#FA Success Ep 192: Breaking Away From A Wirehouse To Build A True Fiduciary Multi-Family Office, with Paul Pagnato

Author: Michael Kitces

Team Kitces

Michael Kitces is Head of Planning Strategy at Buckingham Wealth Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

What You’ll Learn In This Podcast Episode

• How A Lack Of Transparency Moved Paul To Leave Merrill Lynch After 19 Years [07:29]
• Paul’s Journey From Wirehouse To RIA [15:17]
• How Paul’s Partnership With Hightower Was Structured [22:53]
• The Transition Conversation That Convinced 90% Of Paul’s Clients To Follow Him [29:24]
• Paul’s Move To Separate From Hightower And Make PagnatoKarp Completely Independent [38:08]
• PagnatoKarp’s Transition Into A Multi-Family Office Company And Their Breakthrough Value Proposition [47:49]
• What PagnatoKarp’s Typical Client Looks Like [01:13:02]
• PagnatoKarp’s Tech Stack And How Their Ongoing Experiments Fuel Exponential Growth [01:17:11]
• How Paul Followed His Massive Transformational Purpose To Merge With Cresset [01:25:41]
• What Surprised Paul The Most About Building An Advisory Business, The Low Point In His Journey, And His Partnership Criteria [01:31:44]
• The Advice Paul Would Give New Advisors And How He Defines Success [01:39:16]

Resources Featured In This Episode:

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Full Transcript:

Michael: Welcome, Paul Pagnato, to the “Financial Advisor Success” podcast.

Paul: Thank you so much, Michael. Awesome to be on your show.

Michael: I’m really excited to have you on the podcast today and talking about what I think is one of the…I guess, to me, one of the sort of evolutionary areas of what’s happening in our advisor world. I feel like it doesn’t get talked about as much as it should, or at least not with the depth that I think it deserves, which is kind of this movement from large firms – from wirehouses, in particular – into the independent channel, which I know you’ve lived in all the various steps. Like, started out at Merrill Lynch, went to HighTower – who was one of the early platforms that was really supporting that transition movement – went fully independent RIA separate from HighTower, have now merged with a larger RIA, and have lived, I think, a lot of these changes that are happening in the industry.

And the industry likes to talk about the billions of dollars that have moved out of some of the wirehouses. It’s like, it’s a big headline number, but I’m struck at the same time – we measure the number of advisors leaving wirehouses at like, “Wow, it was a really big quarter. There were like 10 or 20 big teams that broke away in the quarter.” And I always look at those numbers, I’m like, you know, between Merrill, Morgan, Wells, and UBS, there are about 50,000 advisors at wirehouses. Which means our debate every year is like, did 0.1% of them leave or did 0.2% of them leave? Which is not exactly like an avalanche tide of industry change. But some folks like you, who run very big, very successful advisory firms, are making the shift and moving around amongst the channels. And so I’m really interested and excited today to talk about more and understand just what goes through your head as you’re trying to think about these different moves and where to affiliate and what platforms to work with and when to be independent and when to work with larger firms, and just what that looks like in the world of clients you live in, where I know you work with some very affluent folks in a multi-family office environment. So, excited today to talk about what that journey looks like and how you make the decisions about those steps along the way.

Paul: Well, thank you. And for me, it’s as simple as always following your true north. I love this quote, it says, “What is it that fascinates me so much that the thought or feeling of it won’t leave me alone?” So, what is it that’s on your mind that you’re obsessing over, and you just can’t let it go? And this is what you want to pour your heart and soul into. And so, all of us as we go through our journey in life and as an advisor, that’s our true north. And it also changes over time. So, for me, it’s been an unrelenting passion for unleashing value for the clients that we serve. We’re stewards of people’s life work – life savings for them and for their children – for future generations. And so I feel a huge responsibility – a fiduciary responsibility – of looking ahead, being the visionary, being the leader for my company, but also for all the clients, and ensuring we’re always two to three steps ahead. We always want to be going where the puck is headed to. And that has led us to the path where we are today. And in over 27 years, there’s been three changes or four changes. So yeah, four changes over 27 years, and it’s all been for that purpose and that reason. I’m happy to talk about each or any of those, or all of those.

Michael: Yeah. So I think as a starting point, I’d love to just talk about the firm as it exists today, or I guess I’ll even say like, the firm as it existed a month or two ago before you did your most recent merger. Because I want to, I think, come to that and sort of the story of the progression of how you’ve done these steps. So at least before your recent transaction, can you tell us about PagnatoKarp as it existed sort of leading up to your most recent deal when you were living in this fully independent world?

How A Lack Of Transparency Moved Paul to Leave Merrill Lynch After 19 Years [07:29]

Paul: You bet. We left the broker-dealer model, Merrill Lynch, which I was at for 19 years. Incredible firm, amazing mentors, fabulous, fabulous 19 years. But we left because the world had changed after the Great Recession in ’08, ’09. And during that period of time, my whole career was with Merrill Lynch and financial services. And during that period of time, I was exposed to a lack of transparency that existed in the entire industry. And I was so moved that I felt compelled to fix it. My entrepreneurial genes came out and I really left to address that and become a fiduciary. And I spent time with the chairman of the SEC, Luis Aguilar at the time, commissioners, Phyllis Borzi, Department of Labor, John Mack, who was the CEO of Morgan Stanley at the time, Todd Thomson, who was the CFO of Citibank at the time, industry leaders, and concluded that no firm – the industry wasn’t going to fix it, the regulator wasn’t. The problem was so big, the regulator wasn’t going to address it and fix it. And if I wanted to do something about it, I would have to create my own business model. So that’s what motivated me to do it and launch PagnatoKarp.

Michael: I was just going to ask, like, you lived in the Merrill Lynch world in PBIG, which is their private banking group that works with some very affluent folks. I guess I’m just trying to understand more, like what changed for you coming through the financial crisis, the Great Recession era that just you spent 20 years at this firm and then all of a sudden, or maybe it wasn’t that sudden, you’re like, “Yeah, I don’t see the next 10 or 20 here?” What changed?

Paul: There were some triggers during the recession. It was a crisis, and during a crisis, this is normal. You get exposed to things and cracks become canyons that you didn’t get exposed to before. So, I’ll give you a couple of examples. So one is – and this is common practice throughout the industry – we were communicated to that clients, these ultra-high-net-worth clients, had cash available. They can earn a higher return on something called a VRDO, Variable Rate Demand Obligations. Completely safe, secure and clients can get their money back every five days, seven days. So, I followed what I was told and placed my clients’ cash into these VRDOs. But when the crisis hit, we all learned that no…your clients don’t always get the money back. And there are situations where these lock up. I didn’t have that transparency before. So, I had to look at clients in the eye and say, “I’m sorry, you can’t get your cash back.” I was losing sleep. I slept four hours a night, really nauseous to my stomach. And these are people who trusted me with their wealth, their cash, let alone.

Another example, I had the CEO of a major bank – financial institution – personally call me, and the bank was out of money – personally called me – asked me to put my client’s capital in his bank’s bonds – bond ventures – because they needed capital. And I just thought to myself, what a massive conflict of interest. What a massive conflict of interest. So those are two examples of items that occurred during this period of time. And there were many, many others that I said, “Uncle! No more. I don’t want to be part of this anymore. I need complete transparency. I need a business model that’s going to have complete transparency.” So those were things that propelled me, motivated me, to make a change.

Michael: Interesting. And just gets to – I think the…kind of this fundamental challenge that I feel like sometimes we don’t appreciate about, just the nature of the broker-dealer model. A lot of the broker-dealer world has increasingly moved towards providing advice in lots of different ways because so much of the traditional brokerage business is just kind of becoming the technology plumbing and pipes. Like, I don’t need a broker who’s got a friend on the floor to execute a good trade for me. I can just go to a .com trading website and hit a button and the stock trade happens.

I feel like sometimes we forget that broker-dealers and wirehouses, in particular, do still sit at the center of the economic system of capital formation, right? Like just companies that need cash and borrowing and equity dollars in various ways and shapes and forms, and use the investment banking and brokerage system in order to raise capital and participate in public markets. And it takes moments like the financial crisis to sort of come back to like, oh, yeah, I guess at the end of the day, if you’re running a major Wall Street institution and there’s a run on cash, and you’ve got clients who have large piles of cash, that you might call one of your brokers and say, “Hey, we need to raise some cash, can you call your clients and see if they want to invest in this thing? Like, our bank’s bond ventures. because we need to raise some capital right now.” Right?

I think you put it well that when the crisis comes… I’ve always sort of been a fan of this framing, like, when the crisis comes, we tend to go back to our roots. So, we tend to revert back to our base roots. And so, when you get back to just the base roots of – particularly like New York, Wall Street brokerage firms – you really get back to the core of capital formation, which is like, what happens when a crisis comes? You need to raise cash, hold cash, borrow for cash, do those things that are absolutely essential for the financial system, but suddenly, you may find you’re not quite the advice-based institution you were before. You get back to the roots of capital formation, which is not actually necessarily very advice-oriented. That’s why the system originally separated the investment advisors from the brokerage firms because the brokerage firms were in the capital formation business, which means you’ve got to sell bonds to investors to raise capital during a crisis, not give them advice about why they wouldn’t want to buy the bonds in the middle of the crisis. That’s the other side of the coin, not the brokerage side of the coin. And unfortunately, sometimes it takes moments like the financial crisis for those separating lines to suddenly come into sharp relief again.

Paul: Exactly.

Michael: So you hit this moment of saying, “Okay, I’m now suddenly concerned that the platform I’m with is really focused more on my client’s capital and how it’s being deployed than actually the advice I get to give them.” And so, you start thinking about doing something differently. So, tell me more about what that discovery journey looks like, right? When you’ve only ever spent your whole career of 20-plus years at Merrill, it’s one thing to sort of say, “Hey, I don’t know if this current system is working for me the way that it is right now,” it’s another to actually figure like, okay, but what the heck are you going to do? Because I’ve only ever lived on this side of the mountain, I only know what the valley looks like on this side of the mountain.

Paul’s Journey From Wirehouse To RIA [15:17]

Paul: Yeah. So, the caption, we don’t know what we don’t know. Right? So, I had to go on a due diligence mode and see the other side and understand what the RIA world is, and understand what the other business models were. And so we spent a good 12-month exhaustive process of meeting with everyone we possibly could, meeting with independent RIAs, friends of ours that had made that leap to the aggregator, like, HighTower. We had to make a decision: do we go about it ourselves, go on our own, or do we work with someone like HighTower that can help us bridge that gap and more efficiently get from point A to point B? And we came to the conclusion that the differences are so big. You’re now becoming an entrepreneur for the first time. You’re going from being a founder, owner, business owner from an employee – which I had been up to my whole career an employee – to switching from broker-dealer model to independence and everything that that entails. And it’s a lot. And now having to worry about human resources, payroll, taxes, renting space, hiring people, to the tech stack, to all of that.

So, we came to the conclusion that if we went out on our own by ourselves, cold turkey, on day one, we would be learning. That learning curve would be at the expense of our clients and team members. And we didn’t want to do that – this was almost 10 years ago. HighTower was one of the first companies to really help advisors that were breaking away from the broker-dealers. And we came to the conclusion that it was going to be in the client’s best interest for us to partner with a firm like HighTower to make that transition. Looking back, we wouldn’t have done it any other way. So, so grateful for all their help and their support to get from point A to point B. It was still hard. Talk about failure, right? Lots of failures. We learned so much. It’s a very, very difficult transition, but they made it easier. And it was a 10X increased client experience utilizing a firm like HighTower than if we just tried to figure it out on our own. Which I’m sure we still would have done; we would have made it happen, but it would have been a lot more challenging and expensive for our clients. So that was our decision process almost a decade ago and why we chose the path with HighTower.

Michael: So I’m wondering, like, what did…having come from the wirehouse world, when you started looking out at the RIA side of the industry – the independent side of the industry – I guess I’m just wondering, what did you find as you looked at the time, like, what were the differences or distinguishing factors or the stuff that was jumping out at you at the time that said, “Oh, wait, this is actually different enough, I think I want to go through all this very, very difficult transition to get to the other side?” Right? Because I’m sure every platform tells a great story about all the wonderful things that you can do with them. I’m sure there were plenty of other platforms that would have encouraged you to say like, “Oh, if you’re not happy at Merrill, come on over to Morgan, come on over UBS, we’ll take great care of you.” So, what was it you were seeing about the RIA side of the industry that made you say, “I actually want to go through and do this transition and change?”

Paul: Well, Michael, it was like being a kid in a candy store. You realize that you now had choices to pair with the client, and what’s best for them and their best interests. So previously, you didn’t have the choice of where to place the client’s capital. You had one custodian, it was who you worked for, and that was that. Now you have a choice of multiple custodians, and some have positives and negatives. And you just pair up the positives with what the client’s needs are. Cash – simple thing as cash – you didn’t really have many places to target before. Now you have a plethora of numbers of places to place cash. The investment offering – now the world is your oyster. You have access to everything out there, not just the ones that have been approved and vetted by the firm you are with. Reporting, the manner in which you report to clients, there was only one way that you could serve it up before. Now you had a plethora of options of reporting. It even cracked open the door for us as we were so passionate about building out a family office. So, we were able to do more things to help our clients free up their time.

So, it is…like, all aspects and the manner in which you serve and touch a client just gets…it gets opened up. And that was so rewarding to us and so beneficial to the client. So, think about before, if a client wanted to borrow against their portfolio, you’re employed by that firm, you’re not going to be able to negotiate against your own firm. So, the rate is the rate. Now, we’re able to put it out to bid amongst multiple custodians, and the client is going to have a substantial line of credit against your portfolio, you’re going to get the best…you’re going to go with the best terms, whoever is going to give us…you have competition, the competition out there. And it was just beautiful. So, the terms for our clients just got better all the way across the board. Yeah.

Michael: And this dynamic of all the different choices, I sort of take it inherently in how you’re describing it, like, the volume of choice for you felt good. Because I know for some, it’s like, “Oh my Lord, there are so many choices. It’s overwhelming. I don’t know what to do with this.” It sounds like that certainly was not your concern around this.

Paul: It was not. And that’s where a partner like HighTower also comes in because they’ve been there, done that. They have relationships, they’ve done a lot of vetting, and they can give you the bottom line upfront, based on what the need is. They can steer you in the right direction. So HighTower was very instrumental. But after a few years, you figured all that out, and you know the new landscape, you know the players, and you can very quickly…our internal AI kicks in, and we can very quickly make a decision on what’s best for the client.

Michael: So as you looked at this transition for HighTower, and I’m going to imagine they’ve changed their structure quite a bit over the past 10 years, so I’m sure their deals don’t look the same way anymore, but what was the structure when you were going to it at the time? Like, was this an equity deal? Was this like a pay basis points for platform deal? How did it actually work?

How Paul’s Partnership With HighTower Was Structured [22:53]

Paul: Yeah. So, this was, again, quite some time – almost a decade ago. And you became a partner with HighTower, so you received equity in the firm. And then they also advanced you some capital for that gap period between when you left your firm and you don’t have any fees coming in from clients and you’re transitioning your book of business of your clients. So, they provide you capital for that transition period. For us, we never did it for those reasons. So, we never did it to be an equity stakeholder in HighTower. But I know a lot of people did, and I’m sure it’s been very rewarding for them. That wasn’t the outcome we were seeking. That’s not why we did it. We did it 100% because of the client, and we wanted to be independent fiduciaries. So that’s why we did it. But economically, that’s how the model was at the time. And you’re spot on, that was, I’m sure, an old model, 9, 10 years ago.

Michael: And so, the essence of it was like, if you’re coming to the table with some amount of revenue and some amount of profits, that’s exchanged in kind into equity of the firm.

Paul: Correct.

Michael: We’ve done the math; you’ll be about 5% of the total profit. So, you’ll get a 5% equity stake for contributing your share of your practice into this larger business entity, something to that effect?

Paul: Yes. Simply put, yes. More complicated than that, but yes, that’s…it was a ratio based on the revenues you’re bringing to the firm and your ownership of the firm.

Michael: Okay. And as you looked at this path with HighTower, like, were you looking at other options as well? Were there even other platform options to support you or was this essentially like, “We can do this guided with HighTower or we can completely take the leap on our own and just put our independent RIA stake in the ground and figure this out?”

Paul: Yeah, there were three paths. It was partner with HighTower – they were really the only significant player at the time as far as an aggregator. And then there was partner with an existing RIA. Some friends of ours had also departed and set up their own RIA. So, we had the opportunity to have a partnership with somebody that’d been there, done that. And then, third, was to create our own RIA. Those were the three paths. And we felt it was in the client’s best interest, smoothest transition partnering with HighTower.

Michael: So, you mentioned it is still a difficult transition. What were the blocking points or the surprises that cropped up as you actually got into it and did the transition and had to leave all the stuff that came along with it?

Paul: Yeah. So, think about it. We had been at…I’d been at Merrill Lynch for 19 years. So you are – in a moment – switching 19 years’ worth of work, systems and processes and intellectual capital and data, overnight into a new custodian, new platform, new reporting, new toolkit, new business, RIA. And so it’s super, super intense, literally 7 days a week, 18-19 hours a day for the first 3 months – just all out – just simply the sheer volume of helping clients get from point A to point B and transitioning everything for them was a lot of work for all of us. After the first three months then, maybe, it was six days a week? I would say it was about six months before we could just breathe, before we could not have to worry about putting in a Saturday, Sunday, to go home and have dinner with the family.

So, it was a long time to get from point A to point B – to transition. And we were very, very fortunate, 90% of our clients came with us. And I think part of that was, I wasn’t given a book of business. I wasn’t given clients to work with at Merrill. So, all the clients that we were working with, we had brought on ourselves, right? So, it’s very…I believe it’s very different when a firm provides you with a client versus you bring a client on. So, the trust, trust is much – that bond is much, much stronger when you’re the one bringing the client on board. They’re investing in you. They’re trusting you versus the firm. So, I think that’s why we had such a high rate come over with us. Yeah.

Michael: Well, and I was going to ask along those lines, I know for so many who live in the world of companies like Merrill and Morgan, you sell that marquee name at the top of your business card and your letterhead that’s part of, “Well, why should I work with you and trust you?” “Well, we have 9 bajillion assets across every continent of the globe.” Like, there’s a certain power and gravitas that goes with that. It’s not coincidental that highest-net-worth clients are still overwhelmingly disproportionately working with major firms because of, kind of, the implied security and stability that goes with that. So how does that conversation go when you’re reaching out to some very affluent people that may have, at least, had a material factor of trust in the strength and stability of that major firm and you may have sold that strength and stability as an asset and a selling point, and now, all of a sudden, you have to take the thing you sold as an asset and say, “No, no, no, that doesn’t matter anymore, I’m doing this other thing instead?” How does that conversation go? How do you talk about removing Merrill from the equation and keeping clients onboard and trusting?

The Transition Conversation That Convinced 90% Of Paul’s Clients To Follow Him [29:24]

Paul: Well, the most important thing is you make the conversation all about the client. You don’t make it about yourself as the advisor or the firm you’re going to, you make it about the client. And when it really is about the client and that’s why you did it, that becomes easy. So, nothing was perfect. I’ll give you some different examples of dialogues that occurred. But we literally had our talking points – our list of data points that we would explain to each client when we spoke to them why we were leaving Merrill after a 19-year successful career, walking away from everything and going independent. And those things ranged from now being a fiduciary, to having superior lending rates, to having a broader family office, to all items about the client. So, explain why we moved, why we’re making the move for them. Because that’s what they want to…it’s about them, right? So, they love us, but it’s about them. So, doing that is absolutely critical.

Now, having said that, different human beings process differently. And so, you have situations…you cannot predict in advance who’s going to react which way. You just can’t. It’s random. So, we had most situations, most dialogues where the client was like, “That’s awesome. You’re becoming more entrepreneurial. I was an entrepreneur. I get it. I am so happy for you.” And they’re just genuinely happy. But then you would have some that would make comments like, “Well, we met last week, and we did a portfolio review. I thought we had a bond of trust. I trusted you, you trust me, like, how come you didn’t say anything?” Right? And you try to have a conversation, “Well, I’m not legally allowed to. It would have broken my employment contract, it would have broke SEC laws.” But you know what? They don’t want to hear that. They felt that the trust was violated.

Michael: They felt the trust was violated because you had to do it with zero notice because that’s the nature of the breakaway deal. If you tell anyone you’re thinking about leaving beforehand, you’re violating your employment agreement to the current firm you’re with, so you can’t sell away. And so that restriction meant from the client-end like, we’ve been chugging along fine. I thought we had a bond of trust and you just overnight, like, ghosted out. I guess we didn’t have the relationship I thought we did.

Paul: Exactly. Exactly.

Michael: Which has to hurt because you literally, legally couldn’t do anything else.

Paul: That’s right. That’s right. That wouldn’t have been the right thing to do. So very challenging. It hurts your heart to listen to someone say that to you, right? It’s like someone you love and you trust and they’re telling you that you broke your trust with them, and it’s like, “Oh, but no.” It was hard.

Michael: And so do you get any awkwardness around things like, “Well, now I’m going to have access to superior lending rates,” like, “Well, Paul, I thought you represented a great firm that already had great rates?” Like, “Well, we’ll have broader family office experiences,” like, “Paul, I thought you were at a firm with like $5 trillion? You were already supposed to be giving me everything that you guys had.” Do you get conversations or questions like that which crop up or is that just fears we put in our own heads but not how clients process this information?

Paul: Yeah, that was more fears that we put in our own heads. It was more fears in our own heads. And what I learned from that experience is…90% came over. The ones that didn’t come over, they were more brand buyers, right? Some people are going to buy a pair of jean that’s Levi Strauss because of Levi Strauss. Or they’re going to buy a Mercedes because it’s a Mercedes. And you’re not going to really change their mind. That’s their DNA, and that’s what they want. So individuals that were buying the brand, wanted the brand, have the comfort level, and Merrill Lynch as an example, they’re going to be very hard to move. So those are the ones that were more challenging. It was the brand buyers.

Michael: Okay. And I guess that’s the whole issue, right? Like if they were buying the brand, they’re going to stay for the brand. If they were buying you, they come with you.

Paul: Exactly. Yep, you got it.

Michael: And so were there any other, I guess, surprises or unexpected challenges that cropped up as you made the transition?

Paul: It was more challenging for clients that had lines of credit with a prior firm. It’s very laborious to transition those over. We did it, but it took time. Some of those took up to 30 days to get all the paperwork because you’re paying off a debt while simultaneously creating a debt. It’s more complicated than just ACAT’ing over, transferring over assets. It’s a lot more complicated. So that was a lot more cumbersome. And then just being an entrepreneur, having to think about rent and our payroll and how we’re doing things. It was a complete shift in mindset being an entrepreneur. Now using another part of your brain that you didn’t have to use before. And so that took some adjusting. But it was just things like that that were a change.

Michael: And so when you made this transition, how big was the client base at the time? How big was your team at the time? What was moving when you did it?

Paul: So we had, at the time, 8-9 team members, roughly family office $10 million-plus clients. We had about 30, yeah, 30 family office clients 8-9 team numbers. The AUM was 900 and some million in AUM that we were transitioning over. Yeah.

Michael: And just striking when you think about those numbers, right? Like, 30-ish family office clients, $900 million AUM. So we’re talking like $30 million average client sizes. Obviously, they barbell a little with bigger and smaller – it’s an average – but you’re talking about very affluent clients with a good amount of complexity, as you noted, a lot of different attachments to the firm because this might not only be an investment account, this might be an investment account or cash management offering lines of credit, a lot of different pieces that have to be moved, that have to be replaced or replicated on the other side. And I guess the flip side even for the firm, more ways that the firm can try to hold on to the client.

Paul: Exactly, yep. And all the team came over. So 100% of the team members came over, 90% of the clients. And, yeah, it was a lot of work.

Michael: So you made this transition. And you had noted that when you did the transition to HighTower, for you, it wasn’t necessarily about getting access to the equity at HighTower, like, “Hey, I’m going to build equity at HighTower, and that’s going to be my financial stake in the future.” It sounds like that was just…that was part of the deal structure as it went. And you’ve talked about this as “I didn’t want to just take the cold leap. HighTower was very compelling for being able to help us in this transition and help us get our feet under ourselves to be able to do this going forward.” So I guess I’m wondering, like, did you join HighTower anticipating like, “This is simply going to be a waypoint in our journey; I’m going to end out fully independent at some point. This is just a stopping point along the way,” or did you join HighTower expecting you were there for the long run, and then at some point later, just sort of came separately to the conclusion of like, “Hey, I’m actually not sure this serves the same purpose it did, I’m looking at another change?”

Paul’s Move To Separate From HighTower And Make PagnatoKarp Completely Independent [38:08]

Paul: Day one, it was a question mark, and we were fully transparent about that. So they knew that we were exploring both options, and they knew that we felt the biggest value-add that they were bringing to us was this transition period. And then it would just be a question mark as to what the relationship would look like three, four, five years from now. So we didn’t know, and we just did our thing, put our head down, grew the business. And we just got to the point where we were ready to be on our own. We wanted to be further unleashed and further build out our family office in a manner that was going to be unique to us. And so it was just…just, it was the right thing for us. And we were completely transparent with HighTower, and talked through all of this and had very good conversations. And it was amicable. So it wasn’t like a breakaway or anything like that. It was amicable, and it was just the right thing for us to move on. So we made them whole, made them good on everything economically. So they were in a good place, and then we were in a good place. So that’s how that happened.

Michael: So as you talk about just, “We wanted to be further out on our own, further unleashed,” as you put it, was that coming down to just, there are still some blocking points when you’re merged in under a larger firm that has multiple partners and multiple equity stakeholders? Like, we were still subject to their compliance and some limitations on that. We wanted to do more independent things. Like, that kind of further unleashed? Like, was that the blocking point?

Paul: That’s one great example. Our average client has 20%-25% of private investments. So we were desirous of doing due diligence and utilizing private investments that weren’t on the HighTower platform. So that would cause some friction. And then we also were desirous of doing tax compliance for our clients, of providing legal services for our clients, and really taking the family office to another level, which wasn’t part of the model of HighTower, which we respected. So it was…

Michael: So you wanted to have lawyers on staff, you wanted to have CPAs on staff doing tax returns, things like that, that HighTower said, “Don’t really want to be in that business.”

Paul: Correct. Correct. Yep.

Michael: Okay. And so it was just the desire for that, said, “All right, well, if at the end of the day we hang our own shingle, then we get to make this what we want. So I think that’s now our time, our transition point.”

Paul: Yep. Yep.

Michael: And so, I am wondering, like, when you’ve gone into a business like this where you weren’t simply paying them as a service provider, you were an equity holder, how does it work when you want to extricate out? Like, I just want to pick up my shares in my hands and kind of walk them over here. How does that separation process work? And was that a challenge for you?

Paul: So in our situation…and I think every situation is different, but in our situation, we just walked. So we just walked from the equity, and we left that behind. So a lot of people wouldn’t be comfortable leaving millions of dollars of equity behind. So we just walked from that. And again, we didn’t do it for the equity. So the value of that to us wasn’t as meaningful as I’m sure it was to other people that that was part of their decision process as to why they would partner there. So we just simply walked from them, Michael.

Michael: And so, in essence, you didn’t sell and exit out, you effectively broke away and just hung a new flag and transferred your clients over, and that’s how they transitioned.

Paul: Yep. Yep. Exactly. And for us, it was a very smooth transition because it was amicable. So if you were a client, it was a non-event for you the next day. Your assets are custodied the same place, it’s the same account numbers, the same team, same fund, same everything. Literally, you wouldn’t even notice a difference. The only difference is they had to sign a new client fee agreement form. Before the fees were going to HighTower, now they go to PagnatoKarp. Literally, that’s the only change, the only difference. Very, very easy.

Michael: And so, I guess, both relative to the challenges of having broken out before with all the account transfers, the ACATs and everything else that moves, like, you didn’t have that. So any clients that were with you for the first transition, I would imagine, were relieved there wasn’t going to be a second paperwork flurry. It’s just like, “Here’s an updated client agreement form and an update to your LPOA so that we can continue to trade on your behalf from the new entity.” And even for other clients, kind of minimally disruptive, just, “Hey, you’re still working with me and we’re providing you the same services, but the name at the top is going to change a little bit. I just need you to update this one piece of paper.”

Paul: You got it. You got it. It was so, so simple: for the team, for the clients, for everybody involved.

Michael: And so I do have to ask of this, like, walking away from the equity piece, you did have an ownership stake – a legal right piece to a slice of the business – was it problematic to try to extricate equity or buy yourself out? Or I guess not buy yourself out, but get bought out or sell your shares back? Was there not an interest in like, “Hey, at least this can be some capital we put in for the next stage because we get a liquidity event leaving the old one?” Was any of that on the table for you?

Paul: A couple of things. So at the time, it was 9, 10 years ago, at the time, Hightower didn’t have other partners that had gone through this or done this. So they didn’t have other people – other individuals that owned equity that were not partners. There were not advisors out there that owned equity that were not part of the Hightower ecosystem. And they were not desirous of that, which I fully respected. And then the partnership legal docs were such that if we left or walked, that we’d be foregoing that based on the time period that we were there. So legal documents were very clear about that. We knew that; we had full transparency going into it. And right or wrong, it just wasn’t that…it wasn’t meaningful to us. It was not a high priority. It was more important to us to have an amicable transition and a smooth transition for our clients and for our team. That trumped, that was way more important. So we didn’t try, we didn’t try to have that vest or own it. Yeah.

Michael: Okay. So just part of the nature of the documents in the first place was, yeah, I guess, limitations, or call it ‘handcuffs’ of, your shares may be forfeit anyways if you leave in a certain time period, under certain circumstances that you were going to be triggering. So you get this choice, like, we can fight and still try to hold on to our equity value but risk having a less than amicable separation, or we can go and say, “Look we want to make a transition and break away. We’re going to bring our clients and revenue, but you guys can keep your equity. So at least you lose the value, but you recover the equity value at the same time. Can we call it even-steven and just move on?” Because obviously, they don’t want to buy back your equity while you literally take the revenue away. That risks putting them in a negative position, which, of course, is why they put provisions like this in their documents. So it sounds like that was their conclusion. Like, “If you don’t fight us on our revenue part, we won’t fight you on your equity part. And we’re both reasonably even at the end of the day, and we can go on with our lives.”

Paul: Yep, it was fair. It was fair. Yep.

Michael: So now you’re entirely out on your own. I think we’re at like 2016, four or five years ago now. PagnatoKarp now exists as a standalone advisory firm. So what was the vision at that point, and what were you building? As you’ve noted, like, you had an interest in more private investments, more legal services, more tax compliance support for clients. So as you set out into the independent RIA realm to hang your own shingle and say, “Okay, now we can build whatever we want, game on,” like, what did you build? What did the firm turn into? What was this multi-family office offering that you developed once you were out on your own?

PagnatoKarp’s Transition Into A Multi-Family Office Company And Their Breakthrough Value Proposition [47:49]

Paul: So PagnatoKarp became a family office company. That was the transition. As the company was now a family office company business, our vision or MTP, Massive Transformational Purpose, was to positively impact a million lives through TrueFiduciary standards. Think of that as standards of transparency. That is the vision, that’s our MTP, Massive Transformational Purpose, and the company became a family office company. And that’s what we are today, and that’s what we’re doing today, and all those things hold true. So that was the breakthrough in the next sequence of our journey.

Michael: So I have more questions about what that looks like in practice, but you used some very interesting labels there. So what is a Master Transformational Purpose and where does this come from?

Paul: Yeah, yeah, Massive Transformational Purpose, so MTP. So I learned that. So I attended Singularity University that’s out on the West Coast, founded by Peter Diamandis and Ray Kurzweil. And the teachings there, they teach you and really encourage entrepreneurs to create a purpose that is way, way beyond themselves for the organization and something that every team member, every person in the organization, can really get behind. And for us, it was very clear to bring transparency to a whole new level in the industry. So that was our ultimate vision. And we’ve, I think, done an incredible job with that. There are certain quantitative measures. I can say that we have reached a million people with that, but there’s always more work to be done. And then the other is our breakthrough value proposition. So the breakthrough value proposition is the family office. And to be able to give back time, an entrepreneur’s most valuable asset – all human beings’ most valuable asset – is their time, to give them more time through our family office.

Michael: Interesting. So you use this label “we became a family office company.” You were already in the business of family office, multi-family office. So how do you explain or distinguish…what does it mean when you say like, “Well, now we’re a Family Office Company,” like, capital letters? What is that and how is that different?

Paul: So now we’re able to not just help clients with their estate planning, but also provide legal services. And now we’re able to not just help with tax planning, but actually do the tax prep, do the tax compliance. And now we were able to take our lifestyle services way beyond the traditional concierge-type services of travel and booking a hotel and things like that to wellness and well-being and create strategic partnerships with companies like Pinnacle, Namaste Wellness. So we’re able to take that to a whole new level. And that’s a never-ending process, continuing to round out and continuing to take these services to a new level. So for us, it was unleashed, the world’s our oyster, and everything that a CEO, founder, entrepreneur needs to be able to take off their plate and things that they want us to be able to take off their plate, we can now do. We don’t have any constraints. And that’s very…it was very inspiring to us.

Michael: So talk to us more then about what this value proposition looks like in practice. In general, for what is normally a wealth management firm measured in assets under management, as many of us, at least traditionally, have done, you’re talking about legal services, tax compliance, lifestyle services, concierge, travel, time savings, like, not usually the sorts of ways that we frame the value proposition for a financial advisory firm. So can you just describe to us more, like, what does it mean to be a client of the firm? Like, what do you get? What are you offering for clients at this point? How do you describe the whole value proposition of becoming a PagnatoKarp client?

Paul: Yep. So we, as most advisors, are very desirous of being the first call for whatever is impacting the family and their situation, whether it’s tax-wise, it could be legal-wise, financially, it could be family dynamics. We now do family governance and conduct family meetings. So we now have the capability of doing all of that under one roof, which is just so spectacular. And it just makes things so seamless. So our clients before, say they have a relationship at a great firm like J.P. Morgan, they have their financial advisor there. They may have their planner there or they may have a separate independent planner. They have a third-party CPA, they have a third-party attorney, they have a travel agent, who’s taking care of that. If they’re very affluent, it’s not uncommon to have a professional helping conduct family meetings. So that would be another person. They have an insurance person taking care of all their insurance needs. But just think about the time and how taxing that is to have all of those relationships, all those appointments, all those dialogues with all of those people. It’s unbelievable how much time that takes.

Now, they have one firm taking care of all of that all under one roof, completely seamless. And we’re all talking to one another and we’re all sharing the data. So if your advisor is going to schedule an appointment with you to review your portfolio and the concierge has scheduled a trip for you and your family to go to Europe for the month of August, the advisor knows that because it’s all in the same organization. If the CPA needs all of your 1099s, all your K-1s, all of your tax information, they don’t have to contact anybody else, we have it all. It’s just seamless. The client doesn’t have to worry about that. Or say you need to make an amendment, say something’s changed with your family, and you need to amend your trust or your will, or something occurs – you’ve got it covered. It’s all under one roof. So it simplifies their life and the efficiencies. There’s no friction with any of that. And it’s all done holistically. It’s super cool now. Virtually, when we have a family meeting, it’s pretty normal for the financial advisor/portfolio manager to be on a Zoom, right, with the planner. The CPA may be on there, the lifestyle expert may be on there. It’s very common to have…we have a private banker. So we also have someone who takes care of all their banking needs. So they need money wired, transferred, how much cash they’re keeping in their account, bills, all of that we take care of.

So it’s all seamless, and it saves them an enormous amount of time. And it’s all done on a fee basis, and it’s all done with these TrueFiduciary standards. So the revenues we receive, the only revenues our firm receive is the advisory fee the client pays us. Period. So the client doesn’t have to worry, is the concierge who just booked their villa in Italy making any money off of that? No, we’re forbidden from doing so. So they know whoever’s doing…is our planner who’s suggesting for them to have a second-to-die policy of $20 million, is the planner advising that because they’re going to get a big commission on insurance? No, they’re not allowed to. No commissions allowed. So it’s all done on a TrueFiduciary basis. So the client knows we always have their best interests first. So that’s just kind of a wrapper around the family office.

Michael: And so, in essence, it’s kind of that fee-only fiduciary framework – we will not draw any commissions or back-end dollars because we won’t be able to say to our clients like, “No, no, truly, the only thing you pay us is what you pay us.”

Paul: You’ve got no revenue share, right? So if we have assets or we’re suggesting a certain custodian for them, it’s not like that custodian is providing us soft dollars or a revenue share or anything to place assets there. It’s clean. It’s very, very clean. There’s just no incentive for us other than to do the right thing for the client.

Michael: And out curiosity, just, like, I feel like what you’re describing is what a lot of the fee-only community describes as well. I’m struck just you don’t use those words of ‘fee-only’ in describing it. Is that sort of deliberate? Do you view it as a distinction? What leads you to just describing it the way that you do and not using some of the industry labels like ‘fee-only’?

Paul: That’s a great question, Michael. I think this becomes…this is what comes naturally to me. And to me – this is the breakthrough value prop – is the total family office, the total solution, bringing up someone’s time. And maybe it’s just become second nature to me that we’re fee-only. And our business model is, the only fee that our company receives is the fee the clients pay us. So maybe it’s just because it’s become second nature to me now.

Michael: Sure. And so, how does the firm actually charge? Like, what, literally, is the business model? Are you an “assets under management” style firm? Are you like a flat retainer fee firm? Do you charge a net worth, since I’m going to imagine working with entrepreneurs, you have a lot of illiquid clients? How does the actual fee structure business model work, particularly when you’re doing all this different stuff?

Paul: Yep. So we have our…we have legacy business, right? So relationships that we’ve had for 25 years, a very long time, that were with us at Merrill that are still AUM-based. So we have a portion of the business that continues to be AUM-based. And they get full transparency every quarter when we meet with them; they see to the penny all the fees that they paid to our firms. They know what they’re paying, and they know how they’re doing. Most of the new relationships that we bring on board, and have brought on board the last few years, have been on a flat fee base. And it’s based on the scope of work that we’re doing. So our minimum fee to work with our family office, to receive everything that I just articulated, is $90,000. So if you have $10 million and you’re going to use our entire family office, the fee would be $90,000. If you start to go outside the scope of the work, so say you need us to manage not just one portfolio but three or four or five portfolios, or say you need more advanced estate planning, not the basics, say you’re going to set up partnerships or say your tax return isn’t a straightforward tax return, and you have international income coming in and need to file with another country, all those examples are things that go outside the scope of the work and the fee would be more. So…

Michael: So you kind of start at a base fee and then, basically, layers add with complexity from there?

Paul: Yep, yep, exactly. Exactly.

Michael: But it’s otherwise like, as long as I’m happy with my core scope of work, I can be a 10 millionaire, I can be a 50 millionaire, it’s my same $90,000 fee. You’re not otherwise doing an AUM-based calculation?

Paul: Correct. And that’s our desire, is to be fee-based versus AUM-based. That’s our desire, and that’s the way we’re moving the business and personally how I think our business, the wealth management industry will ultimately be moving towards. Yeah.

Michael: And so, in this framing of a $90,000 fee, this is management of all your portfolios, your annual tax return, legal advice to update your estate planning documents. What else is in there just as you’re describing to someone the proverbial, “So, Paul, what do I get for $90,000? Like, I can hire a person, a whole person full-time basis for $90,000. So what are you doing for me for $90,000?”

Paul: Now, you’re hiring a team of people. So you’re not just hiring a portfolio manager or a planner. So you’re getting a portfolio manager, you’re getting a planner, but you’re also getting an attorney. You’re getting a CPA, you’re getting a private banker, someone who’s going to take care of all of your banking needs. We’re going to do all of your reporting for you. You have a family – Dr. Orlando – you have someone to help you with family planning and governance and education, lifestyle. You have full-time lifestyle experts to help you, whether it’s wellness or whether it’s an event that you’re having, or it could be a crisis that hits the family, you have people to turn to and talk to. So you receive all of that.

Michael: And how does that work from a servicing end? Like, do I literally as a client get a team, like, “Here’s a list of five phone numbers and email addresses?” Like, if it’s a tax thing, email Bob, and if it’s a legal thing, send your email to Nancy. And like, “Here’s a list of folks,” or do you do more of a like, “Here’s your advisor, your advisor will marshal all the resources internally, but we’re going to just a single point of contact for you and they’ll handle all the internal stuff?” Like, how do you actually structure and offer that model?

Paul: So both. So what happens is you always have one point of contact, so you never have to worry about, “Who do I go to for what?” So you always have one point of contact who can facilitate everything. And we term that person a family wealth advisor. But in addition to that, you have and you will meet right upfront each of the individuals. You’ll meet your lifestyle expert, your attorney, your CPA, your private banker, your portfolio manager, your planner, you meet them all. You have their email. We actually give them like the “Hollywood Squares” photo. So literally, they get a one-pager. They have the picture, the area of expertise, their email, and the cell phone number of each person that is their family office. So they interact with them. Now it’s on Zoom. They have a one-pager for everybody. And what happens is, over time, they begin to…as they begin to engage with the family office, they’ll ultimately…fast forward three, five years from now, they’ll have relationships with everyone. So they’ll have a relationship with Oleg the CPA, they’ll have a relationship with Wayne, the attorney, they’ll have a relationship with Dr. Orlando, they’ll have a relationship with Steve, the portfolio manager, but that takes time. That takes time.

Michael: So out of curiosity, from the business end, do you end out with this like laddering of different subsidiaries where there’s like PagnatoKarp legal, PagnatoKarp accounting, PagnatoKarp advisory that all roll up to one thing, or can you literally put all of these services in one entity? How does it work on the back end to be able to structure this? Because I know some advisors get very concerned about, “I don’t want my IRS audits to be all up in my RIA records. I don’t want my RIA auditors to be in my lawyer’s correspondence.” How do you actually structure this? Or do you build those kinds of separations?

Paul: So you have – most of it all goes directly to PagnatoKarp, the legal entity, PagnatoKarp Partners. There are tax services – there’s another LLC that’s been created, which is 100% owned by PagnatoKarp. And then the legal piece – to be able to provide legal services, to draft documents – you need to be a law firm. So we have a relationship, actually, with multiple attorneys, law firms, where they are on retainer for us. So what happens is that if you were a client, in addition to signing the advisory fee agreement for PagnatoKarp, you would also sign an engagement with that law firm. And that’s how they’re able to legally draft the documents for you. As long as it’s within the scope of the work, PagnatoKarp is paying for those services.

Michael: Okay. So effectively, tax services is literally your entity, legal subsidiary. Legal services you’re structuring is, I guess, functionally more like a subcontractor arrangement.

Paul: Correct.

Michael: You’re hiring PagnatoKarp for the scope of legal work, but at the end of the day, PagnatoKarp is subbing this out to a law firm that technically legally gets paid the fees for the legal drafting because that has to be paid to a law firm, but you will cover the dollars of that cost as long as what they’re engaging law firm for is within the scope of work of what you commit to clients in the first place.

Paul: Perfect. Yep. Bingo. You got it. Yep.

Michael: And so, what about in services like private banking? Is this like an extension of what RIA custodians offer? Is this a whole other subsidiary or external relationship as well?

Paul: It’s all within PagnatoKarp. And we have private banking individuals where that’s their job – to help manage the cash flow, wire transfers, all of that. And they will work with, it could be the custodian that their assets are held with, or it could be a third-party bank that they’ve had a long relationship with, but they can handle all of that for them.

Michael: And so with so much industry buzz these days around things like cash at custodians, the profits that custodians make off of cash, I think Schwab now, it’s almost 60% of their entire revenue is cash management. We think of them as an RIA custodian that holds our assets business-wise, like, they’re a cash management firm with the RIA custodian side hustle. Like, what happens in practice with a firm like yours? Are you doing a lot of work with outside banks and moving money around and shopping for yields, or does cash management mean something different in your world, in your clientele?

Paul: Yeah, it’s exactly what you said. So we are micromanaging that. And we’re making sure that their cash is placed in a safe location that’s the highest yielding. Now, as we all know, rates have come down, but we have negotiated super, super good terms. So with some of the custodians, we have a relationship where they’re receiving the institutional money market rate as if they have $10 million. And a normal client would take $10 million to be able to have access to that. But for $100,000, $50,000, we’re able to go into that. But there is manual work that the team, our team needs to do to make sure that it’s going in there. And so we do that. We take on that work.

Michael: Interesting. And I guess for large enough clients and large enough dollar amounts, shopping for yield if you’re moving millions of cash around at a time, that can actually make a pretty good dent in that $90,000 a year fee by literally just getting cash to a better place for where it’s sitting.

Paul: Totally. Totally.

Michael: And you’ve mentioned as well a lifestyle expert. I think you mentioned Dr. Orlando at some point. So what is going on with lifestyle and medical and doctors on staff? Like, what are you doing and offering in this regard?

Paul: So, the lifestyle services are very robust. There’s your traditional concierge-type work: if you want to take a trip to Asia, we’ll facilitate and coordinate the entire trip for you. But then it goes way, way, way beyond that. Say you have a family emergency. Say you have a child that’s in college and needs medical help or you need to get that child home. Or say you have a child who wants to go do work over in Ethiopia, and you want to make sure that the security is in place for your child going over there. Or say you learn that you have a family member that has an addiction problem or issue, or there’s some friction amongst the family, for some reason. They can come to us for all of those items. A more timely, recent example is the COVID era that we’re in. So we struck a relationship with PinnacleCare. So our clients now have a hotline. If they feel that they, or one of their family members, may have COVID symptoms, they can call and speak to an immunologist, someone who is an expert in the field. So it’s pretty robust. Say you’re a client and you want a new car, you tell us the make, model, color of the car, it’ll show up at your house and probably a better price than you could obtain on your own because we buy so many cars for our clients every year.

Michael: You’re buying cars for clients.

Paul: Yes. Yep. Yeah, we’ve been doing that a long time. So if you want a Mercedes, we know the person at the Mercedes dealership that we work with who’s like the head of the dealership. He knows us, we know them. There’s no back and forth. They immediately get us the best price, and you’ll get the exact car that you want. So you don’t have to spend your time doing that, and you’re going to get a very good price for your car. Now, Tesla would be the exception because the Tesla has to be ordered online.

Michael: They’re cutting you out of the picture, Paul.

Paul: Yes, they are.

Michael: I guess you can go on the website and click the buttons for them. It’s probably not as exciting of a thing to have delegated to you. So help us understand a little more about the typical client. Just who buys this at $90,000-plus a year?

What PagnatoKarp’s Typical Client Looks Like [01:13:02]

Paul: Yeah. So our experience is, when someone gets to the point where they have $10 million in investible assets, they have these needs. These needs become exponential for them. Not to say that someone with $5 million or $1 million doesn’t have a lot of these needs as well. But we have found the value proposition becomes exponential when you hit the $10 million mark. And then it goes up to – we have clients with $1 billion, with our partnership now with Cresset – billionaires. So it’s pretty wide-ranging.

Well, Michael, I believe, our vision is to continually… We’re a database technology company at the end of the day. We are working really hard to digitize all of these aspects. So the vision is to bring that down to lower and lower thresholds. So from $10 million, $8 million, $5 million, and just…we’re just going to relentlessly drive this down. As technology allows us to digitize all of these various different areas – when something is digitized, then it becomes very, very highly scalable. So we’re working super hard at that. But today, based on where we’re at as a business, based on where the technologies are, $10 million, the value kicks in pretty strong.

Michael: And it just strikes me when you do the math, like, $90,000 on $10 million-plus, like, you’re at 90 basis points, which is not that far off from what a lot of advisory firms charge, literally, just for investment management, never mind the full range of services that you’ve got here. And when you’re at…when you get to $20 million instead, suddenly you’re at 45 basis points. When you’re at $30 million, you’re at 30 basis points. And you quickly, as the dollars go up, get to price points that are quite competitive and even lower than some other firms that are AUM-based.

Paul: Yep. Yeah, a lot of times we’ll have someone just question us, like, too good to be true. Now, we get that. Like, “So you’re telling me I’m going to pay the same fee that I’m paying with XYZ advisor and you’re going to do all these other things?” I’m like, “Yep.”

Michael: So then, just, I’ve got to ask from that end, like, do you think about the AUM model? Do you think about going back to the AUM model? Do you think about at least having tiers, if you’re at $50 million it’s $150,000? Because you’re probably going to have a little more complexity and we’re still, for a 50 millionaire, a highly competitive fee. It’s the equivalent of 30 bps. Like, do you think about other tiers…I guess fee tiers or AUM or net worth-based charging or something else to account for that?

Paul: I think of it in terms of complexity and profitability to the firm. So if the relationship is taking more time and because, say they have $50 million but they’ve done a great job with their estate planning, and they have 10 different portfolios and partnerships and complicated tax returns, it’s not going to be a $90,000 fee because that wouldn’t be profitable to the company. So it needs to be a win-win-win. And that’s how I think about it. So, no, I don’t have a desire to go back to AUM-based. We’re leaning totally into a fixed fee based on the scope of work.

Michael: And so, you mentioned like you see yourselves increasingly as a technology-oriented company and working hard to digitize these pieces. So can you tell us what the technology stack looks like for PagnatoKarp? Like, what are you actually using to power the business?

PagnatoKarp’s Tech Stack And How Their Ongoing Experiments Fuel Exponential Growth [01:17:11]

Paul: Yeah, sure. You bet. And to that point, so we have experimentation that takes place all the time. So each area is like eight, nine different areas of the business. Each area is expected to be having three to five experiments running at all times. We have – we call it company day – once a quarter, those areas present to the entire company their experiments, and what’s working, what’s not working. So at the end of the day, if the company has 30, 40 experiments taking place, all I’m hoping for is one or two to pop through, one or two to be successful. And that would be a new value creation to the client. So then every quarter – quarter in, quarter out – we’re unleashing more value for our clients. So it’s a very experiment, data-driven organization.

So I’ll give you some examples of experiments that have worked that have now been positive for the company and clients. So private investments have an abundance of paperwork, right? It could be 200 pages for one subscription. We actually quantified the time it took for one of our admin people to do the private subscription docs for a single client. On average, it was about five hours of time for one subscription document for one client, all-in. We completely digitized that – completely. Now it takes about three minutes, and it’s a much better experience for the client. Tax, we have digitized so much. And these are for ultra-high-net-worth individuals. So much of the tax prep. It’s unbelievable. So it’s a better client experience and much more efficient for our tax practice. So some of these technologies that are being employed, they were experiments. Reporting – we’ve used a lot of different reporting tools over the years. We had the Merrill Lynch tool. We’ve used Black Diamond, we’ve used Tamarac, we now use Addepar. And we have found – particularly the technology they have – particularly for the private investments is highly scalable for us. So I’ll share with you, our business is three times the size it is today than it was eight, nine years ago, and we have not had to hire any additional reporting analysts. And the end deliverable to the client is better today than it’s ever been.

So these are examples of technologies that are enabling the team to scale and provide a better experience to the client. So we were just relentlessly working at this and continuing to digitize. The ultimate vision is, in three to five years, the entire family office to be completely digitized. So we’re working on that, and it’s going to take some time, but we’ll get there. We’ll get there.

Michael: And is that driving off of like just finding more and better tech solutions that work for you – Addepar over Black Diamond for your high-net-worth clients – or are you like, you’re literally hiring developers? Like, as part of the staff headcount at the firm, we have lawyers and accountants and the lifestyle experts and a bunch of advisors and portfolio managers. Oh, and like, “Here’s our technology dev team?”

Paul: Yeah. So it’s all the above. Our preference is always to outsource when possible. But we do have situations that we come into where it’s not…you can’t outsource what we’re striving to do. So if we’re not able to outsource, then we’ll look for a partner. An example is digitizing the private investments, the alternative investment paperwork. So that one, we were able to find a partner to create it, design it. They own the IP. And we were the first ones – because of the partnership, we were the first ones to pilot it and the first ones to use it with clients. That would be the second option. And then the third would be to do it in-house. We do have technology people that can do programming in the company. So that’s how we think about it. But when possible, we outsource, and secondly, try to partner. Yeah.

Michael: And just curious then, from, I guess, like an entrepreneur or a business-building, an enterprise perspective, like, what leads you to this outsource-first approach or mentality as opposed to a like, “Hey, we want to create all this in-house, then it’s our unique value, it’s our proprietary offering, no one else can do this because we literally are the ones that built it?” I’m struck for wanting to build a lot of unique value. I feel like a lot of firm owners I talk to say…it sort of ends with dot, dot, dot, “And that’s why we build it all in-house.” So I’m very struck that your go-to is like the polar opposite viewpoint. Like, how do you think about that? What do we do in-house versus not? And if we want to create all this unique stuff, why do it with an outsource-driven approach and not an internal approach?

Paul: Our priority is open source, community, share, everyone benefit, versus being beholden. The companies that are growing exponentially have that mindset and that philosophy as well. But there’s a book called “Exponential Organizations” by Salim Ismail, who was the creator of Yahoo back in the day, brilliant human being. So he wrote the book “Exponential Organizations.” So that’s the DNA of a company that grows exponentially. And outsource versus insource, those companies have that DNA. In fact, our hiring process is, before anybody is hired, they have to read the book, and then they have to present to me what XO traits they are going to bring into the organization. So what that does is…

Michael: And what’s an XO trait?

Paul: Yeah. So these are the DNA characteristics of an exponential organization. So the companies that – the DNA of a company growing exponentially, 20%-plus per year – they are some of the things we’re talking about. They outsource versus insource, they’re data-based, they’re technology-based, they’re focused on the community, they’re open sharing. They use dashboards. They’re digitizing. Those are the characteristics of an exponential organization. And I highly recommend the book. For an entrepreneur today it’s, I think, a must-read. So anybody we hire reads the book. So one, then they have total transparency and proper expectation on our organization and what they’re getting themselves into, and how we’re wired, and what the expectation is going to be on them. But then also, it helps us to gain insight as to how they’re thinking. Are they thinking linearly? Are they thinking exponentially? So that’s why we have that kind of decision tree for technology.

Michael: And so, you’re building all this stuff, it’s going so well, you’ve had your growth, and then a month or two ago the news breaks that PagnatoKarp is merging with Cresset, which is…you were, I think, $2.5 billion, they’re something like $9 billion. So now help me understand, what leads you to this world of, okay, it’s going so well. We’ve done this journey. Like, we were in Merrill, we went more independent with HighTower, we went totally independent so that we could build whatever we want and not be beholden to anybody else, and now we’re merging. So help me understand, like, what changed? What shifted? What makes you leave a firm like HighTower but then join a firm like Cresset?

How Paul Followed His Massive Transformational Purpose To Merge With Cresset [01:25:41]

Paul: Yep. So it gets back to the fundamentals of following our true north, our Massive Transformational Purpose, and continuing to grow and make a greater, greater impact, greater greater…unleash more and more value for our clients. Fundamentally, that’s what happened. But specifically, there are three reasons. As a business, as you grow, you hit ceilings of complexity, then you get through the ceiling of complexity, you grow, then you hit another ceiling of complexity. This is just the life cycle of every business for every entrepreneur. So I had three ceilings of complexity that I was hitting. Number one, we needed to expand nationally. Number two, I needed more capital to fund some of these digital initiatives, these technology initiatives we were talking about, and then third, I had a junior partner who wanted some liquidity. And he was an awesome partner of mine for 20-some years, and he’s been desirous of some liquidity for some time. And as you have duly noted, we didn’t take chips off the table when we left Merrill, didn’t take chips off the table when we left Hightower. So he’s like, “All right, come on, Paul, it’s been 20 years. You’ve got to help me.”

Michael: “You’ve got to give me some opportunity here, man.”

Paul: “You’ve got to give me…give me something there.” So I felt an obligation to David for that. So those are the three items I was solving for. And hired an investment banker, Raymond James, Liz Nesvold and Jeff Brand, you probably know them, wonderful people, to help me solve for these three ceilings of complexity. And there were three options. The options were, establish a large facility at a bank – a large line of credit at a bank to provide the capital for these three items. Number two, have another partner come in with permanent capital, where I would remain in control as a minority partner. And we found a person for that. And we also found a bank to provide us a line of credit. And then, thirdly, would be to find a larger strategic partner, like a Cresset, to really merge the companies together. And transparently, I never thought it would be the latter. I never thought it would be totally letting go and merging with somebody else. I thought, for sure, it was going to be permanent capital or a line of credit.

So the beautiful thing is I had all three options on the table. And I came to the conclusion that I didn’t want to lever the company up. I didn’t want to take on all that debt. I didn’t want to do the bank facility. The permanent capital would have been great, would have satisfied my junior partner, David. It would have brought a little bit of capital in, but not the capital that I needed for the ambitious plans to have a national practice and to build out the technology that I’d like. And so when Cresset and I…I had a relationship with Eric Becker, one of the founders. We both serve on the advisory council at Fidelity. So I knew him for a couple of years. We had a relationship. So it was a perfect match.

So Cresset is founded by Eric Becker and Avy Stein, two very wealthy individuals, who had their own family offices. And they were each putting millions of dollars into their own family office staff and support. And they both came to the conclusion that “This sucks. Like, I’m spending millions of dollars and it’s still a bad experience.” And they were friends. So, like, “Well, let’s do this together, okay? Let’s put our family offices together and let’s create an RIA and let’s invite our wealthy friends to be part of this. And let’s really…let’s blow this out.” So, they did that, and a year and a half into it, they’re like, “This is a lot harder than we thought. We need some help with this.” And it was the same time that I was looking to solve for these ceilings of complexity. And so, it’s really been just a great, perfect match. So, they were able to help, take chips off the table for David. And we’re 100% employee-owned. So, it was a very nice liquidity event for everybody, as well as national expansion. They already had seven offices nationally. So, we immediately get our penetration. They’re adopting our TrueFiduciary standards nationally. They’re adopting our family office nationally. And they have the capital to fund on a much grander scale the digital vision that we have.

So that’s how this came about, and that’s how we solved for the ceilings of complexity, which is ultimately going to unleash more value for our clients and just the next evolution of the business. Yeah. But I never thought I would land here. I never thought that would happen. I never thought I would give up control. So, I am a co-chairman of the new company. I’m the third-largest shareholder next to the two founders, Eric and Avy, and a board member of the new entity. So, yeah.

Michael: I was going to say, and just how do you think about control and control dynamics, especially having spent the past 10 years of the journey towards…kind of on this arc of more control and more freedom to unleash all the ideas in your head?

Paul: Yep. So at the end of the day, the same problem…it’s what’s in the best interest of the client, the team members, and then last, the shareholders. So as I think about that, it was more important for me to give up control to be able to impact more lives, for the clients to have a better experience, and the team members to have such…they have an abundance of opportunities now. So, Oleg, who headed up our tax practice, he now heads up the tax nationally for the whole firm. Lorrie is doing lifestyle services. I could go on and on and on. So, it’s just really awesome to see these bright individuals have now so much opportunity, so much upside professionally. So, I had to let go. But not totally let it go. Don’t get me wrong. I’m very involved with the decisions. Yeah.

Michael: So, as you look back on this journey, what surprised you the most about the path for building an advisory business?

What Surprised Paul The Most About Building An Advisory Business, The Low Point In His Journey, And His Partnership Criteria [01:31:44]

Paul: The amount of entrepreneurial spirit that goes into this, the opportunities are so abundant. We’re in this passion economy now, where people can have a voice, right? That’s why YouTube has exploded, and Snapchat has exploded. All these are providing voices and tools for people to express themselves. And that’s what I think makes an RIA so beautiful. And that’s why all these RIAs have popped up, because these entrepreneurs can express their unique abilities, their genius, their gift. They can be who they are. And what happens is then they are highly attracted by other people that are like them and that want that. And that’s why it’s so beautiful. Like you, you, Michael, your genius, have unique abilities that I’ll never have. And you’re going to attract people that would never be attracted to me. And your firm, the same, it’s just different. I’ve never competed against your firm. It’s unbelievable. So, it’s just…

Michael: Yeah. For both being – we were two billion-plus firms in the D.C. metropolitan area. I literally don’t ever recall a situation where we were talking to the same prospect.

Paul: Right. So, it’s beautiful. So that’s one of the – such a unique attribute of these RIAs and advisors. So, I think whatever we can do to help people in this passion economy to express their unique abilities is going to enable them to have the greatest impact on society and to people. So that just totally inspires me.

Michael: So, what was the low point for you on this journey?

Paul: Giving up control. That was tough. That was tough.

Michael: Like, particularly for the most recent deal with Cresset?

Paul: Yeah, the most recent deal. I’ll share…I’m a very transparent human being. I literally wrote the book on transparency, “Transparency Wave.” So, things are going along, cruising along, all good. And this was like three, four weeks before the deal was going to close. And I’m sleeping, lying in bed with my wife, and I wake up at 2:00 in the morning and I’m bawling crying. Man, it just came out of nowhere. And it was one of those like, I was crying so hard, I couldn’t even breathe. My wife wakes up, like, “What’s going on?” And I was like, “I don’t know.” And it was just a total purge. It was just a total release. And at that moment, I knew like, “Okay, this is it. I’m ready. Ready to let go, ready to…my journey is ready to go to the next level and make a bigger impact, and I’ve got to let go.” So wasn’t easy; it never is. Now, that’s what I would say was the hardest part of my journey. But now it’s behind me and now I’m ready for my next challenge.

Michael: And how do you figure out if these are the right people to be in business with, right? If you’re going to go back into this world of shared control and minority ownership for you, like, what’s the thought process or the vetting process or whatever it is that you would go through to try to figure out like, “Are these really the people that I want to be in business with this way and giving up this layer of control that I spent years building?”

Paul: Yep. So, for me, it was a couple of items that had to have complete alignment – this true north. So, one, they had to be aligned with these standards of transparency, these TrueFiduciary principles. And they are, and they’re going to go into their ADV. And that’s huge because not many firms will have that alignment. So that’s one. Secondly, had to share the vision of the family office, of being a family office company. And the vision of experimenting, and the vision of relentlessly upping the ante, relentlessly unleashing more and more value for our clients. And the vision of employing technology to one day completely digitize the family office. So those were the core traits that were non-starters to me. Like, those things had to line up.

Michael: So, you kind of came to the table and said, “Look, here’s the vision I’ve got, here’s the vision I believe in. Yes, you all happen to have technically more dollars and capital on the table, but you’ve got to be on board with my vision if you want to have the opportunity to do this deal.” Those were the terms.

Paul: Yep, those were the terms. And they were leaning into all of those things, all of them. So, yeah, time will tell. And like any partnership, there’s always going to be give and take. Healthy tension is good. And like you, I’m uber-transparent, I’m uber-direct. Everyone knows exactly what’s on my mind, no secrets. I’m very intentional about everything I do in my life. And they respect that. They appreciate that. And you’re putting two cultures together. So, there’s change, and there’s give and take with the cultures. So, it’s a process, and it’s taking time. But, hey, we’re in this exponential era and things are changing so fast. It’s mind-boggling. So, the same thing is happening here with the partnership together, things are just happening much quicker than any of us ever expected.

Michael: So what do you know now about this journey that you wish you could go back and tell you 10 years ago when you were still at Merrill and thinking about whether you want to do this new journey?

The Advice Paul Would Give New Advisors And How He Defines Success [01:39:16]

Paul: Yeah. If I had to do over, I would advise someone in my shoes to take the leap to be an entrepreneur faster, to have the courage and faith to do that. At the end of the day, it’s in all of our DNA to grow. That’s why we don’t die, and we live. And that’s just…it’s in our DNA. And don’t be afraid, put your fears aside and just do it, and it’ll work out. You’re doing the right things and you’re following your true north. If you’re expressing your unique ability and you know you can make a greater impact doing ABC, do it. Unleash yourself. So that would be the first thing. And then secondly, experiment more. My background is, I was a scientist. I was a microbiologist; I spent five years with NASA on a project. So those were always my roots. But I went through this period of time where I didn’t experiment as much as I should have. And so, experiment, don’t be afraid to fail. Failure is success turned inside out. The more we experiment, the more failure we have, the more data we’re collecting, and the quicker we’re going to get to where we want to go. So, every failure you have, don’t let it bum you out. I know it sucks, nobody likes to fail, but that’s just a stepping stone. It’s like, “Okay, I’m not going to do that. I’m going to turn left.”

And I will share with you, my early days…I don’t come from money. I didn’t have a financial background. In fact, when I graduated from college, I was financially illiterate. Fifty percent of the people that graduate college are financially illiterate, I was one of them. I didn’t take any business courses. I didn’t know what a 401(k) plan was, how much to save for retirement. I knew none of that. And I completely changed careers. So, I had no marketing experience, no sales experience, no financial background. And so, I had to experiment a lot with marketing. And so, when I got started, I did everything, Michael. I cold-called. I did mailers. I did workshops and seminars. I formed networking groups. I walked door-to-door in industrial parks. And some of those things worked and some of those things didn’t. And the things that worked and gave me energy and I had success, I spent more time on and I went in that direction. And the things that didn’t, I didn’t pursue anymore. So, like, tremendous failure.

And in my business, I have so many failures. Failure every single day. I’m failing at things. It’s not easy making the transition from a player to a coach and a mentor, right? So, when you’re leading an organization, you’re a mentor and you’re a coach, not necessarily a player. And I had to make that transition early on. And that’s not easy, and you fail a lot. So you learn. I made the wrong hires, and that’s painful. So you learn how to hire the right people. You learn how to cultivate a hiring process, which can be a whole episode in and of itself, right? So, I’ve had tremendous failure along the way. And what kept me going and what keeps me going after 27 years is…gets me out of bed and jumping out of bed 27 years later is the MTP, knowing that we’re impacting so many people’s lives positively, and knowing that we’re truly making a difference.

Michael: So having been on the wirehouse side, and you were there 20 years before you made the transition, like, what do people in the wirehouse world not understand about the RIA side of the business that still gets us to the point that at the end of the day we measure the number of people shifting channels every year as to whether it’s 0.1% or 0.2% who broke away? Like, what is it that you think is going on that still the overwhelming majority are on the wirehouse side? Like, do we, as independents, not give enough credit for the benefits of the large firm environment, or is there something else going on?

Paul: There’s something else going on. Number one, it’s compensation. Number two is education. And wonderful people, some really good friends, mentors of mine are still with broker-dealers on the wirehouse side. And super, super good people, people that I would trust. So, it’s not about that at all. So, the business model, when we made the transition, we took a 50% pay cut. We took the transition from a wirehouse broker-dealer model to pure independence, fee-only. There’s a 50% reduction in compensation. It’s very, very meaningful. So, there are not many people that are set up to be able to take that type of a cut in compensation. So that’s number one, the compensation.

And then number two it’s the education level about the model. So, when I was at Merrill, I felt like I was a fiduciary – always, always felt like I was doing the right thing for my client. But what I didn’t realize is the toolkit I had – I was doing the right thing for my client and the best thing I possibly could for my client with the toolkit I had, but that doesn’t mean it’s the best thing for the client, right? If I only had the option of putting my client’s cash into something that was paying 20 basis points, that was the best thing I could, as an advisor, placing them in the money market paying 20 basis points. But if you’re outside that ecosystem and they can earn 50 basis points, that’s better for them. And if my client was paying 2% on a line of credit borrowing against their assets and that was the best thing I could do for them at the time, that was the best thing I could do, but outside, somewhere else, the client would only have to pay 1%. So that’s the gap. They’re just not aware of the impacts of being in a different ecosystem.

Michael: Yeah. Well, and to me, it’s sort of the sad irony of how the SEC has been updating the regulations and what they did with Regulation Best Interest. They put this new requirement on brokers to say, “You have to make the best interest recommendation to the client.” As you noted, like, if 20 basis points is the best cash option we’ve got available, like, you have to recommend that one to your clients. But no obligation on brokerage platforms, on the platforms themselves to say like, “But maybe you should give your people a different option than your proprietary-only one that pays less than everybody else and pays you more.” And the part at the broker-dealer entity level, the SEC entirely punted on. Like, no best interest obligation, no additional requirements, essentially just some layers of disclosure that we all know people don’t really end out reading at the end of the day. That they doubled down on, “You have to recommend the best thing available on your platform,” but the SEC punted on, “But your platform actually has to offer what’s competitive in the marketplace,” and they didn’t put that requirement in. And, as you note, I think it becomes limiting as to how much change can really happen when firms can still offer whatever gives them the most dollars on the back end.

Paul: Totally agree. It’s the model. It’s the old business model. Yep, could not agree more.

Michael: So as we wrap up, this is a podcast about success, and one of the themes that always comes up is just the word ‘success’ means, I think, very different things to different people. And so, as you built what I think anyone would certainly objectively call very successful business, I’m just wondering, how do you define success for yourself at this point?

Paul: It’s: how many lives am I able to positively impact in the organization, outside the organization, in the community, clients, the marketplace? How am I able to move the needle to make a greater difference? And how many people’s lives can I positively impact? So, I want to put my energy into things that are going to have the greatest impact on as many human lives as possible. That’s one of the reasons, that motivated me to write a book called “Transparency Wave.” That’s one of the things that motivated me to be part of a larger organization, Cresset. That’s why I’ve affiliated myself with Singularity University and now Stanford and other universities, other institutions. It’s to make a greater impact. Yeah.

Michael: Well, very cool. I appreciate you joining us on the podcast here and hopefully giving you a little bit of opportunity to share that message and expand that impact a little bit further in the advisor community.

Paul: Thank you, Michael. Love all the questions, super good dialogue, and always here for you. I’m a huge fan, huge fan of you and what you do.

Michael: Awesome. Awesome. Well, thank you so much. I appreciate it, Paul.

Paul: Bye, buddy. We’ll be in touch. Thanks.

Michael: Thank you.