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Peter Mallouk, Creative Planning President and CEO

Industry Spotlight > Advisors

Peter Mallouk: Competition in Financial Planning Is Heating Up

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In the view of Peter Mallouk, the CEO of Creative Planning, the competitive landscape facing today’s independent financial advisors is equal parts daunting and exciting.

Many segments of the advisory industry have enjoyed record growth in the wake of the COVID-19 pandemic, and Mallouk points to substantial consolidation across all segments of the financial services and advisory industry.

In fact, Mallouk’s firm has been one of the major drivers of consolidation, with some half-dozen acquisitions booked in 2023 alone, including the acquisition of Wipfli Financial Advisors, an RIA with $5 billion in assets under management, in August. That deal came on the heels of Creative Planning’s purchase of Rosen Capital Management, a smaller shop, and Ferris Capital, which manages $755 million in assets.

In a recent interiew, Mallouk — a finalist in ThinkAdvisor’s 2022 LUMINARIES awards program — describes his industry outlook for 2023 with respect to market volatility, industry consolidation, client demands and growing competition. He says it is a great time to be in the advisory and planning industry, but those who don’t commit to changing with the times will find it increasingly difficult to win (and maintain) new business.

THINKADVISOR: How would you summarize the year we have gone through with respect to market volatility and the composure of the typical investor?

PETER MALLOUK: My sense is that, if we were to have had this year of volatility in the past, people would have been more panicked. However, the volatility we have seen came on the back of such a huge, prolonged bull market. Anyone with even a short history of participating in the markets knows that a rally such as the one we have experienced since the Great Recession doesn’t last forever.

I think it is also important to point out what I would call the hidden story of the markets in 2022. In essence, we have had two different bear markets happening at the same time.

What do I mean? When we look back at 2008 and 2009, that was a singular bear market that delivered some pretty severe devastation everywhere. Large-cap stocks had losses in the range of 40%, while small-cap stocks suffered even more.

The situation we saw in 2022 was different. One the one hand, a significant part of the market has fallen by 60% or 70%. I’m referring to speculative cryptocurrencies and SPACs, yes, but also to more legit stocks that lacked sufficient earnings to justify their high valuations. The basic story there is that a lot of stocks just caught fire coming out of the COVID-19 crisis, and now they have been brought back down to earth. Sadly, in many cases, the asset values have been devastated and they may never come back.

On the other hand, other parts of the market have withstood the pressure a lot better. Generally, larger stocks that have higher quality have seen more modest declines, in the realm of 10% to 20%. That is painful, but it is a more normal correction. Ultimately, investors with good financial plans — those who have not flooded into unproven asset classes or made risky bets — are navigating this difficult year relatively OK.

What is really sad is to see how many new and novice investors have been burned this year.

Heading into 2023, how is the advisory and asset management industry changing?

There is a steady evolution towards holistic advisory services, across the board. Back when I started my career, in the early 2000s, a lot of people didn’t even know what a financial planner was — including myself. I literally hadn’t heard of a financial planner. Those days are gone.

Today, we are seeing advisory professionals rushing into the planning space, and clearly, the competition is getting more intense. I think the competition is soon going to get a lot more intense, in fact. Until now, the planners coming into this space have been able to just win those clients who also have never had a financial planner before. The bar for quality service had been set low.

As we head into 2023, all the fish are now in the pond, so to speak, especially when it comes to the ideal clients. They have learned what real financial planning is, and so the competition is just going to get a lot fiercer.

What about the registered investment advisory space in particular? Will consolidation continue?

The RIA space is still very fragmented, and even some of those firms that have undergone mergers are still operating in a fragmented manner with respect to their operations and investment approaches.

People often ask me what inning we are in when it comes to RIA consolidation, and my answer is that we are probably only in the second. There are still literally tens of thousands of independent advisors out there still doing their thing, and many of them will be the target of acquisitions in the future.

One secret of the RIA space is that many firms are not actually growing, but that has been masked by a strong market over the last five years. Their assets under management have gone up and up with the markets, and that has delivered strong revenue, which in turn has driven the very high multiples that we have seen in the RIA acquisition that have happened in the past several years.

In my view, that trend is now over, and likely for good. We have peaked in valuations, though they may stay near this level for a while longer. As we enter 2023, we are coming out of a special period where RIA revenues were going up while expenses were not. That time is gone, and likely for good.

We are seeing wage inflation in our space, and the expenses of operating the business and, most importantly, of staying competitive, are so high. My view is that the competitive pressures will very soon start to meaningfully diminish the margins in this space. We are going to enter a new normal period that sees more modest valuations.

Pictured: Peter Mallouk. (Photo: Janie Jones)


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