Challenge Facing Advisors: Growth

Peter Mallouk’s firm Creative Planning is one of the country’s largest RIAs.

Reviewed by: Heather Bell
Edited by: Heather Bell

Peter Mallouk

Creative Planning is one of the largest independent wealth management and advisory firms in the country, with roughly $42 billion in assets under management. The firm’s president, Peter Mallouk, will be speaking at the “WealthStack” conference in Scottsdale, Ariz., Sept. 8-10, at the session titled, “What It Takes To Become An RIA Giant.” Here, he previews his appearance at the conference and talks about how Creative Planning grew into the company it is today. Would you give me an overview of the firm and what your typical client is like?

Peter Mallouk: Our typical client is the multimillionaire next door. We're divided in three groups.

We have a private wealth group that works with our typical clients. We have an ultra-affluent practice that works with very high net worth clients. And then we have the emerging wealth group that works with clients with less than $500,000.The emerging wealth group represents about $800 million of our practice, with the rest of the assets in the private wealth and ultra-affluent categories. We manage about $42.5 billion for clients in all 50 states. What are the driving investment principles underlying what you do for your clients?

Mallouk: Basically, we believe you have to control fees, you have to control taxes, and you really need a portfolio that's designed to meet the needs of the clients.

We take a needs-based approach to building a portfolio. We will work around positions that they bring to the table rather than selling things and starting with a model portfolio. Each account is traded separately.

We also believe in using alternatives. For those who have $5 million or more in particular, illiquid alternatives tend to be a part of their portfolio. In the equity part of the portfolio, we favor passive. And we may be the largest holder of ETFs of any independent firm serving individuals in the country. There could be another firm working with individuals that has more [invested in] ETFs than Creative Planning; I just don't know who that would be. What drove your growth to $42 billion?

Mallouk: Instead of using a risk-based or an age-based approach to investing, we used a needs-based approach early on. We were one of the first independent firms to really embrace passive and ETFs, and I think that's how we turned out to be probably still the largest holder of ETFs among firms that serve individuals.

So all these trends in industry, people moving toward firms that are passive, people moving toward firms that are needs-based, moving to firms that do planning without a separate fee, we were doing that all a long time before most of the space was. That made a big difference in us getting a head start. What do you think are the “must have” traits for a firm to achieve the kind of growth your firm has?

Mallouk: It’s gotten a little harder since I started. If you look at the technology hurdles, the compliance hurdles, the cost burden to get it going is a little bit different than it used to be. But I think there's a path for anyone building a successful practice.

When I got going, million-dollar firms were a really big deal. I remember when we got to a billion dollars, I think we were at that point the 50th biggest firm in the country, maybe the 20th.

It's a very different landscape now, where you have a lot more heavyweights, and I think it's harder when you're small to compete, because you look at what the average American's been through—they've seen Bernie Madoff, they've been through '08/'09—they’re very nervous about investing, and so they want to see some scale before they give you their life savings. By “some scale,” I mean $500 million, $1 billion, and it really wasn't that way when I started.

The hardest part isn't going to be someone getting from $20 million to $40 million. The hard part is going to be somebody getting from zero to $2 billion. There are hundreds of firms that have done that though, so clearly there’s a path there. So the barriers to entry have basically gotten higher?

Mallouk: Without question: It's more competitive, more expensive and there's more risk. Those three things have definitely occurred, particularly in the last five years. And you also have to do a lot more for a client than you used to have to do 10 years ago.

When we were getting started, we were competing with a bunch of firms that were running a strategy. It's not like that anymore. Everyone's trying to do more to attract the client. And they should; I think that's a wonderful thing. How does your firm address the challenges of having such a large amount of assets under management?

Mallouk: I wouldn't call it a challenge, but I would say there's an incredible responsibility, and I think we're all aware of that at Creative Planning. What’s great about it is it forces you to look at every single thing with a microscope and say, how can this be better? How can we be smarter about this? How can we make this more efficient? How can this be a better client experience? Every little incremental improvement we make has a massive impact across all of our clients.

I'd say one of the things we do is spend a lot more time on minutiae, on how we improve one little thing here or there because we know it'll have an impact.

But in terms of day to day, it's actually much easier than it was five years ago, because we're institutionalized. I feel much less stressed today from that perspective than I did when we were a couple-billion-dollar firm. What appeals to you about ETFs, and what are you usually looking for in an ETF for a portfolio?

Mallouk: What I like about them is there's a lot of research that shows passive beats active in a lot of spaces. And with an ETF, you have a very-low-cost way to solve for that problem. And you have a great way to be able to take advantage of tax situations.

It also allows for a lot of customization around existing positions. It really makes it easy if you've got a client who’s got certain holdings and you're trying to work around them; you can kind of slice and dice the ETFs as you need to, to really build a portfolio that makes a lot of sense for them.

They were a great solution for us early on, and I think that it's been amazing watching the rest of the marketplace really embrace ETFs. They’re just a very, very big part of our portfolios and what we do.

You hear that a lot of these companies that create them have found ways to make them more tax efficient, lower cost, and they create more specialized ones that allow us to customize a bit further.

Heather Bell can be reached at [email protected]

Heather Bell is a former managing editor of She has also held editorial positions at Dow Jones Indexes and Lehman Brothers. Bell is a graduate of Dartmouth college and resides in the Denver area with her two dogs.