FA Magazine, September 2018, by Tracey Longo
Read the original FA Magazine Article here: Capitalizing On The Power Of Trust
If doing the right thing for investors comes with a price, it also comes with exponential upside potential.
Just ask PagnatoKarp, a Reston, Va.-based registered investment advisor formed by a high-net-worth team of brokers who made the leap from Merrill Lynch toward independence just seven years ago. The firm has capitalized on the trust it created with clients—more than quadrupling advised assets to nearly $4 billion in just seven years.
The firm was founded by veteran Merrill Lynch financial advisors Paul Pagnato and David Karp when the duo decided to trade in the safe bet of well-known corporate affiliation to create their own independent “True Fiduciary®” firm.
“We found we just couldn’t get the products and services we needed from the broker-dealer’s platform to serve our clients—many of them business owners who were selling their life’s work and coming to us for solutions,” Pagnato says.
Walking away from Merrill cost the firm’s founders a steep 30% of their compensation that first year as they set about building an independent registered investment advisory free from most of the conflicts and overhead costs brokerage firms are famous for.
“We were very early in terms of high-net-worth teams breaking away, but whatever we lost, we have more than made up for in revenues, especially when you strip away the layers of costs and infrastructure inherent in the so-called ivory tower,” says Karp, who 20 years ago was mentored by Pagnato at Merrill after being recruited from Morgan Stanley.
Today the firm, which services over 300 clients with a robust team of nearly 30 employees, is on track to grow to $10 billion in advised assets over the next five years, Pagnato says.
All of the firm’s enviable growth is organic. “We consistently have growth because our clients are telling their friends about us,” he adds.
The clients are almost all entrepreneurs, with a sprinkling of corporate executives, who have sold their own company or are about to. “We’ve assisted more than 70 entrepreneurs through their liquidity events and creating portfolios that will take care of them and their families’ needs,” Pagnato says.
It is not unusual for the firm to be working with an entrepreneur whose investable assets go from $1 million to $25 million almost overnight after the sale of their business.
Entrepreneurs and executives have always been Pagnato and Karp’s sweet spot. The unique high-value family office practice the firm has created is a calling card for demanding business owners who appreciate the benefits of working with a deep family office team.
PagnatoKarp’s family office services are some of the most robust in the country and include asset management, financial planning, legal services, estate planning, tax planning and preparation, concierge services, family coaching and even private banking services, all under one roof.
At most firms, the luxury of family office services are reserved for ultra-high-net-worth investors with $100 million or more. PagnatoKarp has created a scalable full-service program the firm makes available to clients with advisable assets as low as $10 million, although the firm’s average client has $25 million. The firm also offers non-family office advisory services.
“This is one of the most comprehensive, in-house family office programs I’ve seen, especially at a lower net-worth level for one fee,” says Dr. Richard Orlando, PagnatoKarp’s family coach and author of Legacy: The Hidden Keys to Optimizing Your Family Wealth Decisions.
“I ran Merrill’s Global Practice Management Consulting Group and was family coach of the firm’s family office for years,” says Orlando. “I have to say PagnatoKarp’s offering is among the best I’ve seen. They don’t just bolt services on when needed.” Orlando customizes coaching programs for wealthy clients and their children based on their goals and needs. “While the firm prepares assets for clients, my job is to prepare families for their assets.”
The firm launched private trust services in July—another draw for entrepreneurs interested in legacy and multigenerational estate planning. “A lot of our clients have asked us to take on trust services,” Pagnato says. “They trust us with their assets and have their portfolios set up with us. But unless we offer private trust services, if something happens to them they may no longer be able to keep their assets with us.”
Between family coaching and the trust services, PagnatoKarp is creating strategic and critically important multigenerational relationships that will allow the firm to hang on to assets as wealth passes to younger heirs. The next generation is expected to inherit a trillion dollars by 2052, but as advisors who don’t prepare are learning the hard way, as many as 90% of heirs reject their parents’ advisors soon after receiving inheritances and some 70% of family wealth does not make it past the second generation, Orlando says.
These services thus help the firm retain clients. But “the number one thing that brings clients to our doors is they want and need a trusted relationship,” Pagnato says. The firm’s 10 “True Fiduciary” standards resonate with entrepreneurs and the handful of business executives the firm serves, especially because they go above and beyond any and all fiduciary standards that are required by law.
To develop the standards, the firm’s leaders met with clients, executives, policy experts, regulators and even sought input from Phyllis Borzi, the former assistant secretary for employee benefits security at the U.S. Department of Labor, and the creator of the department’s fiduciary standard.
“As a testament to our commitment, we were recently awarded the registered trademarks for “True Fiduciary” and “A Fiduciary Business” by the U.S. Patent and Trademark Office,” Pagnato says. “We take our fiduciary duty as an RIA further than required, with standards that embrace transparency and the legal obligation to put clients’ interests first.”
The firm’s commitment resonates with entrepreneurs nationally. When New York Times best-selling advice guru and entrepreneur Tony Robbins wrote his book Money: Master the Game, he sought out Karp and quoted him on the important differences between investing with a “suitable” broker and a “fiduciary” advisor.
“A typical broker is someone who sells something,” Karp says. “He only makes money when a client buys an investment. Advisors don’t sell products, they sell advice. If I make a recommendation and a client doesn’t listen, it doesn’t impact my economics one way or another.”
While broker-dealers can charge clients as much as the market will bear, even on inferior products that often pay millions of dollars to get on a firm’s platform, “we would be sued if we tried to use these products as fiduciaries,” Karp says. “As advisors who charge based on client assets, we are incented to preserve and grow assets and to drive costs down.”
Here’s a glimpse of how PagnatoKarp’s True Fiduciary® standards work. Recently, the firm’s financial planning department recommended a $50 million insurance policy to offset the estate taxes a client’s heirs would be charged.
Imagine the commissions that could be earned from selling a $50 million life insurance policy. “We worked a year on the estate plan for the client and delivered the work to an insurance agent they chose, but walked away from the commissions,” says Amanda Plonski, PagnatoKarp’s director of financial planning. “That is an example of how seriously we take our fiduciary standards. If we did earn commissions, the client would always wonder if they really needed the insurance,” she adds.
Giving away that kind of business and commissions would be unheard of at a broker-dealer or wirehouse, where product offerings are limited to those manufactured in house or those who pay to be on the B-D’s platform.
It was precisely those types of conflicts and constraints that came to a head during the market meltdown of 2008, lighting the desire in Pagnato and Karp to create an independent, fee-only fiduciary firm they controlled. The desire also led to the offering of the firm’s new trust services.
“The financial crisis of 2008 put us on the path to independence,” Pagnato says. “Our clients’ assets were being custodied at a location where there was a lot of uncertainty and instability. In crisis you get to see a lot of things you don’t normally see. I was exposed to a lot of conflicts and I vowed to fix that. I vowed to create a business where we’d be able to strip out most conflicts of interest.”
Five years ago, the firm also introduced its mission statement of “Massive Transformational Purpose (MTP)”—the name of the firm’s goal to impact one million lives through its True Fiduciary standards. “We are doing this one client at a time. It’s extremely fulfilling,” Pagnato says. “MTP impacts every aspect of our business—how we operate with taxes, investments, literally our entire operating philosophy, so we focus on preserving clients’ capital and asset protection. It’s life-changing.”
So, too, is the firm’s bottom-up, autonomous management style, which Pagnato discovered during one of his monthly West Coast treks to meet with innovators in Silicon Valley. “When I learned how open, transparent and autonomous Google is I thought, ‘This is the way to run a business,’” Pagnato says. “Everyone can see everyone’s calendar. Everyone can meet with anyone. Everyone is seeking the flourishing of others there.”
He came back to Virginia and began transitioning his firm to a bottom-up organization about two years ago. What that means is that any member of the 30-member PagnatoKarp team can see what every other member is working on and can make suggestions and disagree with their bosses, even the founders. They are also empowered to experiment and create the best experiences for clients. “What happens now is you have nearly 30 people who are innovators and nearly 30 people who are creating,” Pagnato says.
Recently, that empowerment spurred on a young trader to provide portfolio metrics that allow clients to see a visual diagram quantifying how their assets are being protected. “He’s two years out of Carnegie Mellon and he created this to give our clients a high degree of confidence. That happened because of bottom up,” says Pagnato, who spent the first five years of his professional life as a scientist at McDonnell Douglas. His scientific background fuels an atmosphere of constant experimentation designed to continuously elevate client value.
That’s led to an overall client offering that includes intensive financial planning and the development of an institutional-level investment policy statement for each client.
“Our primary deliverable when we begin the relationship is a comprehensive financial plan covering everything from assessing risk tolerance goals and objectives up through lifestyle and legacy planning and new business ventures,” says Lars Okeson, the firm’s CFO and one of its six family wealth advisors. Okeson is a CPA, a former advisor of Alliance Bernstein and a longtime CFO. He took a company public in the 1990s.
“We use a very comprehensive and customized process that allows clients to pre-experience what may happen with their wealth in the future,” Okeson says. “It enables them to make meaningful decisions about wealth transfer, estate planning and philanthropy.”
Instead of clients having to hire a CPA, investment manager, estate attorney and travel agent, PagnatoKarp acts as a one-stop shop. “In my assessment of the industry, there really is no firm that is doing all the things we do for the $10 million-plus family relationship,” says Okeson.
The firm’s transparency about fees and costs is a major selling point, Okeson says. “In traditional broker-dealers, there are costs embedded in portfolios, traditional soft dollars, 12b-1 fees, insurance commissions. There are all sorts of ways the broker earns revenue. There is only one way we generate revenue and that’s through our advisory fee.”
The firm’s $3.8 billion in assets under advisement also works in clients’ favor—giving them access to a wider array of top investment managers, as well as alternative investments. The firm is also able to aggregate funds to get clients into investments that require a high minimum stake.
That kind of access helps the firm’s investment team build a customized investment portfolio for each client. “We are asset-class agnostic,” Karp says. “Every client is unique. No two portfolios are identical. We don’t use labels or put people in buckets. We get to know goals and tax status. Based on what we know about you, we build a portfolio.”
While all advisors have access to stocks, bonds, mutual funds and ETFs, “some people are better at selecting them and we’re very good,” Karp says. “One of our unique attributes is our ability to use non-correlated, non-directional alternative type investments from the private markets.”
Alternatives used by PagnatoKarp involve a high level of due diligence and include farmland leases, triple-net-lease real estate, agriculture and aviation finance and direct and collateralized lending. “These are investments that have high-single-digit and low-double-digit returns with cash flows and without the volatility measures of the traditional liquid markets,” Karp says.
“Where we excel is when a client goes from $1 million to $20 million,” he continues. “We understand their concerns and anticipate their needs. It’s our job to replicate the paycheck you’ve been getting your whole life. We target solutions that allow you to pay your bills, even if the market goes down 40%.”
The firm’s metric of success is determined by asking: Does it do what it says it is going to do—meet the objectives laid out in the client’s investment policy—and is the client happy?
“There’s a lot of trust there that the client has with us,” says Lorrie Zimecki, the firm’s director of concierge services whose team helps plan travel, makes luxury purchases and hires integral household personnel like nurses and physical therapists for clients. Zimecki’s team recently successfully retrieved a substantial amount of money a client had left in his hotel room’s safe while he was traveling with his family.
“We encourage clients to rely on us,” says Zimecki, who spent months experimenting with interactive travel apps to find one that allows the concierge department to create and update extensive client itineraries and reservations instead of spending hours preparing hard copies and PDF files. The app helps to create a luxurious, seamless travel experience that clients can now access on their cell phones.
“We give clients back the luxury of time,” says Zimecki, who believes her firm’s autonomous, bottom-up style empowers every team member to do the right thing for clients in a timely fashion. “This is critical to the success of our clients and our business, especially as we become a bigger firm,” she says.
Read the FA Magazine Article here: Capitalizing On The Power Of Trust
At PagnatoKarp, we help high-net-worth families streamline and move forward. Our boutique team of professionals manage complex needs through investments, financial planning, tax, legal, private banking, family governance and concierge. With True Fiduciary® standards of transparency, we embrace the legal obligation to put your interests first while focusing on asset protection, cost, and opportunities.
Please contact PagnatoKarp at 703-468-2700 to schedule a private, confidential meeting at your convenience.
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Assets Under Advisement (AUA) over $3.8B as of 6/30/18. AUA = Assets under advisement refers to assets on which the firm provides advice or consultation but for which the firm either has discretionary authority or does not arrange or effectuate transactions.