Benjamin Valore-Caplan spent 10 years teaching and developing nonprofit educational programs for inner-city youths. Today he is the managing partner of Syntrinsic Investment Counsel in Denver, an RIA firm with $600 million assets under management. Valore-Caplan's original job experiences in the inner city helping those in need may seem far removed from his current big-money advisory practice, but he says, "It actually informs the work we do and how we think about issues."
This focus can be seen in the firm's mission statement, which explains Syntrinsic's goal of providing "independent investment advice and strategic guidance to select foundations and endowments, faith-based institutions and philanthropic families." The vast majority of its 29 clients are not-for-profits and high-net-worth families with a philanthropic focus. As a part of it's mission, the firm aims to teach clients best practices in fiduciary responsibility and socially responsible.
Even for RIAs not playing in this niche area of endowment investing, Syntrinsic and Valore-Caplan's story offers useful lessons on how to grow a business, the value of independence and, perhaps most intriguing, how to create an alternative model for endowment investing following the crash of the old model during the 2007 to 2008 crisis.
Valore-Caplan still spends a lot of time teaching the professional development arms of CPA societies, as well as at foundation groups that advise other foundations. "We teach topics like the role of asset allocation, how to be a good fiduciary and what being a good trustee really means," he says. "For instance, to what standards should trustees be held?" The workshops have been on simpler topics as well, such as how fees are charged. "This may sound overly boring and technical, but once you tell people how it really works, they perk right up."
Though foundation trustees need to pay particular attention to these issues, all clients can benefit from a better understanding of the investment industry. Indeed, Valore-Caplan has found that teaching best practices in these areas has also turned out to be a good way to grow the business-several Syntrinsic client relationships grew out of these teaching workshops.
An Alternative Endowment Investment Model
The investment issue du jour among foundation trustees, endowment professionals, advisors to ultra-high-net-worth clients and Valore-Caplan's own team, is how to improve the traditional endowment investment model. Pioneered by Yale and other universities, endowment investing has traditionally involved large allocations to illiquid alternative assets, such as hedge funds, timber and farmland, and private equity and venture capital. This model portfolio also became popular in the family-office world for advisors serving ultra-high-net-worth clients. While this portfolio produced market-beating returns during good years, it resulted in a cash crunch during the 2007 to 2008 crisis, when many endowments had to sell their assets at fire-sale prices.
"The problem is that endowment models were used for everything," says Valore-Caplan. "Advisors used them for IRAs or personal trusts. They became too widespread." Moreover, he argues that every endowment portfolio began to look alike; all used roughly the same allocations with 30% to hedge funds, 15% to private equity, etc. Yet each endowment-or client-does not have the same objective. "What you got in most instances was, 'This is the model,' rather than 'This is the client and their cash flow needs,'" he says.
His solution is to make clients' objectives, particularly their cash flow needs, drive the investment model. As an example, he says, "I am writing an investment policy statement for a new endowment right now. Their focus is on stability of current income." Here, safe income-producing investments are appropriate, rather than illiquid alternative investments with payoffs long in the future. "Paying attention to cash flow needs as well as long-term risks puts you in a different mind-set about building a portfolio," adds Valore-Caplan.
For high-net-worth investors in their forties and fifties who have healthy incomes, the traditional endowment model might still be a perfect fit because they can afford to take risks. But for everyone else, particularly retirees, Valore-Caplan typically suggests clients put some money on the sidelines, say two years worth of cash flow needs. The portfolio can still contain alternatives, but it is segregated into short-term and long-term assets. Clients aren't forced to sell in a crisis and cash reserves on hand make clients more comfortable.
The Benefits of Independence
Valore-Caplan spent much of his career as an advisor at a large wirehouse. He was very successful in that environment, rising to senior vice president, but hankered to run his own business. In 2008, after developing a business plan of how to best serve nonprofits, he and several colleagues launched Syntrinsic Investment Counsel, which is an independent, fee-based RIA. (It custodies assets with Pershing Advisors Solutions and trades are cleared by Pershing LLC.) For Valore-Caplan, the value of being independent is clear in almost every client conversation. "We can really put our clients first. You don't run into the awkward situation where you have to compromise."
Being independent, in turn, creates business opportunities for an advisor operating in the endowment and philanthropic world. "I think investors, particularly high-net-worth clients, are looking at the structure of the industry and looking for something cleaner." His prospecting advice is that planners educate potential clients about what independence means, selling them on the reasons to be served by an advisor under the 1940 Act. This is not to say that the wirehouse approach isn't appropriate for many investors. However when it comes to clients like foundations, endowments or high-net-worth individuals with a philanthropic agenda, being an RIA "provides the best possible structure for clients."
For his part, Valore-Caplan still finds time for volunteer work and serves on three nonprofit boards. When it comes to the advice business, his approach-which stems from his experience, philosophy and values-shows the viability of alternative portfolio approaches, the benefits of educating clients and the value that stems from being an RIA.