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Why Creative Planning Isn't Slowing Down on RIA Deals Anytime Soon

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Peter Mallouk, president of Creative Planning, is an RIA in a hurry.

Growing his firm organically at a rapid clip wasn’t fast enough for the certified financial planner, who bought it 16 years ago when its assets under management were $30 million. Now, on the heels of sensational growth, he has embarked on an acquisition strategy that as of last month, helped boost AUM to about $56 billion.

Since the start of this year, Creative has bought nine RIAs, bringing the total number of acquisitions to 13.

“We can’t take another 10 years to get into the Top 3 [RIAs] in the major markets,” where we already are, he says. “We need to move — and move quicker — to become even more competitive,” Mallouk explains, revealing his supplemental expansion strategy, in an interview with ThinkAdvisor.

Creative Planning now has about 28 offices (versus 17 in 2017) and some 350 advisors (versus 150 in 2017).

Named consistently the country’s No. 1 Independent Wealth Management Firm by Barron’s, CP had grown AUM by 30% or more annually since Mallouk bought the firm after a five-year stint as an estate planner there. In 2017, The New York Times singled out Kansas-based Creative, in a headline, as “…Spurring Big Change on Wall Street.”

CP serves the ultra-high net worth and emerging-wealth segments, but its main target client remains “the millionaire next door,” as Mallouk calls that demographic.

The firm’s FAs comprise CFPs, “lead advisors” and “secondary advisors,” says Mallouk, who seeks no breakaway wirehouse brokers, as they fail to fit the firm’s M.O. and culture.

In his new book, “The Path: Accelerating Your Journey to Financial Freedom” (Post Hill-Oct. 2020), which is written for consumers and is an unabashed plug for his firm, Mallouk generously bashes FAs (“There are so many ways to be deceived by a financial advisor that it’s shocking”) and dismisses economists as inept forecasters.

Overall, however, the book is a friendly guide to investment tools, asset allocation, portfolio-building and what to look for in a financial advisor.

It was written with coach and entrepreneur Tony Robbins, at whose events Mallouk is a sometime-speaker and with whom he co-wrote the earlier “Unshakeable: Your Financial Freedom Playbook.” Robbins used to be CP’s director of investor psychology, but that economic relationship has terminated.

ThinkAdvisor interviewed Mallouk on Oct. 15. Speaking from Leawood, Kansas — near CP’s Overland Park headquarters — the RIA talked about how the coronavirus pandemic “completely changed investing,” presumed that a bear market isn’t far off and opined that former Vice President Joe Biden, if elected president, might not implement tax increases or other campaign promises till 2022 — or, even, “not do them at all.”

Here are excerpts from our conversation:

THINKADVISOR: Creative Planning made 13 acquisitions 2019-2020, thus far — the most recent one, last month. What’s behind them all?

PETER MALLOUK: We’d achieved a decent presence in all the major markets; but in the increasingly competitive landscape, we can’t take another 10 years to get into the Top 3 in those markets. We really need to move — and move quicker. 

Was making acquisitions in your long-term plan?

Our strategy has always mainly been organic — adding one client at a time, and we’re still on that page. But now we’re supplementing that with acquisitions. The idea is that we’re already in all the major markets, and now we’re trying to have a more substantive, more competitive presence there. We’re trying to accelerate in those cities across the country where we already have a presence to get even more competitive.

How did you find the firms you’ve acquired?

So far, 95% of them found us. They called us; and if [everything] made sense, we moved ahead.

Did the firms retire their names, or did they just add the Creative Planning brand to them?

It’s total integration: name change, planning the way we do it. We’re buying only firms that match our philosophy: They’re already doing planning like us, already managing money the way we do.

What sort of hierarchical structure do you have for running your company?

With 700 employees, we needed a management infrastructure and have had one for a couple of years. We have a lot of [department] leaders and managing directors that run different regions of the country.

The principals of the firms you acquired were running their own show. Now they’re not. That must be a big adjustment for them.

I think part of why [these advisors] are selling is that they don’t want to have to run their own shows. They want to work with their team and see their clients; but they don’t want to deal with HR, compliance or renegotiate leases. That’s part of the motivation of some folks.

You told me in our interview in July 2017 that you had no interest in hiring wirehouse breakaway brokers. Is that still the case?

Yes. It isn’t only that we think they’re not a fit for us; when they learn about us, they think the same thing. We want to hire people and then have them grow within the Creative Planning model. The breakaway broker doesn’t fit our model culturally.

Please elaborate. 

It’s a different approach and way of looking at things. We don’t want to transform the way people think. We want people who already have the same general philosophy as we do so that they’re more likely to fit the way we do things.

Who’s your target client?

We have several different groups. The ultra-affluent team works with people who have $10 million, $25 million or $100 million and up. Our private wealth group works with multimillion-dollar and millionaire-next-door clients, which is the bulk of our practice. And we have an emerging-wealth group that oversees about $1.2 billion of people who have small accounts.

You start off your new book by putting down the media. Then you move to FAs: “There are so many ways to be deceived by a financial advisor that it’s shocking”; Working with dually registered advisors is “an extremely dangerous situation”; It’s amazing that “the advisory profession is still in business because [clients] end up worse than when they started.” And: “Economists show no ability to predict the direction of the economy.” Were you just in a bad mood when you wrote that?

[Laughs] [The way the media reports], a lot of investors get scared out of the market and make mistakes that they wouldn’t make otherwise. For instance, in March of this year the news on TV scared the hell out of them.

Please comment on your assertion in the book that advisors are “just salespeople in disguise.” 

The reality is that a lot of people with the title “financial advisor” are really selling a product. Some are insurance salespeople, some annuity salespeople. Some sell certain mutual funds on commission. I’m telling readers to make sure they know how the person they’re working with gets paid: Pay them a fee for investment advice, and that’s it. Make sure they’re not [also] getting paid another way on the investments — for example, revenue sharing or commissions — to be sure they’re on the same side of the table as they are.

Were you aware of how this business worked when you entered the industry?

No. I got educated over time. You learn how everything works and that the title “financial advisor” means 100 million things.

Why do you believe that economists aren’t good forecasters?

No one can predict! Warren Buffett said, “Economists making predictions are designed to make astrologists look good.” I want investors to know the market is unpredictable over the short run — so don’t get sucked into buying all these different narratives that scare you into making an irrecoverable mistake.

Has the pandemic and recession — actually a depression in certain industries — brought changes to how financial plans are structured? 

Definitely. The way investing works has completely changed. The way we look at the bond side of the portfolio is so different. For example, bond yields are so low that a 60%/40% portfolio won’t work because you’re just not going to get enough [return] from the bond side. That’s forced people to be more equity-heavy than they would have been [ordinarily] or to look at alternatives when perhaps they wouldn’t have before. This is a recent phenomenon.

Doesn’t investing more in equities raise clients’ anxiety — at a time when many are already worried?

A little bit. But since [the point] when people had to change their allocation, we haven’t yet had our first bear market. That’s when we’ll, maybe, see a new level of anxiety.

Any idea when that bear market will arrive?

I wish I did. But I don’t think we’re going to have to go too long to find out.

“Eliminate cash as a consideration from your investment portfolio; it drags down returns,” you write. Amid the pandemic, do you still advise that? 

Yes. I would [separate] investment portfolio from emergency reserve: money on the side to cover short-term needs, if you lose your job [etc.] But the money in the portfolio should always be invested for the long term. You should have all that money engaged rather than trying to outsmart the market and looking for entry points.

Is there more interest from clients in estate planning because of the pandemic?

For sure. That’s definitely sparked an interest in people making sure they get all their estate planning cleaned up. We proactively bring it up with clients because it’s important. But the enthusiasm with which people follow through is much more significant now than it’s been historically.

You write that “the market doesn’t care much about who is sitting in the Oval Office.” What scenario do you envision should former Vice President Joe Biden be elected president?

People think the president controls all kinds of stuff with the economy, but there are so many ingredients in that cake. People overestimate what the president can do. They think that on election day everything changes. Historically, that’s not how it has worked.

What about Biden’s potential election as president?

If Biden were to win and the economy is weak and there’s still coronavirus and high unemployment, he might decide to fulfill his [campaign] promises in 2022 instead of 2021. It might not be the time to implement new tax changes [so soon]. He might want to wait a year or maybe make compromises or not do them at all.

What else is in the “cake”?

The economy is dynamic; so a million other things are happening. Earnings are going up or down; interest rates are going up or down. The way people perceive stocks versus bonds is changing. So many things matter.

How do you think the stock market will react if Biden wins?

The market has had to find a way up through every administration. Usually when you see an exception to that, something really dramatic has happened [e.g., the bookend events of 9/11 and 2008 financial crisis]. The market went up under Carter, Reagan, Bush Sr., Clinton, Obama and Trump.

You have clients coast to coast and globally. So you probably were holding virtual meetings before the pandemic — and now even more of them. Do you miss meeting in person?

Yes. It’s very, very different to do it remotely and over the phone. Nothing beats sitting down with someone. It’s part of making sure that people are comfortable with your approach and strategy, connecting with them and learning about them. It’s [observing] body language. All that’s important. That doesn’t mean we won’t do virtual meetings when we have to, but it feels different in person. And I think that way is better for everybody.

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