Fayetteville Tables Decision on Investment Adviser

After an hour-and-a-half of jargon-riddled discussion Sept. 5, the Fayetteville City Council voted to table a resolution that would have approved a five-year contract with a firm to manage more than $69 million of the city’s money.

A wholly owned subsidiary of First Security Bancorp of Searcy — Crews & Associates — had been picked by a selection committee to manage the money. Crews had been selected as one of the four finalists through the city’s request for proposal (RFP) bid process. The committee then voted unanimously to hire the firm as its investment adviser in early July.

But a challenge by members of Garrison Financial Corp. of Fayetteville — the firm that has managed the city’s money for the past six years — raised several objections about Crews, FSB and the company’s qualifications to manage the money.

In an Aug. 31 letter to the council, Garrison Asset Management (a subsidiary of Garrison Financial Corp.) spelled out 24 concerns it had with the FSB/Crews proposal. Basically, the objections boil down to this: In GAM’s opinion, the proposal to the city was incomplete and misleading.

The resolution will be revisited by the council on Sept. 19, after City Attorney Kit Williams and the city’s finance director, Paul Becker, have a chance to look closer at Garrison’s concerns.

Rebecca Garner, president and chief investment officer of Garrison Asset Management, said she realizes her objections to Crews looks like sour grapes over losing an account that’s worth about $124,000 a year. But she said her firm’s objections are in the best interests of the City of Fayetteville and her industry as a whole.

Garrison bid a fee of 18 basis points, or 0.0018 percent of the city’s portfolio, to manage the money. FSB bid 10 basis points, or 0.0010 percent, a savings of about $50,000 per year to Fayetteville. FSB claims that any additional brokerage fees would be minimal.

Fayetteville’s $69 million pool is primarily special project money and mostly earmarked, Becker said.

Garrison’s Concerns

In Garner’s opinion, perhaps the biggest rub — and the biggest chasm in the lingo between the two firms — is that Crews is not a registered investment adviser with the Securities and Exchange Commission. Therefore, the firm is not allowed to be a “discretionary investment adviser.” Instead, Crews would be able to provide brokerage services, for which it could charge a commission, she said.

“If Crews is acting as an investment adviser and providing fee-based portfolio management services, it is our opinion that Crews should be registered with the SEC as an investment adviser,” the Aug. 31 letter states.

Crews is not registered with the SEC. And the company intends to manage the city’s money through the trust department of FSB’s subsidiary, First Security Bank of Searcy. That management would not be discretionary and transactions would require approval by someone from the City of Fayetteville. That management is allowed by law.

The issue comes down to the “buy side versus the sell side,” Garner said. Her firm buys for the city while, in her opinion, Crews would be selling to the city.

“The RFP did not limit the responses to fee-only discretionary accounts,” Rush Harding, CEO of Crews & Associates, told the council. “I was asked to prepare the responses to that RFP. I’m certain that if I was aware that these responses would come under this type of scrutiny, I would have taken more time with it and been more precise with some of my answers … ”

It’s easy to see how a layman might be confused by the co-branding in the FSB/Crews proposal.

Both company’s logos (which are similar) are used on the paperwork and most of the proposal is written from a Crews-centric perspective. But Frank Faust, senior vice president and trust officer with First Security Bank, is named along with Harding and others as the investment management team.

“In our opinion it was a joint proposal,” said Reynie Rutledge, chairman and CEO of First Security Bancorp.

Then there is the issue of fiduciary liability.

As an SEC-registered investment adviser, Garrison assumes all fiduciary liability on behalf of the client.

John Rutledge, vice president with FSB’s Northwest Arkansas division and one of Reynie Rutledge’s sons, said the bank’s trust department has $2 million of fiduciary liability insurance and the bank has a $5 million insurance policy.

Combined, that’s about 10 percent of the city’s money pool.

But, “We’ve never had a claim on any of our accounts,” Faust said.

Faust also noted that under the city’s investment schedule, only six issues will mature over the course of the five-year contract, or about $7.33 million of the city’s pool.

That gives a limited number of opportunities for any firm to take advantage of the city.

Council Night

Five representatives from Garrison Asset Management, nine from First Security/Crews and one each from Arvest Asset Management and Stephens Inc. showed up for the council meeting.

AAM and Stephens were the other two firms that had made it through the propsal process.

All 16 representatives and a score of others sat tight for three hours as the council and citizens discussed zoning issues in downtown Fayetteville.

After a short break, representative from both sides prepped for verbal exchange over the city’s investment business.

The presentations to the council amounted to a quarrel for business between two of the state’s financial powerhouses.

Reynie Rutledge is the primary owner of First Security Bancorp, while Garner was the longtime owner of Garner Asset Management of Fayetteville before it sold to Garrison in 2005.

Both Rutledge and Garner graduated from high school in Smackover and have been self-described friends.

Garner said the issue has likely cost her that friendship.

“We know we did the right thing for the city,” she said. “I can’t apologize for what we did.”

Reynie Rutledge said he felt good about FSB’s presentation to the council and that he looks forward to a resolution on Sept. 19.

He wasn’t sure he would attend the meeting.

First Security Bancorp and its three banks had total assets of $2.10 billion as of June 30.

According to the Business Journal’s list of largest area broker dealers, Crews & Associates had net worth of $17.7 million at year-end 2004.

Garrison Financial Corp. had $250 million in assets under management in 2005, up from about $185 million as Garner Asset in 2004.