Publications

- May 1, 2018: Vol. 5, Number 5

Going organic: Peter Mallouk bought a $100 million RIA in 2004. Today, Creative Planning is a $34 billion leviathan, and all that growth came without raiding wirehouses or making acquisitions

by Mike Consol

Industry awards and rankings are a dime a dozen, which is why this magazine has never paid heed to such dubious honorifics. Still, it is an attention-grabber when an RIA is identified as the nation’s best four times by Barron’s, including three consecutive years (2013–2015); the No. 1 wealth management firm in the United States by CNBC two consecutive years (2014–2015); the decade’s top RIA by Forbes; and a member of the top RIAs list compiled by the Financial Times.

It did not take long to figure out why Peter Mallouk and his firm, Creative Planning, were garnering so much attention. In only 14 years, Mallouk lit a match to a one-office, $100 million firm dealing in nothing more complex than two-dimensional stock and bond portfolios, and watched it explode into a 22-office, $34 billion full-service firm serving the interests of more than 15,000 clients, most of them high-net-worth individuals and families. During a 12-month stretch during 2016 and 2017, he hired 100 advisers to support the firm’s torrid growth — personally interviewing each one of them before signing off on their offer letters.

For all that success, Mallouk still does not have a luxury vehicle or a secretary to his name, instead favoring a modest and dependable Acura, and to answer his own phone. This has never prevented him from leaving the office between 5 and 6 p.m. to attend one of his children’s sporting events.

What annoys Mallouk is the widespread industry practice of constructing client portfolios that financially benefit advisers more than clients, and a federal regulatory regime that does not begin to address the problem, while crushing wealth advisory firms with compliance paperwork and expense.

“I honestly think that if you are a financial consumer and you are dealing with a brokerage house, you are just out of your mind,” Mallouk told The New York Times. “The problem in American finance is that if you go to a large broker, you are assuming he will act in your best interest, but by law he does not have to. It’s horrible. People don’t even know that they are paying someone to sell them something.”

If you could go back in time, what would you tell a 25-year-old Peter Mallouk?

Faster!

What is your most pronounced characteristic?

Drive.

If the most recent year were set to music, what would be the first cut on the soundtrack?

“Here Comes the Sun” by The Beatles. I start and end each year with that song!

Favorite quotation?

“To whom much is given, much is expected.” (Luke 12:48)

Tell us something people would be surprised to know about you.

I used to own a chain of used-music stores while I was in college. Let’s just say I learned about high-speed Internet and how quick capitalism can work the hard way.

Which historical figure do you most identify with?

My dad. Yes, I understand the question.

You’re organizing a dinner party. Which three people, dead or alive, do you invite?

It seems like an hour with Jesus Christ would provide a lot of clarity going forward. I wouldn’t tell him who to bring along, but he could bring whichever two folks he thought would be most interesting.

What is your greatest extravagance?

Tennis shoes. I own lots of them. My kids make fun of me.

If you could change one thing about yourself, what would it be?

I am incredibly impatient. That helps a lot most of the time, but at times it’s better to dial it back a bit. I’m working on it. Oh, and I’d like to be 6 inches taller, too.

Most influential book you have read?

Awareness by Anthony de Mello.

What phrase is most overused in your industry?

Downside protection.

Where did the idea for Creative Planning come from?

Creative Planning has been around since 1983; it was a small RIA. In 1998, the owner brought me in to handle financial planning for their clients, and in 2004 I bought the firm. It had less than $100 million in assets under management when I acquired it.

Creative Planning seems like an unusual name for an RIA.

I would agree. I was frustrated with the name early on because it sounded like an ad agency, but it has really come to symbolize a lot of what we do. So, in a roundabout way, it really could not be a better name.

In what ways is the name emblematic of what the firm does?

High-net-worth investors already have a lawyer, a CPA, a money manager and financial planner, but what they are longing for is someone who can visualize how all of these interrelate, and a plan that makes sense to them on paper, legally and tax-wise. That grand scheme is how we look at things.

How has the operating model changed at Creative Planning during your tenure?

When I bought Creative Planning, it was a firm that did financial plans. It picked some mutual funds, and that was it, and that is how 95 percent of the industry operated at the time, just doing straight-up-the-middle-type stuff.

And now the array of services includes what?

We have a trust company, and we help business owners with retirement plans, risk management and asset protection. We have about 35 people who come to work everyday that are involved in our estate planning practice, and more than that in our tax practice.

In one decade, your firm grew from $50 million to $12 billion in AUM. How did the firm grow so quickly?

A big part of it was the direction the industry moved. The first thing was that money moved from brokers to independent firms. If you look at the last five years, the share of the marketplace controlled by brokers has gone down and has been directly correlated to the share of the marketplace that has increased for RIAs. The second shift is the move from active to passive management, and part of our portfolios is passively managed. We were one of the largest holders of Vanguard ETFs before most people knew what ETFs were, so we were there before the market moved. There has also been a major movement in the RIA space from smaller firms to larger firms, and the top 50 RIAs are getting a huge percentage of market share, and we are one of those top 50. We were in the right place when each of these shifts occurred. And we were executing for our clients. They could see and feel that, and they became advocates and referred people to us.

You started your career helping advisers with estate planning. What did you learn about the RIA business while you were playing that role?

I probably worked with 100 different advisers, and a lot of them worked at brokerage houses, so I really got to see the entire business from big brokerage houses to small ones, from the independent broker/dealers to RIAs. There was a tipping point when I had to set up a pretty complex estate plan for a client and recommended several things to the adviser. When I did the annual review with the client a year later, his portfolio had a whole bunch of the adviser’s proprietary funds and annuities, things that made no sense for the client. That’s when I decided I wanted to get out of this business and find a way to work directly with clients, and to have a place where legal work, tax advice, financial planning and investment decisions were all done in one spot.

How does a portfolio end up with investments that make no sense for the client?

There are a lot of extremely ethical, highly competent advisers in this industry, but they are the minority. It is just the reality. For example, a lot of advisers sell their clients annuities. Why would they do that? Sometimes, from a planning perspective, you can make a case for it, but the adviser was being paid five or 10 times more with annuities than other investments, so there is a lot of financial incentive to do things that are not in the best interest of the client. It is just the reality of how the industry is set up.

What is driving industry consolidation?

Two things: regulations and technology. The burden of compliance is borderline ridiculous; it is just completely out of control. The rules are fairly arbitrary, and you have to dedicate a lot of time, resources and money to it. We have in-house compliance, and then we have compliance consultants, and then we have compliance attorneys, and then we have other compliance attorneys. It is just amazing the amount of time and energy and resources you have to put into it, and we are pretty plain vanilla — no commissionable investments, using fairly low-cost options for sophisticated clients that are hiring us as a pure RIA, and we still have this major burden. I don’t know how a firm with $50 million or even half a billion dollars can afford a serious commitment to compliance.

What about the tech requirements?

The demands are off the charts. As an example, we have several teams dedicated to special projects and operational aspects that integrate technology at our firm, and to figure out how to make things run faster and better.

How could industry regulations be made rational?

One, everyone has to be a fiduciary when handling investments. Two, advisers are forbidden from receiving commissions on investment products, so the inherent conflict of interest is eliminated. Three, an adviser cannot be paid to recommend their own funds because that is an inherent conflict. You eliminate those three things and you solve 95 percent of the problems, and the industry wouldn’t have the economic burden we have today with a huge series of rules that don’t really benefit the end consumer.

Has the industry put forth a regimen similar to what you’re talking about?

No. The industry doesn’t want that because it makes much more money operating with conflicts of interest. The reason brokerage houses fight the fiduciary rule is because if the fiduciary rule were in place, they would have to act in the best interest of the client, which means they would have to disclose all their fees. They wouldn’t be able to sell their own proprietary funds unless they can demonstrate it is the best option. These are very big profit centers for the overwhelming majority of the industry, so the industry is not interested in these rules, so they lobby Congress and prevent the rules from passing.

Characterize your client base.

The biggest group is the “millionaire next door,” which numbers 10,000 to 20,000 clients. We also have an ultra-affluent practice for people who have $25 million to $100 million in investable assets. There is also a new practice we started about 18 months ago that helps clients with less than $500,000 by providing a streamlined process to help those clients grow their assets above the $500,000 mark, where they can get access to the broader array of services.

What is the geographic spread of your clientele?

Only 10 percent or 15 percent of our clients are within hours of our office headquarters in Kansas City; the rest are all over the country, with some of the largest concentrations in California, New York, Illinois, Texas and Florida. Those are very big areas for us.

Has the firm’s growth come primarily from organic expansion or acquisitions?

Today we manage around $34 billion in assets, and about $33 billion of it is organic. Our emphasis is organic.

No interest in acquiring other firms?

I don’t want to acquire firms. When you buy a firm, you buy complications. I don’t know what the point is. We have the scale now to handle the technology and the compliance. I am much more concerned with being the best possible firm we can be for high-net-worth investors than being the biggest. I have no desire to go public, and I have no desire to be the biggest firm on earth. I do have a very intense desire to work with the best people possible and provide the best value possible to the client. That usually isn’t accomplished through acquisitions.

Describe your management style.

Somebody who looks for stars, lets them shine and removes obstacles. If my people are underperforming, I will let them know. If they are successful, I will make sure there are no impediments. I am not a micromanager at all; I let people do their own thing as long as they are delivering on our promise to our clients.

You say you hire “stars.” How do you know a star when you see one?

I’m looking for hands-on experience. I don’t want to teach a receiver how to catch a football; I want them to have already caught a football a thousand times. I just want them to learn how to run our route. I meet with every single person before they receive an employment offer from Creative Planning.

When you meet with a candidate, what do you want to see and hear?

I am trying to find a real passion for excellence, someone who really wants to be great and has the energy to compete at this level, someone who can see themselves completing their career with us.

Describe your ideal candidate.

The dream candidate is someone who has got hands-on experience at another RIA, so they understand the process, and I can teach them our way of doing things. I don’t really hire from the brokerage world because they are doing things completely different than us, and then I’ve got to convert them. I don’t want to convert somebody’s way of thinking. I want somebody who is already passionate about the fiduciary standard and being independent.

What was the most formative professional experience of your career?

I had recommended to a client that he buy a term life insurance policy, and he decided not to do that. I recommended to another client that she buy a long-term care policy, and she decided not to do that. In another case, I recommended a client diversify his stock, and he decided not to do it. All three of these instances were early in my career and things didn’t work out for those clients. One died and another took a hit in the stock market. They all said, “Why didn’t you recommend this?” I pulled up the recommendations, and I showed them that I had, in fact, recommended it and reminded them that we had discussed it several times. One of them said something that stuck out to me, which was, “You should have been more forceful.” That’s when I realized it wasn’t enough to make recommendations; I really needed to push people to do the right thing to protect themselves.

What was the most formative personal experience of your life?

It’s cliché, but there is nothing like having a kid. As soon as you have a kid, you look at everything differently, and everything that you are doing in this profession comes to life. It is generational.

Tell us about your involvement in charitable causes.

I am very involved, I want the firm to be very involved, and I want the people in the firm to be involved too. We have several charitable events each year and encourage our employees and their families to participate. We have multiple blood drives; we go to a charity called Giving the Basics, where we help them put together basic-need packages for people who are in need. We have a day with the food bank, and there is an event where we provide everything needed for a Thanksgiving dinner that we have done for over a decade. Most firms in our business are involved in things that would draw clients — such as memberships to museums and symphonies and ballets. Those are wonderful things, but I am very focused on, “How do we help the part of the community that we are not serving day to day?” It helps remind us the whole world isn’t like the people we are seeing every day. There are a lot of people that need a helping hand, and I personally want to be a part of that, and I want our firm culture to embrace that.

What assets or strategies are currently high on your list?

It normally stays the same. On the stock side, we are largely passive. When it comes to bonds, we use individual bonds or funds, depending on the client’s needs. We are also believers in alternatives for the affluent, having private real estate, private equity or private lending. We have never recommended public equity hedge funds.

You bought a building years ago as your headquarters office. Now you are building a new headquarters location. Why invest the money in buying or construction? Some business people would regard that as unnecessarily tying-up the firm’s cash.

In July we are moving to a headquarters we built just a few blocks from where we are now, and we are going to occupying 175,000 square feet. I’m not interested in it from an investment perspective; in fact, I don’t think it is a great investment. What I like is controlling the location, the environment for our team, and controlling everything the client is going to experience, rather than counting on a landlord to do it. I don’t want the client having to go to a different building every five or 10 years.

What is the best piece of career advice you ever received?

“Be intentional about your path, every year, every day.” I try not to meander through a day. I have very specific personal and professional goals, and if I’m spending time on something that isn’t helping me progress toward either of those, I am quick to ask myself why I am doing it.

How do you like to spend your time outside of work?

I enjoy traveling with family and friends, particularly to new places. We are working on hitting all the Major League Baseball cities, and my kids are bracing themselves to tackle more national parks.

What is your idea of perfect happiness?

Having all the pieces in place to make a lasting difference for everyone I touch, personally and professionally.

What are you afraid of?

Ordering a piece of chocolate cake and having it delivered drenched in a raspberry sauce, or my 12-year-old daughter when she is upset. Different types of discomfort.

What is your biggest regret?

Life is too short to work with a very difficult client or employee. I wish I set the bar higher earlier. If this ends up being my greatest regret, I will consider myself a fortunate man.

What would be your first choice for a new career?

Running a nonprofit or being a guest DJ at nightclubs.

What book might people be surprised to find in your bookcase or iPad?

Black Mass, a book about organized crime figure Whitey Bulger. My brother Mark wrote the screenplay for the movie and gave me an autographed copy. It definitely sticks out in my collection of books that are mostly about business, finance, religion and psychology.

How do you want to be remembered?

I would love for people to meet my kids many years from now and see some of me — the good parts only I hope — in them.

Mike Consol (m.consol@irei.com) is editor of Real Assets Adviser. Follow him on Twitter
@mikeconsol to read his latest postings.

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