ago, he launched River Glen Wealth Counselors, a fee-only practice that specializes in working with high-net-worth investors. As part of its services, the company offers clients private-equity investments in handpicked Iowa start-up companies. His firm now has about 60 clients and approximately $100 million in assets under management.

Matt Busick was swimming off a beach in Maui six years ago when a rogue wave pitched him headlong into the ocean bottom.

He was paralyzed from the neck down.

Busick spent the next year rehabilitating from a spinal cord injury, and eventually regained some use of his legs and arms.

His near-death experience – and the extreme physical limitations it put on the former Marine Corps officer and triathlete – led him to ask some hard questions about his approach to providing investment advice as well.

“It causes you to wonder, are you living the life you want to live?” said Busick, who is now 44.

After 14 years of earning commissions on the investment products he sold, Busick decided to start a fee-only advisory firm, a model that fit better with his goals and philosophy.

“It always bothered me that I was charging $500 for a financial plan and then hoping that (the client would) implement my recommendations, because hopefully the commissions from the products (the clients buys) add up to the $5,000 that I really spent of my time,” he said. “And all the while I’d be thinking, ‘Do these clients realize the bias in this?’ I decided that I wanted to build a company that I would be comfortable with (my wife) Betsy being a client of.”

Incorporated in July 2008, River Glen Wealth Counselors specializes in serving accredited investors – people who meet minimum asset and income guidelines and are eligible to invest in higher-risk deals that can’t be offered to ordinary investors.

Busick recently moved his firm to a newly renovated 3,000-square-foot office suite at 2600 Westown Parkway in West Des Moines. He currently works with a staff of two people, but hopes to bring on an experienced investment adviser this year as a partner, but only if he can find someone who shares his vision of what a fee-based advisory firm should be.

The most commonly accepted arrangement by which fee-only advisers are paid is based upon a percentage of the client’s assets, regardless of performance, Busick noted.

“What we’re trying to get to eventually is to be a pure fixed-fee, performance-based operator in which we would charge a consulting fee tied loosely to time and materials,” he said. “And to the extent that we provide advice about investments, we would only be paid after the client has either generated a positive return or a return above a certain benchmark index.”

Achieving that level of performance-based model is a significant challenge and “exceptionally rare,” Busick said, primarily because of existing regulatory hurdles.

Beyond the complexity of determining how to benchmark performance objectively, advisers who charge a performance-based fee must meet the qualified client rule, a regulatory standard even more stringent than the accredited investor rule.

So-called qualified clients must have a net worth of at least $2 million, not counting the value of their homes, which is twice the asset requirement for accredited investors.

Private-equity niche

Because it works with accredited investors, River Glen can offer private-equity investments to its clients. To date, the firm has selected eight Iowa start-ups for its clients to invest in, with a goal of having 10 companies as investment options. So far, these private-equity investments are the only portion of its business in which River Glen charges a performance-based fee, Busick noted.

Busick entered the private-equity niche after finding that his clients, most of them retired executives, physicians or other professionals, would bring investment ideas to him to evaluate.

“Over time, we realized that if we did this right, we could potentially put our clients, with a small amount of money, in a situation where they could have good upside potential as investors in earlier-stage companies,” he said. “But we also realized we were going to be far more likely to secure a good entry point with a large dollar amount versus a small dollar amount.”

By combining, for instance, 20 investors with $25,000 each in a selected venture, Busick can typically negotiate better terms for clients and create a greater margin of safety, he said.

Rather than launching a venture capital fund “and having money burning a hole in our pocket,” River Glen forms a limited liability company as a single-purpose investment vehicle once it has selected a company in which to invest.

Busick and his private-capital specialist, Heather Welch Puri, painstakingly evaluate potential investments in three broad industry sectors: food products, health care and financial services. It’s not a one-time throw of the dice for clients, though.

“If (clients) do one investment, they need to do at least five,” he said, “because of five we put together, maybe only one works, but has enough return to make all five investments worthwhile. Otherwise, you’re not taking advantage of this allocation process correctly.”

Clients’ private-equity investments are limited to fit within their existing overall asset allocations, so that they don’t invest beyond what they would have otherwise in small-capitalization stocks, Busick said. “Then from there, typically what we say is that you should invest no more than 1 percent of your invested capital, plus no more than 20 percent of your annual discretionary income, in any single investment,” he said.

Though a high-income household might think it can risk $100,000 in an early-stage deal, under River Glen’s model, that investor might be limited to investing just $5,000 in that company, he said.

Performance-based, hybrid twist

One of the first companies in which River Glen clients invested was NewLink Genetics Corp., an Ames-based pharmaceuticals company that in November launched an initial public offering of stock. The clients who invested in NewLink doubled their investment within about 15 months. Even if River Glen dissolves its investment LLC in NewLink and distributes the shares, Busick is recommending that his investors don’t sell until after the results of a Stage 3 drug trial of NewLink’s pancreatic cancer vaccine, a final step needed for approval by the U.S. Food and Drug Administration, are released.

Another company in which some of Busick’s clients invested is preparing to begin a new fund-raising round. River Glen is proceeding with a new round of due diligence to determine if it will again offer it as an investment opportunity, Busick said. “We have the ability, given that we’re starting out with such a small portion of a client’s capital, to add to investments that are going well,” he said.

River Glen waives its base management fee on money its clients invest in private equity deals, instead charging a performance fee on any earnings that exceed a compound rate of return of 10 percent. “That’s in the spirit of what I’m trying to get the whole business to, but we’re facing just really tough barriers in doing that,” Busick said.

Another long-term goal for River Glen is to structure clients’ portfolios based on hybrid portfolio theory, rather than modern portfolio theory, which is practiced by the vast majority of the investment industry.

In a nutshell, hybrid portfolio theory entails balancing a portfolio made up of about 90 percent low-risk bond investments with a small amount of higher-risk private equity investments. By contrast, modern portfolio theory’s objective is to maximize the expected return for a given amount of portfolio risk, or to minimize risk for a given level of expected return, by carefully choosing the proportions of various assets.

The primary challenge in putting hybrid theory into practice is achieving sufficient economies of scale, Busick said, noting it would take 20 to 30 firms of his size to be able to effectively access high-quality private bonds in the market. Though U.S. Treasury bonds are easily bought and sold, their low yields make them impractical for this strategy.

“I’m a realist, so I’ve got to embrace modern portfolio theory,” he said. “But I like the idea. If I were the client of a firm like this, it would give me great satisfaction to know that I keep things simple – I don’t have to freak out because the market just dropped 25 percent.”

In the long run, forming a network of like-minded Upper Midwest advisory firms may be the route to accomplish both ideals of a better performance fee and hybrid portfolio theory, he said.

Meanwhile, with about 60 high-wealth clients, Busick considers himself at his maximum capacity as a solo practitioner. “So we’ve got to add somebody so that we can add clients by referral,” he said. Additionally, he plans to hire a younger adviser who can be trained. His firm has also established an internship with Drake University in which it is bringing in finance students to expose them to working within a fee-only environment as an alternative to the traditional sales-oriented adviser route.

“The injury took a lot away from me,” Busick said, “but I still have the same drive and desire – I just have to channel it in different ways. Being a sole practitioner wasn’t enough. I think if we can crack the code on (the performance fee) concept, everybody wins.”