Over the past few years our business has continued to expand and grow, as we have added more advisors and brokerage specialists, more clients, more assets, and more service offerings. We now have 34 professionals in six states and three countries.
Not every initiative we have started has been successful. We shut down the 99Funding early stage platform, which never gained traction, and we restructured the REITless funding platform to focus exclusively on managed portfolios, so that our interests would be aligned completely with our advisory clients’. We still work with a large number of funding platforms and managers as a provider of wholesale brokerage, compliance and technology services, but our direct interaction with retail investors under the North Capital brand is mostly in an advisory capacity.
This year we are launching two new initiatives to expand the breadth of our advisory coverage and provide what we believe will be a unique set of capabilities: first, Paul Bowers, a financial professional who I have known for almost 30 years, joined the firm to start and lead what we’re calling the Compass Multi-Family Office. It will deliver a broad range of advisory services to families who might have otherwise considered forming their own family office. We are partnering with premier legal, accounting, and tax firms to offer a holistic, strategic approach to planning, advice, and investment management. So far, the reception has been better than we could have imagined, so we are very enthusiastic.
Second, we are rolling out an online financial planning service that I think is going to be incredible. For me, this represents an important first step in bringing institutional-style asset and liability forecasting techniques to investors who have never had access to these types of resources. We have spent a lot of energy packaging the service in an engaging and non-threatening way, but we have put in place a robust foundation that we believe we can build upon in future releases. And because this is a technology-based solution, it has the potential to dramatically expand the reach of our advisory business.
We also are working on some other new initiatives to respond to our clients’ needs and opportunities we have observed in the market. Our 2019 is going to be an exciting year filled with change!
The North Capital companies consist of a registered investment advisor (RIA), a registered broker-dealer, and a financial technology company that has developed innovative, proprietary platforms focused on transforming the accessibility, transparency, and cost structure of advisory services and private markets through the use of technology. Jim Dowd, Founder and Managing Director of the North Capital companies, has 30 years of industry experience in global financial services. Jim is leading the charge in pioneering the democratization of venture capital through offerings such as what it describes as the first online crowdfunding marketplace syndicating broker-vetted private offerings.
[Editor’s Note: Our original profile piece from 2015 is below.]
Financial services is a highly regulated business, and our three companies were formed at different times to address particular needs that we identified in the market.
North Capital Inc. was the first, started in 2008. It’s a registered investment advisor providing fee-only, institutional style advice and investment management services to individuals, families, and small institutions.
North Capital Private Securities is a registered broker-dealer engaged in the placement of equity and debt securities for private companies and funds. We started it in 2010.
North Capital Investment Technology was formed last year to be a holding company for the broker-dealer and to maintain our intellectual property — the technology that drives the rest of the business. We also license some of our technology to other financial institutions.
Our Wall Street experience – good and bad – has had a direct impact on what we are building at North Capital. First, we are intensely focused on meeting the needs of our clients. We have designed our business around identifying and responding to those needs. This focus has influenced every major decision we have made in the business. Second, our business is totally dependent on our ability to attract and retain outstanding people. Giving employees the opportunity to take on major responsibility, maintaining a flat management structure, and creating an environment where people enjoy coming to work, are some values I experienced early in my career at Bankers Trust. We have tried to create a similar culture at North Capital. I am also regularly criticized for the focus on expenses that I brought over from Bear Stearns.
We are a financial institution that is creating financial technology to improve access, increase efficiency, and ultimately to drive down the cost of participation in financial markets. When we talk about democratization, this is what we mean. Most financial firms have a difficult time adopting new technology, let alone develop it.
It’s important because investors want direct access to early stage deals. Online funding platforms have become a natural extension of angel investing, as groups like Angelist, SeedInvest, Onevest, and FundersClub have shown. They expose investors to deals that are outside of their geographic region, which is a limitation of most angel groups. 99Funding is unique because we are syndicating deals across multiple platforms, and we are doing it under the auspices of our broker-dealer. Right now we have deals from three different platforms, but that will soon expand to six and then to ten. We think funding platforms will follow the same development cycle that ECNs did in the 90s and early 2000s, as investors and issuers realize that networking will lead to greater access and transparency and better, more efficient markets. [Editors’ Note: an ECN is an automated system that matches buy and sell orders for securities, allowing direct trades between brokerages and traders].
Real estate is a natural market for funding platforms, and like early stage investing, it’s a market where individual investors are already heavily involved. We saw an opportunity in a specific segment: commercial deals less than $5 million. These tend to be too small for institutional investors and too large for most individual investors. Funding platforms offer the ability to distribute risk across a number of investors. As we talked to investors about what they wanted to see, it became clear that we would need to be involved in the origination process, to ensure that we find the right kinds of deals. We’ll see what kind of impact we have. Our immediate goal is to meet the need we have identified. [Editors’ Note: for more on real estate-focussed platforms, listen to this interview of Jilliene Helman, CEO of Realty Mogul. For additional information on investing in commercial real estate, read this article.]
We have a rigorous research and due diligence process for all deals that are managed by North Capital Private Securities. A big part of the review involves investment research: determining whether the deal is a suitable investment for our clients. There is a wide range of variables that we consider, depending on the industry vertical and the specifics of the transaction. Second, we conduct an operational due diligence review, including background checks of the principals and document reviews. We work in partnership with Crowdcheck for this. They can do the work faster and more efficiently than us. Each deal goes to our investment committee for approval before we approve it for distribution. The vast majority of deals never make it that far.
First, they need to understand what “high risk” means. It means they could lose their entire investment. Because of that, they also must understand that they should limit their total allocation to high-risk alternative investments to an amount they can afford to lose. For most people, that’s no more than 5-10% of their total investment portfolio. Finally, we always recommend diversification. Diversification mitigates the risk that an investor might lose everything on one poor outcome.
Without a doubt, funding platforms have permanently transformed the way information is disseminated and transactions are completed, in a way that few would have predicted five years ago. We expect the pace of change to continue or accelerate, with innovation finding its way into major financial institutions as well.
The JOBS Act is one of the three or four most important developments in the financial services industry in the past 50 years. By liberalizing the private offering rules, the Act has created a whole new universe of private investors. We expect general solicitation to become commonplace for all types of private offerings.
The market is evolving in ways that give investors more choice, but there will always be a need for professional managers. Lower transactions costs and higher liquidity in the stock market have not tempered the growth of mutual funds or the managed account business. However, professional managers will have to justify their high fees, and there will be pressure to reduce them. 2.5% per annum, with a 20%-25% carried interest, is pretty typical in early stage venture, and it is a substantial drag on investor performance. Top fund managers will still be able to command premium pricing, but fees are likely to come down across the board.
A: Our clients will direct us to the next development. Right now we are working on ways to streamline portfolio reporting on private offerings. Clients have told us that they want to be able to see their private investments alongside their regular investments. This is a challenge, because there are no standard custodial systems for private securities. We have some ideas about how to improve the state of reporting, but a global solution will require broad industry buy-in. I am not sure the market is ready for that yet.
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