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Ex-Merrill Team: HighTower's Model Is Financial Advisory World's iPod

Ex-Merrill Team: HighTower's Model Is Financial Advisory World's iPod

The Pagnato-Karp Group, with $1.2 billion in assets, likens HighTower’s model to those that have leveled the proverbial playing fields in other industries.

HighTower Advisors’ latest recruitment prize, a Merrill Lynch private banking team, says it sees big changes coming in the financial advisory world. The Pagnato-Karp Group, with $1.2 billion in assets, likens HighTower’s model to those that have leveled the proverbial playing fields in other industries. David W. Karp, 41, uses comparisons such as iPod to the music industry, to retail, and LendingTree to the mortgage business.

“We genuinely believe that this platform is going to dramatically change the landscape of financial services and wealth advisory,” he says. His partner of 15 years, Paul A. Pagnato, 47, adds, “We really believe that HighTower’s platform is so disruptive that over the next 12 to 24 months you’re going to see a tremendous shift. We believe this is the tipping point for this industry, and HighTower is going to capture a lot of assets.”

The Chicago-based national registered investment advisor has had a busy recruiting year. Pagnato-Karp is their sixth wirehouse team to join the hybrid RIA this year, and the fourth Merrill Lynch team. Last month a former Morgan Stanley Smith Barney practice in northern Virginia with $700 million in assets signed up with HighTower. The moves have brought HighTower’s assets under management to about $20 billion, says Michael Papedis, managing director of national business development; the company has 54 financial advisor partners.

“We attract builders, and Paul and David are the ultimate expression of that,” Papedis says.

HighTower “has really decided to put together a platform to support very high-end advisors,” says Dennis Gallant, president of Gallant Distribution Consulting, in Sherborn, Mass. “They seem to have gotten a lot of deals from the wirehouses, but that’s where a lot of your source is.” When practices get to a certain size, he says, they develop a particular way that they want to run their businesses and start looking outside of their broker/dealers or wirehouses to do so, he says.

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Now based in Reston, Va., Pagnato-Karp differs from previous practices that HighTower signed up this year; the group was part of Merrill Lynch’s Private Banking and Investment Group, which specializes in the needs of ultra-high-net-worth clients. (Pagnato-Karp’s 70 clients have assets of more than $10 million each.) “It’s not a strategic shift for us,” Papedis says about the RIA’s latest recruitment of a private banking group, but he adds that HighTower is also talking with “a number of similar teams.” Merrill Lynch declined comment.

It’s unusual for a group to defect from Merrill’s private banking group, says Charles “Chip” Roame, managing partner of Tiburon Strategic Advisors in Tiburon, Calif. At $20 billion in AUM, HighTower would be among the top 20 RIAs (not including the corporate RIAs of, say, wirehouses) and larger than any other custodian excluding Charles Schwab, Fidelity Investments, TD Ameritrade and Pershing. “If I am a wirehouse executive, [HighTower] bothers me, but frankly I am not sure the wires are losing more AUM than previously,” Roame says.

Pagnato, who joined Merrill in 1992, has plenty of nice things to say about his former employer. But when the financial crash of 2008 led to “a lot of concerns” from clients about whether wirehouses would survive, Pagnato said, he and Karp decided to explore their options. The team offers family office service to entrepreneurs who have sold their businesses; among other things, the practice provides asset management, estate and tax planning, and philanthropic advice. Pagnato-Karp looked at all their options, from joining other wirehouses to running their own independent RIA.

The two advisors said they decided they wanted to be able to offer unconflicted advice to their clients, and to be able to work with multiple custodians, whoever their clients preferred. But running their own business looked like a headache: tracking bills, managing payroll, negotiating leases. “Obviously we’re good at asset management, we’re great at due diligence,” Karp says. “We have some wonderful relationships with our clients. For our practice to thrive, that is where we need to spend all of our time.”

They decided to go with HighTower because they were impressed with the quality of the attention they were getting. “The HighTower model is 100 percent centered around the advisors,” Karp says. He recalled one conference call meeting at midnight discussing transitions issues with 13 HighTower people “who were completely focused on making sure our clients and team were covered as well as they possibly could.” The timelines were laid out with “military-grade precision.”

The equity stake in HighTower that the two advisors and their team of nine staff received was also significant, Pagnato says. There was a “very nominal” recruitment bonus as part of the deal, he adds, but “that piece of it was the last thing we thought about.

“For us, it wasn’t about receiving upfront money. If we went to one of the large wirehouses, we would have received a tremendous amount of capital up front. And that’s not what was important to David or I. What was important was, number one, that our clients were taken care of; number two, that our team was taken care of; and third was really about us.

“We’re young. We feel, even though it’s been 20 years, that we’re just getting started with our careers. The best is yet to come,” Pagnato says.

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