Sawtooth builds investment firm from ground up

It took Scott Mecham nearly five months to set up Sawtooth Securities, a rare example of an Idaho-based brokerage firm complete with in-house regulatory compliance operations and a growing network of representatives.

Now it probably would take a year or more to become licensed in one of the country’s most heavily regulated industries, he estimated.
The first couple of years were tough, Mecham said.
“I can’t imagine working in any other type of environment as an investment person,” he said.
Sawtooth Securities LLC – not to be confused with Sawtooth Investments, also in Boise – is based at 910 Main St. Mecham is CEO. He previously worked for another securities firm, and for an accounting firm.
Sawtooth Securities was created through angel financing in October 2000. Now, the company manages around $100 million in customer assets through its broker-dealer and registered investment adviser independent network.
About the only thing Sawtooth Securities does not do is clear its own transactions. The company is an introducing broker-dealer of securities, Mecham said. It introduces accounts to Bank of New York unit Pershing LLC, which clears transactions via a relationship that resembles leasing a seat on the exchange floor, he said.
Sawtooth Securities has two parts.
One entity is a broker-dealer regulated by the Financial Industry Regulatory Authority (formerly the National Association of Securities Dealers), the U.S. Securities and Exchange Commission and the Idaho Department of Finance. Sawtooth carries the investment representatives’ securities licenses and provides an operations platform, but the reps – who are commission-based – are independent contractors who control their own books of business.
A separate unit operates as a registered investment advisory (RIA) firm. The independent advisers charge fees, which could be based on assets under management, an hourly or flat fee, or a one-time fee.
“Right now, we are state-regulated, but we hope to become an SEC-regulated firm soon,” Mecham said of the RIA.
Registered investment advisory firms are licensed exclusively by the state until they have more than $25 million in assets under management, Idaho Department of Finance Securities Bureau Chief Marilyn Chastain said. Once they cross that threshold, they become SEC-registered and regulated exclusively by the SEC, she said.
Sawtooth’s effort to move its registered investment advisory firm into the SEC realm is under way, said Dini Harris, president and chief compliance officer.
Regulatory compliance efforts account for 35 to 40 percent of Sawtooth Securities’ annual budget, up from about 15 percent pre-911, Mecham said. Expenditures include staying up to date on regulations, rewriting supervisory procedures as needed, and providing continuing education.
The company is moving toward a paperless environment featuring off-site servers and electronic imaging systems, Harris said.
Sawtooth recruits investment reps and advisers. This is another sizable expense, though it touches on why the company was set up in the first place, Mecham and Harris said.
“We’re entrepreneurs and want to be in control of our own destiny,” said Mecham. “You’re not in control of your destiny at a big firm.”
Producers aren’t required to market particular products or account types, he said.
“The model is very independent,” Harris said.
As many big firms get bigger, a number of investment professionals seek a smaller, and in some cases boutique-style, setting, she said.
Sawtooth seeks people who have experience and who are entrepreneurial; the producers can retain as much as 90 percent of their revenue, but they pay their own overhead expenses.
The company named for an Idaho mountain range employs four people full-time. It has 10 independent producers. Mecham and Harris are among producers.
Sawtooth this year added three producers and two producers-in-training.
The broker-dealer is licensed in about two dozen states, the RIA in Idaho, Oregon and California.
More information is available online at www.sawtoothsecurities.com and www.joinsawtooth.com.
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