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Today, we have an incredible guest joining us. Paul Karger, the Co-Founder and Managing Director of TwinFocus, a prestigious Boston-based wealth advisory firm. With over $7 billion under his management, Paul is no stranger to handling the finances of ultra-high-net-worth families and individuals.
Before Paul founded TwinFocus in 2006, he had already built an impressive career at UBS, where he established The Karger Group and led a team providing counsel to global high-net-worth families.
Throughout this episode, we’ll dive into Paul’s effective investment insights, tax strategies, when to start succession planning, creating an effective portfolio and allocating assets. Paul’s day-to-day activities revolve around partnering with TwinFocus’ key clients, guiding them through complex business, financial, and life decisions.
Beyond discussing his journey and the creation of TwinFocus, Paul is well-versed in a wide range of topics related to investing, building wealth, generational wealth planning, and extreme tax planning. His clients include some of America’s wealthiest families and CEOs, giving him a unique perspective on managing substantial wealth.
Whether you’re a seasoned investor or someone just starting on their wealth-building journey, this episode promises to be a wealth of knowledge!
In This Episode
- Paul’s background and journey to becoming the Co-Founder and Managing Director of TwinFocus
- Extreme tax planning strategies and tips for optimizing tax efficiency for ultra-high-net-worth individuals.
- Tips for creating a well-balanced investment portfolio and allocating assets effectively.
- The range of services offered by TwinFocus, including advising clients on complex business, financial, and life decisions.
Welcome to today’s show on Wealth Strategy Secrets. We’ve got another awesome episode for you today. We are joined by Paul Karger, the co-founder and managing director of Twin Focus, a Boston-based wealth advisory firm where he manages over a $7 billion portfolio for ultra-high-net-worth families and individuals. Before founding Twin Focus in 2006, Paul founded the Karger Group at UBS, where he led a team that counseled global high-net-worth families.
Day-to-day, Paul partners with Twin Focus’s key clients to advise them on a broad range of complex business, financial, and life decisions, including generational wealth transfers, extreme tax planning, investing, and more. He also leads the firm’s direct investing efforts in private equity and real estate. Paul, welcome to the show!
Thanks, Dave! Great to be here.
Awesome to have you on the show, Paul. I’ve been looking forward to this discussion. I know we both grew up in the New England area and share some similar values, as well as experiences. I think you have some powerful lessons from your journey that can provide great value to our listeners. So why don’t we start things off? For those who may not have heard of you or Twin Focus, tell us about your journey, how things started for you, and how you got into the wealth-building space.
Dave, thanks for the question. As mentioned, I founded Twin Focus about 17 years ago. I was previously an investment adviser, or what we used to call brokers. I started my career at PaineWebber in the late ’90s. PaineWebber was subsequently acquired by UBS around 2000 or 2001. At that time, I was a young broker without a deep network, so I began my career dialing for dollars. I started with a phone book and worked nights and weekends. Back then, you could actually cold call people, which has become much more challenging today. I built up a small book of business, and like many of us, I had a few lucky breaks along the way. You meet interesting individuals who can change the trajectory of your career, and I had a couple of those early on.
I tend to be a pretty good storyteller, and I experienced early success. By around 23 or 24 years old, I became a vice president. At about 25 or 26, I started my group within UBS. We were quite different from many others in similar roles at that time. I pursued the CFA designation, which is somewhat uncommon for financial advisers; most pursue it on the buy side or in money management. I added to my credentials and gradually climbed the learning curve in the industry, building bigger and bigger relationships along the way.
Around 2004, I met a gentleman through a referral from another client who had just sold his company for $150 million. At that time, I was managing clients in the $1 to $10 million range, so this was a pretty foreign subset of clients for me, but I jumped at the opportunity to work with him. As luck would have it, another adviser in my office had cold-called him about a week before our introduction. Nonetheless, I went down to see him in New Jersey from Boston.
When I arrived, he asked me what I thought he should be investing in, and I honestly told him I had no idea. I felt he needed to focus on building a team first and putting a plan together, and I offered to help him do that. After my visit, my managing director called me into his office and said he wanted me to split this relationship with the other adviser. I replied that it wasn’t for me; I felt the margins would be too thin and that I would end up doing all the work. I wished them luck in capturing the relationship, but I was determined to pursue it myself.
At that point, I spoke with my twin brother, Wes, and said, “We should leave UBS.” I believed there had to be more people like this gentleman out there facing big issues that went beyond what typically happens inside a brokerage account. It took some convincing, but after about a year and a half, I persuaded Wes that we needed to leap. We charted a plan to launch our advisory firm, and in the early days of 2006, we prepared to resign from UBS.
After resigning in June 2006, I found myself sued by UBS. It was the first time in my life I had ever faced legal action, and I quickly learned about that process. I settled with them and was off to the races.
It was just my brother and me, along with a couple of interns working for free, an assistant, and a few thousand square feet of office space atop one of the big buildings in Boston that we could barely afford. I cashed in my 401(k)—which I typically wouldn’t advise anyone to do—and Wes and I borrowed some money from friends, along with our savings, to get the business off the ground. Shortly after settling my lawsuit with UBS, I called that gentleman I had met a couple of years prior and said, “Hey, remember me?”
He replied, “Yes. Where did you go?” I explained the internal politics I had faced, and I asked him what he ended up doing with his investments. He told me he had split the money across four or five different brokers, but he couldn’t track it because everyone was giving him conflicting advice. He said he needed someone to help him oversee the big picture.
So, my brother and I went down to see him in New Jersey, and within a couple of meetings, he signed up with us. That became our first $100 million relationship. Looking back 17 years ago, the ultra-high-net-worth industry and the family office model were still very new. This was the early days of the significant wealth proliferation we’ve witnessed over the last 15 to 20 years. Twenty-five years ago, having a $100 million relationship in Boston was rare; there were only a few families with that kind of net worth. Today, many families across the U.S. and around the world hold that level of wealth.
There has been a significant proliferation of wealth globally, and families like this face institutional-type complexities. We often refer to them internally as individuals because they possess these institutional complexities while still being individuals who, at least in the U.S., are paying U.S. taxes. Over the last 17 years, starting with that one significant family, we have built the business brick by brick, client by client, to where we are today, overseeing just shy of $8 billion for about 40 families.
Wow, that’s such an inspiring story! As an entrepreneur, did you have a particular “light bulb” moment or a burning passion that led you to say, “Hey, I want to solve this specific problem” or “I want to work with this particular clientele,” prompting you to break free from UBS?
As I became more senior at UBS and was running my group, I noticed that my competition wasn’t the other brokerage firms like Goldman Sachs, Morgan Stanley, or Merrill Lynch. They were at the table, but I felt we were differentiated enough to compete against those types of offerings. I continued to see that the real competition came from truly independent firms that weren’t just pushing products to their clients, often called the “product of the day” pushed by sales managers.
I also noticed that the fee structures were confusing for clients. Around 2004, when I met this large individual, I thought, “There’s got to be a better way to do this.” I spent about a year and a half meeting with other firms, contemplating whether I should open a firm in Boston, consider franchising, or figure something else out.
Ultimately, I realized this was the early days of the family office concept, and I thought, “I can do this myself. I’m willing to take the risk on myself.” My brother and I have always had an entrepreneurial spirit, likely due to our upbringing. We didn’t have the safety net of wealthy parents; we were raised by a single mother who taught us the value of hard work. I never really considered failure an option; I always knew I would keep figuring things out.
Sure, there are little failures along the way, but that’s how you learn. You pick yourself up, keep going, and learn from your mistakes, telling yourself, “I won’t do that again” or “I won’t approach it that way next time.” I believe that ethos is deeply embedded in our firm today. Any company reflects the genesis of its founders, and that’s especially true of TwinFocus’ hustle mentality. Our client base reflects that as well because, as I often say, people do business with those they like, and they tend to work with people who are like themselves. When you look at many of our clients at TwinFocus, they are, in many respects, just like my brother and me.
People do business with people they like and people do business with people like themselves.
Paul. Can you also share your journey into the investment world? I know that growing up in a middle-class family in Connecticut, I was led to believe that the only investment options available were Wall Street stocks, bonds, and mutual funds.
That was the only option until I started studying the top 1% and how they build wealth. I began to explore how they allocate capital and discovered other asset classes, like real estate and private equity alternatives. That’s when I learned how to create a solid portfolio. I know you focus on real estate and private equity in addition to equities. Can you share a bit more about your journey and how you view these different asset classes?
Sure! Over time, we’ve learned a lot. As much as I’d love to say I started my career working with $100 million-plus families, that’s just not the case. My first relationship was with the local liquor store owner, who bought $20,000 worth of stocks from me. I earned a commission on that. But gradually, over time, I upgraded my client relationships. You learn based on their needs and strive to offer differentiated services and products.
On the real estate side, we’ve been investing in direct real estate opportunities on behalf of clients for the last decade, but not formally. We were co-investing until 2018 when the Trump administration introduced the Qualified Opportunity Zone program. This was an ideal program for many of the families we work with, so we formalized our efforts around real estate investing.
Regarding alternatives, I understood these products through my CFA and experience as a financial advisor at UBS. However, it wasn’t until I started my firm that I needed to formalize our research efforts in identifying and conducting due diligence on those managers. As you know, that opportunity set is constantly shifting. Twenty years ago, long-short equity investing was significant, but today it’s harder to differentiate as a long-short investor. Moreover, from a tax perspective for U.S. taxable investors, it’s challenging to make sense of long-short returns, even if you’re delivering returns north of 10% or in the mid-teens, due to the current tax profile where fees can’t be deducted.
So, it was really out of necessity that I learned about various asset classes. Interestingly, the CFA curriculum evolves based on current opportunity sets. Maybe we can discuss this further later, but with rising interest rates, there’s a significant opportunity in credit. Different managers are exploring various areas of the credit spectrum, whether it’s real estate credit or corporate credit. As the Fed indicates a “higher for longer” stance, we may see stress in the system.
Companies that financed their businesses or assets in a lower interest rate environment a decade or even 20 years ago are facing a reckoning now, having to finance assets at higher rates. Some assets may not even make sense to finance at these elevated rates. So, there will be interesting opportunities ahead, alongside potential challenges for some.
I agree. Have you developed a specific wealth strategy or investment thesis that you follow for the families you manage?
We largely split our allocations into three buckets. Of course, this can shift from client to client. For clients who are just starting with a pile of cash, the strategy is very different than for those with a legacy portfolio they’ve been investing in for a decade or more. Generally, we categorize investments into equity exposure, cash, and fixed income for liquidity with minimal risk, and lastly, an alternative bucket, which encompasses a wide range of investments.
On the equity side, we strive to keep things simple and not overthink our approach. There are too many potential pitfalls in investing and running family offices. We utilize a lot of tax-managed products, regularly harvesting losses while maintaining inexpensive exposure to beta. We also use various ETF products and low-cost mutual funds to establish satellite positions within equities. Our focus is on the regular rebalancing of those allocations.
On the fixed-income side, the landscape has shifted dramatically. For the past decade, investors had to reach for yield, but that has changed significantly in the last 18 months. As of today, the 10-year yield is topping 3.5%, and the 30-year looks like it’s north of 4%.
This is a very different environment. Historically, there was little cost to investing in riskier assets because cash returns were negligible. Now, there’s a significant opportunity cost to consider. For example, you can sit in short-term treasuries and earn 5% or 6%, which is quite appealing. I’m not sure how long this short-term opportunity will last, but the Fed seems to indicate that rates may remain elevated longer than most anticipate.
This may be the time to broaden our approach and consider extending the duration. It’s interesting to lock in almost 4% risk-free on 10-year treasuries when just a few years ago, you were struggling to achieve that yield in real estate, often targeting a 4% cap rate. Today, you can achieve that return with risk-free treasuries.
Our last bucket is alternatives, which we view as more tactical. We focus on what’s working today and firmly believe in the importance of diversification. As the saying goes, diversification is the only free lunch in investing.
One of the advantages of working with ultra-high-net-worth families is the ability to take long-term views and make investments where you don’t need capital immediately to cover living expenses. Those expenses can be budgeted from other sources. Currently, distressed credit and commodities are appealing opportunities. We’ve gained exposure to commodities in various forms, from liquid to illiquid investments, including trading managers.
Real estate also remains a key focus, especially for U.S. taxable investors. It offers the potential for locking in yields that provide some inflation protection, with the hope that these yields will increase as rents rise over time. However, the real estate landscape has been turned upside down by current interest rates, and it may take some time for the market to stabilize and reveal clearer opportunities.
Today, investing requires some risk-taking, particularly in areas that are less traditional. The pandemic and shifts in living patterns have also altered opportunities in sectors like multifamily and industrial real estate.
For your clients, do you have a specific return profile, like an average IRR or rate of return across all these assets? Or are you primarily focused on wealth preservation strategies, and risk mitigation, in addition to capital appreciation?
The answer is all of the above. As the old saying goes, if you’ve seen one family office, you’ve seen one family office. We look to diversify across asset classes.
However, it’s essential to manage liquidity when dealing with family offices. Liquidity profiles vary from family to family, which means portfolios can look different. Over time, there is some continuity across our portfolios because we pursue similar trades and themes. Yet, some clients have legacy positions, so it wouldn’t necessarily make sense to double up exposures or advise clients to sell investments they had before our relationship, especially if it doesn’t make tax sense.
The beauty of our family office model is that we can think objectively and independently. From an incentive standpoint, we’re compensated based on the overall relationship rather than the specific investments we make. This means we’re just as inclined to advise a client against an investment or to keep an existing investment as we are to recommend new opportunities.
That’s a great model because, frankly, many typical advisors are primarily focused on collecting assets under management fees and may not have aligned interests with their clients. We aim to be advocates and true fiduciaries, enabling clients to make the right decisions objectively.
So, Paul, you mentioned extreme tax planning, which is one of my favorite topics. I never thought I’d get so excited about taxes, but over the years, I’ve realized the importance of tax mitigation strategies, especially after exiting a business with significant tax considerations. Are there any typical strategies you advise clients on that you can share with the audience?
Sure. In building a comprehensive wealth management solution, whether through a family office or otherwise, I often liken it to cooking. I love to cook! You don’t just show up in the kitchen and start throwing things on the grill; there’s a lot of preparation involved before you start cooking.
It all begins at the grocery store, where you consider how many guests you have, who eats what, and any dietary restrictions. Similarly, in wealth management, you need to think about your client’s specific needs and preferences. This includes a variety of investment types to ensure diversification.
Once you have your ingredients, the prep work is crucial before anything goes on the grill or skillet. While grilling or cooking can be fun, the real work happens before you start.
When clients come into a windfall of cash, the last thing they should initially think about is how to invest that money—that part can be relatively straightforward. I don’t want to downplay the complexities of investing, but it tends to be more formulaic. The challenging aspect is planning around the wealth: identifying long-term objectives, ensuring suitable estate planning documents are in place in case of unforeseen events, and understanding how those assets will flow over time.
When new families come to Twin Focus, we spend significant time establishing the estate infrastructure to ensure it aligns with our client’s goals and objectives.
A lot of that involves tax planning, efficient wealth transfer to the next generation, and charitable planning centered around philanthropic intentions. Only after establishing that infrastructure and those various buckets to receive cash over time can you start thinking about investing. The different buckets in your financial life—whether they are charitable vehicles or trusts for children—will likely have very different risk and liquidity profiles.
You need to consider the different time horizons and beneficiaries involved before you can determine how to invest the capital. It’s crucial to lay the groundwork and understand the tax implications. In terms of tax strategies, both we and most in the high-net-worth community focus on how to pass wealth efficiently to future generations.
In a lower interest rate environment, many techniques rely on those low rates. Essentially, matriarchs and patriarchs would loan money in specific ways to future generations, receiving interest payments in return, allowing the next generation to profit tax-free from the spread. While you may benefit from higher rates on the investment side by investing in fixed income and other assets that yield higher returns, there’s a higher cost associated with estate planning in such an environment.
In a higher interest rate world, vehicles like GRATs and CLATs may not be as effective. However, there are still many interesting estate planning techniques to help transfer assets to future generations and mitigate taxes. I mentioned earlier the Qualified Opportunity Zone (QOZ) program that has emerged in the past five to six years, initially introduced by the Trump administration and receiving bipartisan support. This program allows investors to take capital gains generated from various sources—such as selling stocks, businesses, or even gains reported on K-1s from a hedge fund or private equity investments—and roll them into new investments without paying taxes on the initial capital gain until 2026.
Moreover, there are significant tax benefits for investments made through this program. If you hold these investments for over 10 years, you can avoid paying taxes on the gains accrued after that period. We’ve utilized this strategy extensively for families experiencing recent windfalls from selling businesses or other assets. Many of our clients are professional money managers, hedge fund managers, or private equity managers who receive their annual income through K-1 gains. This has been a significant tax advantage over the past five years, benefiting our country and communities by fostering economic development and addressing housing and infrastructure needs in areas that require support.
So, yes, that’s exactly what the tax code is—a sprawling 6,000 pages filled with incentives for business owners and investors who can navigate it and put it to good use. Unfortunately, there aren’t enough quality CPA firms providing the right advice to help clients leverage these opportunities effectively.
A key part of preserving and growing wealth, especially for high-net-worth and ultra-high-net-worth individuals, is effective tax planning. With the way the government is spending money, one thing I’m certain about the future is that taxes will continue to rise. Therefore, tax planning is crucial.
As you pointed out, looking down the generational line—thinking about future generations like G2, G3, and G4—is critical for long-term success. We’re witnessing a significant exodus from high-tax states in America, with people leaving places like Massachusetts, Connecticut, New York, and California. Massachusetts, for instance, recently instituted a millionaire’s tax, which imposes an additional 4% on all income over $1 million. This includes any gains from selling a business or other assets.
States like Florida, Texas, and Tennessee have become major beneficiaries of this migration, as they don’t impose significant estate or income taxes. Recently, I spoke with a client who moved from Boston to Florida. They shared an interesting anecdote: while waiting in line at the DMV, the clerk mentioned that they were the 24th person that day who had relocated from Massachusetts and needed a Florida license.
I also have a friend in Maryland who had an $80 million exit and purchased a $20 million home in Florida, still having money left over compared to what he would have lost if he had stayed in Maryland due to state taxes. He successfully utilized geographic arbitrage to his advantage.
Everyone needs to stay informed about the changing tax laws and how they impact long-term wealth. As you noted earlier, Paul, everything should align with your long-term goals and vision. Does your family share this vision? How can you adjust your portfolio to achieve the life you want?
When it comes to developing a strategy for individuals who come into money or are looking to allocate funds, it’s important to stress the value of hiring good advisors. It’s similar to dealing with a medical issue: if you get sick, you won’t go to medical school. Instead, you’d find a trusted doctor who knows what they’re doing. The same principle applies to wealth advisors, tax advisors, or legal advisors.
While you should educate yourself on the relevant issues, you likely won’t have the time to obtain a law degree or CPA just to make informed decisions. It’s about assembling a team of good advisors who can help you navigate the complexities of wealth management. These issues are often multifaceted, which is why firms like mine exist. We help clients think holistically and address potential blind spots, considering all aspects—legal, tax, and investment—simultaneously.
It’s about understanding the upstream and downstream effects of making one strategic move. How will that impact something else? Having that visibility is key. In my book, The Holistic Wealth Strategy, I discuss the importance of building your dream team. Finding great advice can be challenging, especially when navigating the world of alternative wealth strategies that go beyond the typical guidance from Wall Street.
As you mentioned, a holistic view is essential. It includes lifestyle, health, and taxes—all these different components. When you get it right, it’s like cooking: bringing the right ingredients together can lead to an elegant outcome.
Absolutely. Hiring the right advisors is crucial, and it’s important to take your time. You’ve spent your whole life earning these funds or building a business, and after a big exit, there’s no need to rush. It’s easier to say that in 2023, where you can earn 5% by simply keeping money in a bank account, compared to a few years ago when it felt like the money was burning a hole in your pocket.
Another thing I tell clients is that if you’re high-net-worth or ultra-high-net-worth, you shouldn’t focus on optimizing against a benchmark like the S&P 500. That benchmark has little relevance to your life. Instead, you should aim for peace of mind, ensuring you can sustain the lifestyle you want. You can’t just reach for returns; returns depend on what the markets provide. It’s about managing risk and liquidity, and while that’s easier said than done, that’s truly the goal.
Well said. It’s challenging in today’s world because it’s so reactionary. If you’re running a business or working in a high-stress job, it’s hard to carve out time to determine what you truly want in life. One exercise we help clients with is creating a list of 100 things they want to be, do, or have. This clarity can serve as a guiding compass in achieving those goals.
As you pointed out, once you reach a certain threshold of wealth, making more money doesn’t necessarily change your life. It’s about identifying the levers that drive what’s meaningful and important to you.
So, Paul, if you could offer one piece of advice to our listeners about how they could accelerate their wealth, what would it be?
That’s a great question. I often focus on the potential downsides for families while letting the upside take care of itself. I advise people not to fall in love with any investment—it doesn’t love you back. Additionally, everything in life takes more money and time than we anticipate. It’s crucial to keep this in mind when allocating capital, especially to early-stage opportunities.
It can be tempting to think, “I’m getting in at an amazing value; I should go all in.” However, the reality is that everything will require more resources and time than you expect. There will be another opportunity for a “bite at the apple.” Therefore, it’s important to be measured and ensure that any investments you make—especially after you feel like you’ve “made it”—won’t materially impact your life, whether positively or negatively.
You don’t want the investment to be so small that it doesn’t move the needle, but you also don’t want it to be so large that you have to think about going back to work.
Well said. Paul, I appreciate you coming on the show today and sharing your wisdom and sage advice with our audience. If people want to learn more about you or Twin Focus, what’s the best way for them to connect?
You can visit our newly launched website at www.twinfocus.com. I think you’ll find it informative, and there’s a contact button there if you want to get in touch with us. I appreciate that, Dave.