Peter Mallouk, president and chief investment officer of Creative Planning, is on a recruiting spree. Brokers need not apply. The owner of the leading independent RIA is seeking financial planners from the RIA world with no assets under management, no entrenched investment philosophy and no objection to rolling up their sleeves and digging in, he told ThinkAdvisor in an interview.
The growth of Creative Planning, based in Leawood, Kansas, has skyrocketed since Mallouk, 47, bought the firm 13 years ago when assets under management totaled $30 million. AUM is now $26.2 billion, about $8 billion more than a little over a year ago.
Mallouk, a Kansas native, purchased the advisory after working as an estate planning attorney there for five years. As an FA, he went on to be named by Barron’s America’s No. 1 independent financial advisor for three consecutive years.
CP’s focus remains “the multimillionaire next door,” as Mallouk puts it. Right now, though, the firm’s two best-growing client segments are the ultra-affluent and folks with less than $500,000 to invest.
CP has two compensation structures: For advisory services, it charges an annual fee; the insurance arm receives commissions — for work on business owner clients’ 401(k)s and health insurance plans, for example.
With as many as 20,000 clients — 25% live in the Midwest — CP has only 150 advisors in 17 offices of varying sizes in the U.S. and overseas.
Apart from hiring more wealth managers, as Mallouk calls his advisors, whom he differentiates from his planners, who don’t interact with clients, the goal is to add 100 folks — planners, attorneys, CPAs, traders, client service specialists — in the next 12 months.
Under one roof but separate entities, Creative Planning Tax and Creative Planning Legal make available to clients CPAs and estate planning attorneys as part of the advisory team. Mallouk is sole owner of the tax unit and majority owner of CP Legal.
To be sure, the wave-making RIA is expanding: Under construction is a 150,000-square-foot new headquarters building in Overland Park, adjacent to Leawood, set to open in August 2018.
Mallouk’s referral strategy is unique and clearly works well. On top of circle-of-influence professionals, four custodians, including TD Ameritrade and Charles Schwab, provide referrals for which they are paid. Mallouk’s director of investor psychology, coach-business strategist Tony Robbins, is a potent source of referrals, for which he too is compensated.
Other members of CP’s board of directors include financial consumer advocate Jane Bryant Quinn — serving also as director of fiduciary advice — and former Wall Street Journal columnist Jonathan Clements, who is director of education.
Safe to say clients come to CP by way of the book “Unshakeable: Your Financial Freedom Playbook” (Simon & Schuster) that Mallouk and Robbins co-wrote, and released this past February. Similarly, Quinn holds CP seminars in New York City and explains fiduciary in correspondence to clients and at the firm’s annual meetings.
ThinkAdvisor recently interviewed Mallouk, on the phone from his office in suburban Leawood, before flying to New York to appear next morning on Maria Bartiromo’s TV show. That was just a few days after CP scored an $11 million account. Four weeks before, The New York Times profiled CP under the headline, “A Kansas Investment Advisory Firm is Spurring Big Change on Wall Street.” Heady times indeed for Creative Planning. Here are excerpts from our interview:
THINKADIVSOR: The trend to money shifting from brokerages to RIAs shows no apparent let-up. You’ve been the leading independent advisor making the charge. What do you see as having the biggest impact?
PETER MALLOUK: There’s been traction. People really are moving toward independent advisors. The brokerage world is looking at the RIA space and going, “Oh, no! This is actually happening.”
A year and a half ago, Creative Planning had $18 billion-plus in AUM. Now you have $26.2 billion. To what do you attribute that huge increase it?
Part of it is that the markets have been very good — in particular, parts of the market that we’ve been invested in. When you start with $18 billion and get double-digit growth, you get a nice kicker. But from our very first year, we’ve grown 30% or more. If anything, our growth rate has maybe declined a little. It’s just bigger dollars now.
Why would a client choose you over a higher profile firm, such as a wirehouse?
Awareness of us is growing. Now that we have some scale and have been noticed, I think we compare extremely favorably to the brokerage world. That’s where the [growth] momentum comes from. But we’re not under the illusion that we’re on a level playing field. We’re nothing compared to multi-million-dollar [wirehouses].
You’re the face and leader of Creative Planning. In that way, are you any different from, say, Ric Edelman or Ken Fisher?
Their organizations are very much built on the model of assets coming in through the leader. We’re not “Mallouk Wealth Management.” There’s a diverse way that clients come in and in the way the money is managed. I’m not the marketing voice. We have a multitude of ways clients find out about us that have nothing to do with me.
Tell me about your referral strategy, then. You’ve got referral-compensation agreements with, for example, Tony Robbins and with your custodians. In addition, other big names, such as Jane Bryant Quinn, compensated for being on your board of directors, advocate for the firm.
Most of our clients come from our clients, and we get referrals from the traditional realm, like CPAs and attorneys. We have four different custodians; and probably among them, there are 500 or more firms on their platforms. Our success there is because a lot of what we offer is unique in the marketplace.
Do advisors bring in high levels of assets when they join you?
More than 95% bring zero assets. They’re not coming from the brokerage world. They’re more likely to come from an RIA or a custodian. A financial planner from another RIA is a very typical hire for us. They don’t have their own book of business.
What about brokers who want to leave wirehouses?
I’m not looking to hire breakaway brokers or people that have their own practices. If I hire somebody from another independent advisory firm, the clients stay with that firm and [only] the employee comes over. A breakaway broker is probably not going to work out at Creative Planning; so I’m not recruiting them.
Why won’t they work out?
If you hire [FAs with books], you’ve got a bunch of people with their own ideas and their own strategies. We’re set up to have philosophical consistency. I want people that completely buy in to how we do things — how we serve the client, our process. And then the assets will come.
But RIA Ajay Gupta with a $1 billion practice joined you about a year and a half ago. He’s the firm’s chief of investment strategy.
He was one of two exceptions of people bringing in assets of any substance. The other was Randy Hallier and his group that managed a little more than $80 million, who joined us in about 2008.
Your website indicates openings for wealth managers and also for financial planners. What’s the difference between the two?
A wealth manager interacts with the client. They’re looking for client needs and figuring how how to best match them to the firm and how to help them. The financial planners are implementing the plan. They’re delivering on our promises.
What’s your ideal wealth manager recruit?
I’m looking for somebody incredibly intelligent. I couldn’t care less about sales because the clients are coming to the brand. I need somebody who can deliver. Our offering is fairly complex. I need a nuts-and-bolts person that really knows how all this stuff works. Those people are not really shining at most firms. The people who shine are the salespeople. If I can get a person who really understands all of this, to me, that’s a perfect fit.
Are you looking to open offices in locations where lots of high-net-worth people live?
We have a small office in West Palm Beach and one in Tampa. But I’m not on a mission to open one in every rich city in America. That’s going to be driven by demand — having enough clients — whether it’s in Minnesota or New York City.
Please discuss Creative Planning’s investing philosophy.
We’re very tailored. We customize the portfolios versus [doing] model-based investing. We have a tilt toward passive but also use alternatives. We use ETFs and also DFAs [Dimensional Fund Advisors]. We use bonds. Probably 30% of all client assets are in bonds. We emphasize planning and holistic services. Those [approaches] have been in our wheelhouse for 10 or 15 years.
In what frame of mind are investors at present?
I don’t know that people have been more scared than they are right now. People are very scared when the market is way down; now they’re scared that the market is way up. Every year, the level of concern is more than the year before. I don’t see [clients] getting further away from 2008 [financial crisis] and feeling better. I think the anxiety goes up.
What’s your outlook, then, for the market for the rest of the year?
I have a zero short-term outlook. But if you made me pick, I’d be bullish. Looking five years forward, I feel very good. What drives the market is earnings, and a big function of what drives earnings is unemployment. It’s been trending lower for almost 10 years now. With low unemployment, you get wage inflation, which tends to drive a healthy economy. I think the stock market sees that, and that’s why it’s doing so well.
Is President Donald Trump contributing to the investor fear you spoke of?
He creates a tremendous amount of anxiety for a subset of clients. A lot don’t like his unpredictability. But I look at how the things he does [would] impact the earnings of corporate America. Are we going to sell fewer iPhones because of Trump? Are people going to go to McDonald’s less because of Trump? I don’t see policies coming from him impacting any of that.
What are your thoughts about those in the industry who want to kill the Labor Department’s fiduciary standard rule?
The rule says you can get in trouble if you don’t [recommend retirement investments] in the best interest of your client. That’s very problematic if you have your own product. What if you put the client in that product and they sue you, insisting, “This isn’t in my best interest”? Now you’ve got to say that, of all the products in the world, the one you recommended — which you happen to own — was the best one.
And many are very uncomfortable with that scenario, it seems.
Brokers are saying that if an American wants to buy one investment over another, we should let them do what they want; and the government doesn’t need to get involved. I don’t agree.
Your Form ADV says that you own “NextEdge.” What’s that?
Basically a robo solution for people who have less than $50,000 to invest but who want a model that adheres, at least in part, to our philosophy.
Why aren’t you marketing it?
About three years ago, I made an investment in Trizic, an online trading platform. My idea was to have access to that as a solution for those types of clients. It’s been in the making, but we’re not ready to roll it out; and I’m not sure if it will ever get rolled out. Hopefully, we’ll be able to do it someday, but I don’t know if we will.
Would it be all-robo?
Probably it would be robo with human advice, but we haven’t decided.
Do you still offer free second opinions on annuities?
We do. But it’s responsible for [few] people coming over to us. It’s just one of a hundred things we do.
You’re building new headquarters in the Kansas City suburbs, close to where you are now. Why don’t you want to relocate to Wall Street or Los Angeles?
We’re triple-committed to having our headquarters in the Midwest. I have several hundred employees here, and I’m not interested in terminating them all to get a different location.
Any other reasons?
If I were on either coast, hiring gets a lot harder. The culture changes. All of those would be negatives.
Is it true that you’ve banned wealth managers from watching CNBC in the office?
We don’t have TV coming into the building [Leawood headquarters]. So it’s just not possible.
And you’re not about to make it possible.
Right. It’s not beneficial. I want [advisors] to focus on what the client is trying to accomplish, how we put the pieces of the puzzle together to get the client in a situation where they can accomplish that. I don’t think it’s helpful to spend two hours watching CNBC and deciding which way they think financials are going to move tomorrow.
You authored “The 5 Mistakes Every Investor Makes and How to Avoid Them” (Wiley, 2014). What’s the biggest one?
People don’t enjoy their money, especially the ultra-affluent obsessive client who has millions of dollars.
Why is that?
They’ve spent a lot time doing the right things — saving and making good decisions and being focused on growing, growing, growing. But when they get to retirement, they can’t turn off those traits that made them successful. They keep doing the things they always did — being thrifty, and maybe a little stingy. So they don’t spend their money for enjoyment. And then they die.
Perhaps it makes them nervous to spend.
Right. So if you can show somebody a clear path that things are OK, they might spend money more happily. Part of the advisor’s job is to empower people to feel OK with that.
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