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Four financial innovations for a new generation

While financial innovation is often associated with nearly toppling the international economic system, some entrepreneurs are preparing a different breed of financial tools.

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Relationship accounts are in use in various forms in Australia and Britain, Landry says. Banks Wells Fargo and SunTrust are already offering products akin to relationship accounts, offering home equity lines of credit in lieu of first mortgages.

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2. Private-company investments

Only the wealthy – those who meet certain criteria, such as a net worth of $1 million or more – can invest in firms privately owned by someone else.

Depression-era rules restrict everyone else to publicly traded companies, where there’s government-mandated disclosure and oversight. That protects average investors from the staff accountant who cooks the books – but it also prevents them from putting money into the well-run hardware store that donates heavily to local causes or even larger, privately held entities like TOMS Shoes, a retailer in Venice, Calif., known for such programs as One for One, through which it donates shoes to children in need.

Enter innovators like Rick Wynn, founding partner of Inspire Capital Partners in Boston. His vision is to knock down barriers facing the average investor’s path to ethical investing while generating a solid profit.

First, Mr. Wynn is devoting his energy to finding “firms of endearment,” a term coined by a trio of academics in a 2007 book by the same name. Wynn is betting that firms with a strong moral purpose, ethical leadership, and a stakeholder (versus shareholder) focus will replicate the success found in the firms of endearment study: Between 1996 and 2006, such firms outpaced a group of 11 “good to great” companies known for outstanding returns by more than 3 to 1, according to the academics’ research.

“If you take a long-term view, you can actually do better by investing in companies like this,” says Wynn. He says he believes he can give access to middle-income investors by creating a public holding company that would, in the long run, post solid gains. “A lot of individual investors are looking for a long-term solution and that’s exactly what I can give them,” he says.

3. Social-investment CDs

With a minimum of $1,000 to open an account in RSF Social Finance’s “social investment fund,” investors get what amounts to a 90-day bank certificate of deposit. But instead of reinvesting the money as a standard mutual fund would, RSF, a San Francisco firm, uses it for loans to for-profit and nonprofit businesses with a social mission. Investors are paid dividends on the interest rate that RSF charges businesses.

The relationship that RSF has developed with its loan beneficiaries may even allow it greater resilience than standard mutual funds would during times of uncertainty. If RSF is hearing pushback from investors on rates being too low in down economic times, “then our borrowers might be able to say, ‘Well, we could handle 50 basis points in order to ensure that RSF can retain its investor base,’ ” said Gary Sprague, RSF’s communications manager. “It can work in both directions, and that’s what we’re after, a two-way dialogue there where the borrower’s needs are always clear.”

4. Local investing

To get his clients up close and personal with their portfolio, wealth-management adviser Josh Silverman steers them toward an approach he calls “100-mile investing.”