#FASuccess Ep 065: Building A True One-Stop Shop Advisory Firm To Drive Organic Growth with Peter Mallouk

What You’ll Learn In This Podcast Episode

• Why the vast majority of advisory firms see their growth rate slow as they get bigger. [4:03]
• The misconception about the difference between most firms. [9:48]
• Where the market is heading—and why it’s a threat to most advisory firms. [9:48]
• What Peter says sets Creative Planning apart. [15:38]
• The mindset that Peter says leads to referrals. [34:03]
• What growth strategies have worked for Creative Planning. [42:46]
• Why both wirehouses and retail divisions of RIA custodians are simultaneously moving away from selling products and into financial planning advice. [50:47]
• The big change that led to Creative Planning becoming what it is today. [1:01:05]
• Why Peter personally still spends 70% of his time every week sitting in front of prospects and clients. [1:11:35]
• Competitive threats that advisory firm owners will have to navigate in the coming years. [1:20:14]

Resources Featured In This Episode:

• Peter Mallouk - Creative Planning
• Creative Planning's website for legal services
• Creative Planning's website for tax services
• Creative Planning's website for trust services
• The 5 Mistakes Every Investor Makes by Peter Mallouk

Full Transcript: Building A True One-Stop Shop Advisory Firm To Drive Organic Growth with Peter Mallouk

Michael: Welcome, everyone. Welcome to the 65th episode of the "Financial Advisor Success" podcast. My guest on today's podcast is Peter Mallouk. Peter is the President of Creative Planning, one of the largest independent REs in the country with nearly $35 billion in assets under management for more than 20,000 clients, spanning 12 states and 21 office locations.

What's unique about Peter, though, is that he's been able to grow the firm from under $100 million to nearly $35 billion in AUM in just 15 years, and without relying on mergers and acquisitions, instead, building an organic growth machine through a combination of strategic partnerships and trying to build a one-stop-shop with enough size and scale to deliver the kind of comprehensive value that really makes clients refer.

In this episode, we talk in depth, about how Peter's firm includes not only financial planning and investment management services, but also divisions for tax preparation, estate planning, and trust services stemming from his own early days as an estate planning attorney before becoming an advisor, why Peter felt it was necessary to expand a deep in the services of the firm to provide real value to clients, and why even at $35 billion in AUM, Peter still views his firm as a small boutique in the marketplace, even as the size of the firm is allowing them to attract more and more affluent, ultra high net worth clientele.

We also talk about the broader trends in the advisory industry, how the consumer marketplace is splitting into pursuing either the highest value or the lowest cost, and why that's a threat to most advisors in-between, why both warehouses and even the retail divisions of RIA custodians are simultaneously moving away from selling products and into financial planning advice, and the competitive threats that advisory firm owners are going to have to navigate in the coming years.

Be certain to listen to the end where Peter shares why he personally still spends a whopping 70% of his time every week sitting in front of prospects and clients, and his philosophy for minimizing layers of management in order to keep the firm efficient, even as they approach 500 employees.

So with that introduction, I hope you enjoy this episode of the "Financial Advisor Success" podcast, with Peter Mallouk. Welcome, Peter Mallouk, to the "Financial Advisor Success" podcast.

Peter: Hey, thanks, Michael. Good to be with you.

Michael: I'm excited about this episode, because you guys are truly, I think, one of the largest advisory firm growth machines I've ever seen in the industry. I know you got kind of started in the current iteration of the firm barely 15 years ago. You guys were, I got to confirm, something like $30 million in 2004. You're now over $30 billion, closing in on $35 billion in barely 15 years, and unlike I know a number of other firms that have grown that size, you have not done it with a long list of acquisitions that bulked up the firm. It's just like actual organic growth strategies, one after another, to accumulate a rather large number of clients and $35 billion under management.

So I'm excited just to hear that story, and what it's like to have that kind of growth trajectory.

Peter: Well, I mean, it has been an incredible journey, and every year has been the same. It's a general range, the same percentage, but obviously, the last few years having 35% to 55% growth on $18 billion is a totally different story than having it on $50 million, or $300 million. So it's reached, long ago, it reached surreal levels, but it's been a lot of fun. It's been a great journey.

Why Most Firms See Their Growth Rate Slow As They Get Larger [4:03]

Michael: You know, it's a theme I talk about a lot for, well, I guess merely large firms, you know, like the ones that have two or three billion dollars that we call large in the independent space, even though they're one-tenth of your size. The challenge that comes up for so many firms, I call it the "Tyranny of the denominator." It's that phenomenon that if you want to maintain a growth rate, the rate gets really hard to sustain as the firm gets bigger. You know, like when a solo advisor is out there doing their own thing and they've got even $100 million under management and you want to get 10% organic growth, it's like, "Okay, I need 10 clients, and if my average client's a million dollars, like I got to go get a client every month." It's like, "Okay, I think I can do that."

But then you start growing and suddenly, at $500 million, if you want to sustain the same growth rate, now it's $500 million, you need $50 million of growth, which means if you're working at the same million dollar clients, you don't need one month, now you need one week. The pace starts to pick up, and by the time you're two or three billion dollars, if you want to sustain that same pace, now all of a sudden, you need a millionaire a day, every business day of the year to maintain the same kind of 10% growth rate.

So virtually all advisory firms seems start to slow on their growth rates as the firm gets bigger, as the denominator gets bigger, except you guys, who seem to have figured out how to sustain that rate even as the denominator gets so incredibly large.

Peter: Well, I think that, you know, there's a lot of different things, I think, attribute to that. So number one, I think some people get to a couple of hundred million and they go, "You know what? I like…this is what I want." And, you know, there's nothing wrong with that, and so you have that they build a practice, they have a circle of influence, they create something of value, and they bring in their 100, 200, 300 clients, and they have a small team. There is nothing wrong with that, and I think that there's a very big group that's there.

Now when you're talking, you're specifically more talking about the one billion, two billion dollar firms. Those are more enterprises. I think that the thing that really impacts things there is sometimes people just go, "You know what, I don't have it in me to do, you know, to do everything else." I think the other biggest thing is the economics really dramatically change, a couple billion to 10 billion. The firm is more profitable not just on a percentage basis, but on a dollar basis, at two billion then it is at 10 if you're doing it right.

And a lot of people are going, "Well, why am I going to take all this liability and stress myself if I'm going to do all this stuff, and for God knows how many more years, I'm going to make less money because of the infrastructure I need technology-wise and employee-wise, and everything else to do that?" So I think a lot of people probably usually subconsciously more than consciously, go, "Well, screw that. That's not super appealing to me."

But I think the biggest thing is what gets you from one level to the other, it's different. And someone say, "Oh, I get $100 million, I'm brilliant, and I get to $500 million, I'm amazing, and I get to a billion," and then all of a sudden, things stall out because to go from that level to another level, it's a different ball game altogether. It requires different skill set, different approach. I think that's really been masked in the industry in the last five to 10 years. You can see a lot of two billion dollars firms, or four billion dollar firms, and not because anybody did anything, but because the market went way, way, way, way, way up, making everybody look smart.

You know, I think it'll be interesting when we have a prolonged bear market, what this industry really looks like on the other side of that.

Michael: Yeah, it is an interesting phenomenon to me, that there is an aspect of business management, like of true business management, that frankly, we don't really teach and train in the advisory industry, even at larger firms. Like when we, you know, when you go to conferences, either there are technical sessions that teach you planning skills, which are great to know to serve clients, but don't literally help you run the business. Or we have "Practice Management" conferences and sessions. But even the practice management sessions until very recently, were mostly about how to make yourself more efficient and productive, which is great in a world where we're all solo advisors trying to be productive with a client basis, but not so helpful for the subset of us that really want to build like scalable businesses that grow not just beyond ourselves even, but really grow into large and lasting enterprises. That it's a whole different skill set, it's a whole different set of issues.

You start caring a whole lot more about, you know, really establishing culture and a pipeline of talent, and how you systematically develop your people in a way that just doesn't exist in the overwhelming majority of advisory firms, but ends up being this big gap for knowing what the heck you're supposed to do if you're actually one of the first that gets large enough to go there.

Peter: Yeah. You know, the conferences, I've never been a fan of conferences, because I found when I'm listening to any of those things, usually the speaker, you know, we're a young enough industry, is a speaker usually has an agenda. And usually, the person talking about what it's like to go from one size firm to another is usually buying firms and telling you why, you know, you just throw in the towel, and stay calm, and, you know, use their processes, and so on.

You really rarely see somebody who's got a large firm that can really tell you how to grow it, because there's not that many people that have done it. I mean, there's some people that can talk about how to acquire a lot of firms, and there are folks that are selling systems to make firms more efficient, but it's not like you go to a conference and there's a whole bunch of speakers running $10 billion firms saying, "These are the 10 steps to get there."

Misconceptions About The True Differences Between Firms [9:48]

Michael: All right, so I've got to ask, what are the 10 steps for getting there? Because you've done this journey from literally, like $30 million to $30-plus billion. From your perspective, what are the growth stages? What are the changes and inflection points that start cropping up, that change the nature of the business, and how it runs and forces you to reinvent yourself?

Peter: Well, I think that there's not a tremendous amount of respect for the end client in this industry. So I think that like most people think the differences between firms are marketing. I think early on, I would never have considered myself somebody who could sell anything to anybody. I was an estate attorney. I really just wanted to have a firm that did a lot of different things for clients, so I was really driven by delivering value. I was doing that, you know, in 2004, 2005 when the industry was really, it'd been around since the 80s but, you know, a big firm was a firm that managed $300 million or $500 million. I think you could get on the top 100 list in size with $500 million back then, and so it was, really, in the infant stages.

You know, when I look back at that, I just basically said I want a firm that delivers all this value to a client. Now, what's happened in the marketplace is, obviously, I have no control over and it's just been good fortune, is the market, over the last 13, 14 years, has dramatically moved towards extreme value, or extremely low cost, and everybody else is getting crushed, right? So we happen to be delivering a tremendous amount of value.

And then in the last five years or so, a lot of people started moving from broker to independent, and from smaller firms to bigger firms. We happened to be an independent that was bigger, so we did a lot of things right a little earlier than a lot of folks, and we found ourselves in the right side of, you know, these major forces: the move to value, the move to passive, a lot of our portfolios have a lot of passive components. The move to larger RIAs. The move from broker to independent. So you combine just the perfect storm with what we had put together in the beginning, and that's attracted a lot of clients to Creative.

Michael: I love this. I love the way that you frame this, of the market is moving towards either high value or low cost. Where like if I just want the simple low cost thing, I just go get the cheapest version of it available, you know, straightforward commoditize product, or you go towards the high value and insist on absolutely willing to pay more, but if I'm going to pay more, I darn well better get more.

Now, I feel like in a lot of businesses, and particularly in our advisory industry, and I guess professional services in general, I feel like the label of high value, at least to me, like I think of boutique. I think of like small boutique, or the high value firms are small, nimble. They are able to go really deep in their services with clients because they don't take on a lot of them or too many of them.

I feel like there's long been this framing that highest value tends to come with smaller size boutique, more customized. So how do I reconcile that with, you guys are doing high value parenthesis, and you also happen to be one of the largest firms in the independent space? Like you are the opposite of staying small and boutique. I mean, we're all kind of tiny compared to wire houses with two trillion dollars, but in the independent space, like I feel like most people would say, your choice is you go high value in boutique, or you build something big, like Peter did.

Peter: Well, I mean, high value to me doesn't mean higher price. So to me, we're priced where the market is. I think our all in costs are lower than the market and we're doing a lot more. So that's what I mean by value, not that we're charging a premium and justifying it, where when people are going to talk to four and five advisors they're going to say, "You know, Creative is going to give me more and their fees are the same or lower." I think that's where we normally wind up.

Now, when I started, it was me and just a couple of people, and we were a boutique firm. And then we were $500 million, and it might have been me and nine or 10 people. A couple of billion, it was just maybe 15, 20 of us.

Now, like you said, compared to brokerage houses, we're all small. I mean, we're a rounding error in the industry. You're managing almost $35 billion, it might sound big in the independent world, but, you know, JPMorgan, Merrill Lynch, Goldman Sachs, Schwab, TD, Fidel. These are all firms that start with a T, like trillion. Two trillion, three trillion.

So, you know, Creative's market share is something like 0.002, and we have hundreds of employees, not thousands of employees, you know. So to me, we are a boutique firm, and I think we're well in that space. I don't think you can really leave that category. Even at $100 billion, I don't think you would leave that category because you're still really small in the grand scheme of things, but it's just delivering something better for the price than somebody else.

Look, if somebody wants to pay somebody 30 basis points to be told which of their own companies mutual funds to buy, they can go to Vanguard, right? There's that super low cost solution. If you're going to be charging 0.8%, 0.9%, 1%, you'd better be doing something more than buying 10 funds. We've been doing that all the way since '04 before anyone needed to do it, and I think that that's really helped. I feel like I'm running a very small company every day. I don't feel like I'm running a big company at all.

What Peter Says Sets Creative Planning Apart [15:38]

Michael: So can you tell us, just a little bit then, about the company? Like, how do you describe Creative Planning as it exists today? What's the business, and what do you do, and who do you do it for?

Peter: I think that the real thing that sets us apart is that the people here, the energy in the firm, the talent in the firm. You know, one of things I'm proudest to hear is somebody will say, "You know, where I was, I was one of the very top people, and here I'm just average." To me, that's a tremendous compliment to what we're really trying to do here, which is, you go to a hospital, it's great if they have the best equipment, and it's great if they have the best facility and the best processes, but you also want the best doctors and nurses.

So that commitment to talent here, I think everyone knows there's a big commitment to talent here. You can feel that energy here, and I think our clients can feel that they're dealing with somebody that might be operating at a…and be able to deliver more to them than they got somewhere else.

From an offering standpoint, I think our typical client is saying, "You know what? I'm getting more from Creative Planning than I got before." I think it's reflected in the massive amount of referrals we get from our clients. I mean, most of our growth doesn't come from any of the programs or anything else, it that comes from just clients adding money and referring friends. That's been the real key for us as we grow throughout the country.

Speaking of being a boutique, you know, I was in Orange County yesterday visiting a prospective client and our team out there. I was sitting in that office, and it's like Kansas City was, you know, 10 years ago. It's just five people. But you could feel these are the right people, this is the right place. You know, there are like $400 million, $500 million in assets, and it wouldn't surprise me if by themselves, you know, they're five billion or $10 billion in five years. I think that I could go to a lot of different parts of the country and feel that. I think when I go from one office to another, it's not just our technology that's the same, or the support, or the specialists that are the same, it's the energy, and the feeling that's the same to me wherever I go.

Michael: Can you help me size the firm a little over all of like what typical clients look like? So at $35 billion under management, like how many clients is that, or how many households is that that you guys work with?

Peter: I think there's over 20,000 clients. We divide our client base into three groups. The largest group is the multimillionaire next door, we them. That group is a massive amount of our clients. We have about five billion or so in our ultra-affluent practice. These are people that have tens of millions, or hundreds of millions. This week, a client signed on with over $500 million. We had a prospective client yesterday with over $400 million. So the ultra-affluent practice maybe or five billion, I think closer to five billion. That's probably the fastest growing in terms of percentage.

And then we have an emerging wealth practice that's new to our firm. It started about 18 months ago, and it's for folks that have under $500,000. We used to just accommodate family and friends of clients, and now we've made a concerted effort to really find a way to reach that group and help them grow, and become part of that millionaire, multimillionaire next door groups. The emerging wealth group is extremely high energy, newer group. They maybe have $600 million, $700 million under management in that group.

Michael: I'm kind of doing the rough math overall, almost $35 billion under management, about 20,000 clients, so, you know, I get an average household of about $1.7 million or $1.8 million, which fits right in with the multimillionaire next door type. I know you guys are based in Leawood Kansas, outside of Kansas City, so $1.7 million goes quite far there, I would think, compared to at least some other cities. I mean, the DC area, that $1.7 million doesn't go quite as far here.

Peter: You're right. But I mean, in Kansas City, even in the Midwest, maybe 15%, 20% of our clients are in Kansas and Missouri, and the surrounding states. Eighty, 90% of our clients are all over the country. So we've got, you know, we have advisors all over the country, and offices in 20 different places. And like you said, here in DC, we have three or four advisors in that area too. So we're committed to being face to face to that client wherever they are, and having someone local to them.

Michael: You're not a fan of the, kind of, the rise of all the distance-based planning, let's do it virtually with Go-To-Meeting from centralized locations?

Peter: You know, I think that is interesting, because when I hear people talk about this, they go, "Well, this works, and this works, and this doesn't work." Really, I think a lot of things work. So I look at the Mutual Fund Store which Adam Bold, from Kansas City started. I've never met him, but he basically started it with radio, and it worked, right? Now they're owned by Financial Engines. Financial Engines is really engrained in the F1K community, so it naturally compliments each other, and it seems to be working.

You have firms like Fisher that are more direct marketing, and that's working. And you have firms that iFirms, and that's working. So I don't really buy into one thing works and one doesn't. I think that, "Hey, I'm going to mail you an iPad and you can just check in with me," that works for some people. I can just tell you that that doesn't work for my mom and dad, it doesn't work for my aunts and uncles, doesn't even work for my brothers who are in their 40s.

So, you know, it's just, it depends what you're trying to do. I don't think if you're trying to be really accommodating, that that's a way to do it, but that could be irrelevant. Three years from now everything could change. I think that's one of the interesting things about the industry, is what works today isn't necessarily going to work tomorrow. So you've got to be flexible, dynamic, willing to change, willing to throw everything that worked before because it might not work going forward.

Michael: Right. So you're serving 20,000 clients, how many advisors does that take to actually support that many clients?

Peter: Well, you know, as a firm, we have maybe 500, 600 people that do all sorts of things: CPAs, attorneys, CFPs. all sorts of different people that do everything, the trades and so on. So when we get down to our professional to client ratio, it's actually very low.

It's not really maintaining those clients that's the deal, it's bringing on new ones efficiently, that I have found is what really puts a strain on an organization. So, you know, you're trying to put something together that's already moving. That's hard. That's basically what we're going through now, is, you know, we're growing faster this year than in any previous year, and we're starting to look at all our processes and saying, "Maybe these things aren't going to work the way we did them before, the way we traded before, and the way we did client service before. Maybe we have to find another way to do it that will accommodate where we're heading."

Michael: Okay. I felt that in firms, pretty much, across the board. That because it's so much more work-intensive to on-board a client and go through that initial year or two of financial planning process, was as well as just establishing the relationship, if you're doing a mass management transition the portfolio, if you're implementing some other product going through the implementation process, that just there's a bottleneck on the upfront work.

It gets easier to maintain and also use some re-systematize for all the ongoing clients' service and support work. So most firms seem to struggle with the bottleneck around what happens if you try to take on too many clients at once, almost regardless of how many existing ones you have. Certainly, the more you have to service, the harder it gets on top. But the constraint is the, you know, the speed that they're flowing in much more so than just the total number that you're servicing until you hit some absolute capacity while at the higher end.

Peter: That's right. I think that if you look at the industry, I think the growth rate is very flat. When you neutralize asset growth, I can't remember who gave me the paper on it, but it looks like, you know, the average firm is really growing at just a couple of percenter, even declining as the client base ages. I think that, really, the inflation of the assets has really masked a lot of what's really happening in the industry as it's gotten more and more competitive.

Michael: So is that the dynamic you see from your end as to what's playing out, we're just flat out getting more competitive?

Peter: Oh, I think it's absolutely more competitive. So in 2007, 2008, when I was bringing on clients, I'd see prospective clients in my office, and they were in mutual funds. I would kind of go through their Janice paperwork, and their American funds, but I would walk through like what we were going to do. That all kind of went away maybe seven, eight years ago, and then people came in with brokerage statements. So they'd come in and they're are at Morgan Stanley, or UBS, or whatever, and we'd talk about differences and move them over. Well, I'd say half the time now, somebody comes in, and they're an independent firm. That was unheard of, you know, five or 10 years ago.

So you're starting to see that, to me, that a lot of people didn't even know what the financial advisor was, and they started to hire advisors. And they didn't know the difference between brokers and independent, and they started to get educated, and a lot of people moved over to independence.

Well, that stuff is over, right? So now you don't have this artificial inflow of people just discovering what an advisor is, or discovering what a fiduciary is. No one, I think, is paying attention to that because that all happened about five years ago when all the markets started to go straight up and everyone wakes up and they're managing 10% more assets than they did the year before.

But I think if you really look at what the real story is in the background, it's a) You know, if you want to a client, you're going to have to take him from somebody else now. You're going to have to deliver more value than somebody else. That's, I think, the next story in this industry.

Michael: Yeah, I know we felt it for our firm as well. We're based in the DC area. I mean, when I think back to what the competitive environment was like 10 or 15 years ago, like the average approach talk for us with the prospects was like us, some local product-based broker from, well, a handful of independent broker-dealers have a big presence in our area, and then like an insurance agent who was their brother-in-law. Trying to do business with them.

And like, basically, as long as they weren't too concerned about it being awkward at Christmas if they didn't do business with the brother-in-law, we won the business. You know, our close rates were phenomenally high back then. Now, I look at our typical approach talk today, when, you know, frankly, we don't things that much differently. Like, we get referrals from existing clients, and, you know, we've established some presence in the community so some people got in touch with us that way.

But I look at the typical approach today and it's us and two to three other RIAs in the area, all of whom I know, all of whom I have a lot of respect for. Like, they have done their homework, and they found a couple of good firms. So, you know, we'll talk about some of the nuance differences. You know, we're a little more tactical, they're a little more passive. We do a little bit more retirement and tax planning, they're a lot bit more focused on small business owners.

Like, we try to find some places to make our distinctions, but the competitive discussions are just completely different than they were. And so we still win our fair share of business now, but now we just kind of win our fair share. In the past, when we came to the table with this comprehensive advisory offering against most, the rest of the industry still selling a lot of products, we closed almost all the business.

Peter: Yeah, it was just so easy. It was crazy. I mean, you were saving people from getting screwed over, and you're saving them fees at the same time. It was just a whole new world than it is today. Which is a good thing for the end client.

Michael: So how does a firm like yours try to maintain its competitive posture? Like, how do you differentiate yourselves in that environment? Is it just, "We're bigger, or we have more resources," is it something different about how you frame the value of planning? Like, how do you make a firm like Creative Planning stand out in this kind of new competitive environment that we're talking about?

Peter: I mean, part of it is, you know, and obviously, it wasn't the case even a year ago, but as we've, you know, grown from $18 billion, or whatever $24 billion to $35 billion, yeah there is comfort that comes from size. When people are looking at advisors, if they're going to move from the worlds of the Goldmans, and the UBSs and those places, they know, I mean they're trying to get educated on the difference between fiduciary and a broker, and proprietary funds versus a firm that doesn't have their own proprietary funds, and avoiding commissions, all that.

But they also want to feel safe. I mean, they want to feel like, "Hey, I'm in a place where other people are in a place. If I'm building a porch and I'm interviewing three people and one guy goes, "By the way, I built your neighbor's porch, and that person's porch, and that person's porch," you know, that person has my attention, right?

Michael: Right.

Peter: So as you start to emerge, and there are a few firms, we're not only one, that you start to emerge in the larger space, we are definitely able to gain the confidence of people. So, you know, there's this implicit thing that's happening when I was meeting a client when we were at $30 million, or $500 million, or two billion, where the client ultimately is deciding, is Creative Planning better for me than me doing it myself and my other options?

Part of that decision making is, is Creative Planning going to screw it up, or is Creative Planning going to do a pretty good job? Well, you know, when you have tens of thousands of clients all over the country, and you've been doing it for a long time, there's a lot of collective due diligence there. So it's no different than going to Trip Advisor. You know, when I'm traveling in the Westham earlier in the week and I go to Trip Advisor I click on, you know, one of the top restaurants in the area, I'm basically saying, you know, where has everyone else already done the due diligence? So that's it. That's kind of my due diligence, right?

So I think there's some safety that we're starting with. You know, when someone is interviewing five advisors, we're usually going to be in the top two or three, just because they're go, "Look, thousands of people have already chosen Creative, they must be okay. You know, at least listen to them." So we're always at the table.

Michael: Well, I mean, I found it's long been a very interesting data point to me in the industry that the size of an advisory firm is almost perfectly correlated to the size of its average clients and its largest clients. Basically, the larger the firm, the larger its average clientele.

Peter: There's no question. Yeah, we've always had larger clients, but I will tell you that when we passed that $25 billion threshold, the attention from those clients went up by 10 fold. I mean, so I think that they want to be in a place where, you know, they know there's some collective due diligence taking place.

Michael: Yeah. Well, and I get it. Like, if you're a, you know, if you're a 500 millionaire, like it feels a little bit weird to go to a firm with a couple of billion dollars under management. You're like, "I'm going to be like 20% of your firm, I have to do a whole other level of due diligence about whether your firm is going to survive and thrive when I actually know you are that reliance on me." You know, on the one end there's a subset of clients that probably like to be a really big fish in a small pond, but for a lot of clients, yeah, I think particularly as you get up to more affluent levels, you know, they value some of the perceived just stability of a firm of size, and so the larger the firm gets, the more comfortable it gets to be a large client in that firm because you actually know you're not dominating the size of the firm. That's actually kind of comforting. It's like a safety in numbers herd mentality thing, I guess.

Peter: That's right. I think that's what's going to be interesting on the independent world, now. Is if you looked five years ago, a big firm was five billion. I mean, there were all kinds of articles about, wow, look at these five firms that are, or 10 firms that are all at five billion, and how crazy is that? That has really changed. I think the type of client looking is getting more sophisticated too. All this fiduciary stuff in the news, and they want to see a bigger firm, usually.

Michael: Well, I think you make an interesting point with that as well that as much as clients look at sort of the classic, what are the features and benefits, what's the value that I'm going to get for the fee that I'm paying? You know, in a world where there are so many different advisory firms and it's hard to compare them, and there's always a little bit of uncertainty to the value proposition you're going to get, whether they're really going to deliver on what they say they're going to give, there's some client aspect that, basically, just comes down to, "Am I going to regret if I pick working with this advisor? What's the chance that I'm going to regret this decision?"

Like it or not, there is, I think, some perceived comfort of well, when they have 20,000 other clients, I feel like the odds aren't as high that I'm going to regret this decision. Like if they were that bad, probably wouldn't have 20,000 clients and $35 billion under management.

Peter: Yeah. I think people underestimate that everyone is always looking for the best. That's why I get up every day and go, "How do we be the best place for a client?" but they're also, they're just going, "I don't want to mess this up." I mean, people have all kinds of horror stories in their minds that are constantly reinforced at cocktail parties, and Christmas parties, and on Fox Business, and CNBC, and American Greed, and all these people losing their money and stealing their money. People are horrified, you know, so they really want to just feel safe. I mean, that's the prerequisite. It's really hard to make somebody feel safe when you're small.

Now, fortunately for me when we were small, there was no '08/'09 crisis. There is no Bernie Madoff. Nobody knew what any of this stuff was, so people didn't really care as much back then. I think it'd be very challenging today, you know, to be a smaller RIA and trying to gain the confidence of clients, which is why I think you see the mass of the top 100 RIAs are collecting more than half of all of the new assets even though there's thousands and thousands and thousands RIAs. I think that's one of the big reasons.

The Mindset Peter Says Leads To Referrals [34:03]

Michael: Yeah, there's some combination of the implicit, that trust that comes with size. I'm sure there are more than a few advisors out there in smaller firms, and, you know, small is relative, like that could be hundreds of millions or several billion dollars under management, who are probably hearing this and like screaming at the podcast to say like, "Yeah, but I'm safe too, and I do the right things too. You should see how many bad things I've seen that came out of large firms because the clients were just a number and not respected as individuals. I will do the individual work for them."

I think that's the case we often make as, you know, solo or small firms in a world where there are multi-trillion dollar wire houses. But, you know, there is just, I think, a fundamental consumer psychology aspect of, you know, part of what people fear is am I going to regret this decision? And right or wrong, when you see lots of other people doing the same thing, it makes you more comfortable that you're probably going to be okay with the decision. And even if you're not, and you ultimately don't like the service, so you're like, "What the heck was I going to do? Like 20,000 other people thought it was a good idea too."

It's the whole like, "If everybody jumped off a bridge, would you jump off too?" You know, but the psych research basically says, "Yeah. Actually, probably most of us would if everybody else was doing it." Like we just, there's safety in the herd.

Peter: And I would say that that safety is not, to me, really hypothesis. I can tell you that I've always taken every client extremely seriously, and every investment I make very seriously, but today, like if we're looking at an alternative investment, I mean, I am constantly thinking about what can go wrong. We'll go through all this due diligence internally, and then, like last private investment we did, we paid an outside firm I think it was $50,000 or $70,000 to do to an onsite audit and analysis for us. Because we have a lot to lose if we mess something up, you know what I mean?

So there really is, I mean, we've always been serious about compliance. We're more serious now. We've always been serious about due diligence to our investments, but you get even more serious now because you have this responsibility to all of these people. If one thing goes wrong, if one investment goes wrong, that touches a decent amount of those accounts, the party is over, you know, and like no one is going to stick around.

So that the level of due diligence that happens now on everything is, you know, from how do we approach cyber-security, to how do we approach an investment, to how do we approach technology? It's totally different mindset. You know, I'm waking up with a healthy dose of fear everyday of, how do I make sure we deliver for all these people?

Michael: Yeah. Because now you've got an entire brand at stake. You know, the good news of a trusted brand is it builds a lot of momentum. The bad news is if you lose the brand trust, it's really hard to get it back as an organization of size.

Peter: That's right. So when you get back into this competitive landscape that you're talking about, so you, you know, and you get some competitive edge now of just having the sheer size, and scale, and the 20,000 clients that naturally creates some level of trust and social proof of clients. Are there are other things that you guys do about how you differentiate yourselves in this marketplace, of how you explain financial planning and what you do that says, "Here's why you should work with Creative Planning," and not all the other firms that the prospect's probably talking to as well?

Peter: Well, I'm not big on how we make the sausages, you know, Michael. But I would just say that I'm always trying to figure out what can I give the client that is real value. So I've never tried to figure out what's a better way to sell something, or how do I persuade somebody to do something. Every bit of energy, and time, and money, is spent into how do I get a better offering? How do I get better people? How do I put something in front of that existing client, or prospective client, where I'm just assuming everybody's talking to another advisor all the time and I want them to be like, "You know what, this firm is practically communicating with me. They're doing more for me than the other folks. They're delivering on the investment side. I'm not going anywhere."

So for me, it's all about how do I add value? How do I add value? How do I add value? What can I give the client that will continue to make them stay with us, not because they like, but because we're giving them more than they can get somewhere else?

Michael: Well, and I know you guys have tried to go deeper on some of that by actually building out complimentary business lines under the umbrella as well. So you mentioned earlier where like you've got financial planners, and CPAs, and attorneys, under the umbrella. So like are you guys now down to the point that you're doing tax returns for clients, and wills for clients, and that stuff as well? Or are these all attorneys and CPAs who are still solely wearing the financial planner hat and advising, but you still refer out all the tax and accounting and legal work?

Peter: Well, I'm an estate attorney as well, and so we've been doing…I was doing wills and trusts before I was managing investments, and doing financially planning. So from day one, we've had that offering. I would say over the years, we've probably done over 20,000 estate plans. My guess is we do 4,000 or 5,000 tax returns every year, so now we're very, very committed to those phases. I think that that's a very important element of wealth management. It's not buying 10 funds. It's being able to advice on a broader array of things. So I've been committed to doing those sorts of things early on.

Michael: And is that like a complimentary service that clients pay for separately? Like, "Here's our advisory fee if you want the planning advice and portfolio management, and then if you need tax returns, we do that here. It's at a favorable rate for clients, but we charge you separately. If you need your estate plan, we'll draft that, but we charge it separately." Like, are these sort of a la carte services available in a one-stop shop, or do you actually try to build like the one-stop bundle fee and put it all together?

Peter: No, they're separate fees. We don't want to replace the client's CPA or estate attorney if they're happy with them. So if they've got a great relationship, that's fine. We're still going to advise them. If they want us to take it over, there is a separate fee for us to do.

Michael: Okay. And were you ever tempted to roll it all into one, or was it just always the goal and plan to keep them separate?

Peter: Well, I think from the estate planning side, it was not really tempting. It's just, you know, it could be very…some of those estate plans are very, very simple. So attorney, and some are incredibly complex. I think there wouldn't be really a fair way to do it. You know, if somebody's got to have money that they have lower fee, but we have more liability, if there's a trader and so on. But with large tax, I mean, two people with the same net worth can have tax returns that take 20 times more than someone else's. So there's really not an equitable way, I think, to deliver that in that way.

Michael: But your goal for it is to say, at least we can do it in-house. We'll, I'm presuming, offer you a reasonable price since, I guess, you know, your tax and estate divisions don't exactly have a lot of marketing costs when they already get fed from a core of 20,000 clients. So you just try to say, like, "Well, we can do it more cost effectively," or just, "We can do it more integrated, because when you work with our accountants and our attorneys in addition to our financial planners, we'll be able to handle more for you behind the scenes since we're all under one roof and working together."

Peter: I don't think the client cares about anything at that. I think when the client comes on to the extent they value this at all, they go, "I like that this firm understands all of these things, right? So when we're managing their money, we know how our foundation should be managed differently than a trust account, and so on, from a tax perspective." When they have eternal rate of trust, we know how that is, we know how it's taxed, we know how to invest the money in there. I think they like that security of knowing if they want to move those things, that we're capable of taking them over.

So I think it's about competence. You know, showing a client that you're committed to this. I'm not going to just sit down and buy 10 funds and run a retirement projection, act like I've done something amazing for you. You know, I'm going to give you more, and I'm going to look at should that IRA be converted, and should it go straight to a charity? And should we accelerate giving your donor-advised fund? But it's not coming from somebody that's just trying to wing it in all these areas, it's coming from specialists. I think the client can feel that difference, and it's been a heart of the success, I think.

What Growth Strategies Have Worked For Creative Planning [42:46]

Michael: So when you kind of roll all of this together, really, I'm still just curious to understand like where does this much growth come from at the end of the day? Like, I get it, 20,000 clients is a heck of a base for potential referrals. so I feel like most of us are always trying to get more referrals with varying degrees of success. I know you've been involved, over the years, in some of the custodian referral programs as well, you're on, I think like virtually every top advisor ranking list that gets put out there. You're barons of "Financial Times" and all those. I know you guys are always at the top of those, so I'm sure that brings some visibility as well.

But from your perspective, I mean, what activities drive growth? I mean, what have you found at the end of the day that works? Or alternatively, what's popular, but you validated really doesn't work as a firm that's, I'm sure, tried a lot of growth strategies over the years?

Peter: I think that ultimately, what the deal is, is that money moves to value. It just does. It might not move there right away, but over time, all the money will find its way to value. So I'm very focused on how do I create that value? Of course, you're right. Being at the top of CNBC and Barron's, of course, some people find us there, but we had to have to get there, right?

Michael: Right.

Peter: And if we're at a custodial platform and we do well there, well why are we doing well there? There's hundreds of other firms on these platforms. You know, it's the value. You know, and the value is the proposition, what we're offering, and the people that are delivering it. I think that those are some of the bigger factors for us.

Michael: Yeah. I guess I'm still just struggling. I mean, I feel like all of us say we give great value. Like, I see the hard work I do every day, I give great value for my clients. They told me all the time that they like me. They may not refer me to all other friends, but I feel like I'm giving good value. Client retention is good. Clients seem happy. I don't have $34.8 billion dollars, like what am I doing wrong here? What are you guys doing, or conveying around your value that others just can't seem to do that we all try to give value for our clients, and for some reason, a whole lot more of them seem to show up at Creative Planning than anywhere else?

Peter: You know, I think that some of it you touched on. Like we also have a trust company. We also handle 401 Ks. We find a way to say yes to the client. Yes, we can help you. Yes, we can do that for you, and we can do it at a high level. So for example, there's an advisor in Kansas City, and he basically, redesigned his whole firm to look like Creative. He said, "Okay, I've got a lawyer, and I've got a CPA, and I've whatever, and at the same place," but it's really just, it's kind of like creating a mirage. You know, it's just not the same thing. We have 80 people coming to work every day in our tax and legal groups that are really committed to this space. They're not there for marketing reasons.

And, you know, there's another firm that manages a few billion, and we were doing a little better than them on our platform, so they added a couple of planners so that they can also say in their marketing materials, "We offer planning." Well, we have probably 200 planners, you know. So there's a difference between just saying what you think the market wants to hear so that you can sit in front of a client or a referral source and say, "Hey, we do these things." Or you on the radio and say, "Hey, we do these things." And it's another thing to be really, totally, completely committed to it. You know, how do I really spend all of our internal, you know, money and time, on building this stuff out in a very big way?

I think that's a very big part of the difference, is people get into a place and go, "Oh, I thought you did all these things," and they find out it's not quite the same thing. You know, I think that that's a big part of it.

Michael: I guess, again, this is one of the advantages you get with size as you grow, just the fact that you get to say, "We offer tax services," not because you have a tax dude, or dudette, that does some tax returns, because you have dozens of them. You don't just help out with the estate planning documents because you'll go to a client's estate planning meeting and work with their attorney, or you have a relationship with an attorney who helps draft these things. You've got dozens of them.

Peter: Yeah, and they go to work every day, and that's all they do. So that client knows, you know, if God forbid, I'm incapacitated or I die, or my CPA retires, or I have a complicated tax question about buying a boat, or a plane, or moving to a different state, Creative probably has somebody that can help me. That's very different than, "I also do tax and law," and you go buy a firm that does it, or you throw in a couple of people and say that you do. I mean, clients aren't stupid. You know, they want to have a real commitment to that space. If you fool them into coming over, you're basically renting the client, because eventually, they'll figure it out, right? They'll eventually figure that component out.

Michael: So I guess part of your point to this would be even for folks that are listening to this and saying like, "Yeah, that one-stop-shop thing where we do all that different stuff sounds great. I want to do that as well," that you'd actually caution them, like, "Don't do it unless you're really, really serious to scale it up, because otherwise you may not get the value that you're hoping for"?

Peter: Yeah, there's a firm I think very highly of in St. Louis, and I'm friends with people there, and they said, "We're just not doing those things. You know, we're not committed to it." They have relationships with CPAs and attorneys. You know, and I applaud them for that. They're not holding themselves out to their clients, saying they're doing things they're not really committed to. They're however many billion, and they're all doing just fine, and they work with outside advisors.

There's a segment that's saying, "Okay, I think this is where the industry's going, so why don't I bring in one or two people and say I'm doing all of these things?" I think that that just is not really a deliverable that's going to work, I think, in the long run.

Michael: So I know you're a firm that's been involved in the custodian referral programs as well. You know, all the major companies have them now. I think TDA has advisor direct, and Schwab has advisor network, and Fidelity has their loss program with advisor solutions, you know, where they refer clients to RIAs on their platform, they get some basis points revenue sharing because they made the referral, and then you get to service the client and do your advice. Do you still view that as a core growth engine for the firm as well? Is that an area that you guys continue to be a fan of? Or what's your outlook for that space as someone that I know has been involved in it a lot more than others have over the years?

Peter: Well, we're definitely a fan of…I mean, there's hundreds of firms on those platforms. I think that just the reality is that custodians have gone to offering some really substantive in-house solutions, so the marketplace has really changed in the last few years. They all are getting their own online, or robot solution, or whatever you want to call it. They're all coming up with their own, you know, targeted portfolio with financial planning. I think they all have that with planning solutions, and some of them have even bought their own RIAs, or created their own.

So I think that space has really contracted in the last few years, but I mean, the custodians are great partners. And there's still a place, because, I think that even while they have all of those things, when they have a client come in and it's a complicated situation, they've empowered their consultants to say, "Okay, we've got a bunch of internal solutions, but you'll be better served with one of these, you know, 200 RIAs over here."

You know, my job is to make sure that we're the number one RIA of all of those. You know, I want to be the one that's delivering the most value. So when they do look over and go, "Hey, we don't think we should be doing this in-house, we want to do it with a partner," want to be the firm that's best positioned to do that. But I think that marketplace has just really changed a lot in the last few years.

Why Both Wirehouses And Retail Divisions Of RIA Custodians Are Moving Away From Selling Products [50:47]

Michael: So if I just continue to project those trends out, and Schwab, and Fidelity, and TD Ameritrade all continue to go deeper with financial planning and higher more CFPs themselves, and put them in branches, and put them in centralized planning programs. And, you know, all of those firms have some kind of program of that sort to varying degrees. Like, when you look out five to 10 years, are you worried about competition from custodians that are doing financial planning and competing with you directly while you're using their platforms?

Peter: Well, I'm not worried about it, but I have no doubt that they're, I mean obviously, they're openly competing with us, and I think that's where the market's heading. I think, frankly, the custodians have a lot of very, very, very smart people there, and I think they're probably frustrated that, "Hey, we're sending money to some of these RIAs" that, you know, they're probably frustrated with.

So I think the custodians not only are going to compete, I think they deliver value, and I think they're formidable. Now, I think that the key there is I want Creative to be delivering certain things they can't deliver. I don't think tomorrow any of the custodians are going to start doing tax returns, or practicing law. So I think there's all kinds of things, and I don't think a trillion, or two trillion dollars are going to be customizing everybody's portfolio either.

I think we also don't have the fiduciary rule in all of that, so I think there's a lot of things that even if they're going to compete, there's going to be plenty of room for the RAI. I think what's ominous for the RIA industry is there's not room for thousands and thousands of RIAs. I think you're going to see what happened with the brokerage world and the custodian world. You're going to have…I'm not one of those people who thinks it's going to be 10 RIAs, I've heard some people say that. But I think it's going to be hundreds. I don't know what they are now, there's probably 10,000, you know? So I think that's what's going to really change.

Michael: I mean, I guess it basically just comes down to you can still differentiate from what two trillion dollar firms are going to do, because they have to do it in a certain size and scale that just limits their customization, their depth in certain services. But if you want to survive in the future, truly, the question becomes like how are you going to differentiate from what trillion dollars custodians are going to be offering?

Peter: Exactly. I mean, like, you know, most RIAs are doing tactical ETFs, or all one fun family mutual funds. Or we're going to put you in a portfolio based on your age or as tolerance. Well, I mean, my God, why would somebody hire you to do that five years from now? You know, the marketplace is just really going to change, I think.

I think that the brokerage houses are going to come around and they're going to fight back hard. You know, if the fiduciary rule passes, then really, that will help the end client, but that will get rid of really the story that the average RIA has versus the brokerage houses. The custodians are getting much more sophisticated about, "Hey, we've got all these assets now. How do we take care of them in-house?"

I just think it's getting to be a much, much more competitive space. Now everyone has an advisory. I mean, when was last time, Michael, that someone come in your office and…The last 10 people you met, I mean, how many of them said, "I'm doing it myself"? I mean, seven years ago, that was half the people.

Michael: Yeah.

Peter: You know, it's like hey, they're all somewhere already. So it's going to be much more doggy dog in the next decade, I think.

Michael: Well, including even, you know, the folks that we might have gotten years ago that were literally, on a, you know, retail do-it-yourself online brokerage platform like Schwab, or TD Ameritrade, that would have said they would do it yourself first, and now, like it or not, they have a financial consultant assigned to them from the local branch who may or may not have a CFP, and be talking about the additional resources of their CFPs in the home office.

Even self-directed investors don't say and identify as being as self-directed as they were before. I mean, I guess there's a subset who are, but they're so hard core self-directed they're never going to be in my office anyway, so I'm not going to be talking to them. But the group in the middle that maybe, yeah, they were kind of self-directed but they really would like some help so they would show up in my office. Now, when they need a little help they don't have to show up my office because they've got any number of on-demand financial planning support services from large firms that are billing out to serve them, because that's what they want. So you build it as a firm.

Peter: That's exactly right, yeah.

Michael: So how did you end out down this path of building this enormous RIA firm, having started out as you said, as an estate planning attorney? Can you take us back to what did that look like in the beginning? What were you doing in the estate planning practice, and how did you transition over to the advisor side of the industry?

Peter: Really, from '98 to '04, I was hired to do planning for some places, and I was hired to do wills and trusts, and give advice like that to other advisor's clients too. So I would, for example, Creative Planning was one of my clients so I did financial planning, and designed portfolios for their clients. There were may be 100 advisors at brokerage houses and independent firms where I did wills and trusts for their clients as well.

I kind of did this for six or seven years, and finally, a light bulb went off in my head that hey, you know, there's got to be a better way to do this. I mean, I'm being hired to plug in for these folks so they could seem seamless. I also had a hard time, you know, watching…I'd set up a charitable trust, and that a foundation and everything else, and recommend certain things to like come back and there'd be a variable annuity in there, you know. So I really wanted to have a firm that was totally independent, didn't sell the thing, didn't have any of its own proprietary funds. I wanted to be able to tailor each portfolio. Instead of these models, I wanted to be able to do legal and tax advice all in one place.

The owner of Creative Planning, who is incredible, at the time said, "Look…," you know, he had had one partner die young, he had had one become disabled young, and I think he decided he was going to retire young. And so he said, "Look, you can just take on Creative Planning." I already knew the clients, I was already of them. That became the place that we grew this from.

But I was able to see the insides of, at the time, Wells Fargo, Wachovia, UBS, Merrill Lynch, Ameriprise, and a whole bunch of independent advisors too. I saw what worked and what didn't, and what was smoking mirrors, and what was real, and how could I maybe do something that I thought would work for the client.

Now, in my wildest dreams I didn't think we would ever get to $200 million, or even $100 million. You know, it never occurred to me. My first person I hired was someone that was interning for an Ameriprise advisor that had moved to a different state and recommended her. She was in college at the time, and I was like, "I still don't know if I can afford this person, but she seems really good. I'll give it a go." She is the Vice President today. But I think that there was zero expectation. I mean, if I had any idea about any of this, I would have done it seven years earlier, and I would have certainly approached it differently, you know, as I earlier on. But it really took a few years before I was like, "Wow, I think we're on to something here."

Again, it was before the industry was really…You know, we were, at the time we were doing the financial plans for free. Other people were charging for them. We were using ETFs when people had to explain what an ETF was, and so we were a little bit ahead of the curve on some of the basics that are all irrelevant now. They've all been completely commoditized, which is why we're doing, you know, more and more things today, you know, than we ever did before. We're delivering much more value today at a lower fee than when I started.

Michael: Which is, I guess, a form of fee compression but not necessarily the bad version that some people, at least in the paint doomsday scenarios about the industry, just the recognition like technology gets better so we can execute more efficiently, so we can charge less for what we do and deliver more, and still be profitable as a business?

Peter: I think that's coming, for sure. I think that you're going to see, people's margins are going to get squeezed because you've got to deliver more. That's number one. Number two, the compliance and technology commitment is way more than anyone, I think, anticipated. And then number three, the fee is going to have to come down as well. I think all of those are totally appropriate. I think that's where the industry's heading. I think capitalism has a way of making sure all these are not exactly the way they're supposed to turn out, you know?

Michael: So when did you come in to take over Creative Planning, and do this transition?

Peter: '04, 2004.

Michael: 2004? So the firm was, how big was it at the time?

Peter: You know, I started there in '98 with their clients, and it was between $30 million and $90 million along that whole path.

Michael: Okay. So now we're at, was that 1,000X today from $30 million to more than $30 billion?

Peter: Yeah.

Michael: So when you came in initially, like you take over this firm in 2004, you've got tens of millions of dollars. Like, what was the vision at the time? So you said like you never dreamed it was going to grow as big as it has. What were you coming in with a vision of doing at the time? Do you remember?

Peter: I really just thought, you know. I'm going about 30 different appointments a week and different advisors' offices and I'm, you know, I was really young. I was maybe 33, 34. And I'm like, "Can I really do this?" You know, these days of driving to UBS at 8:30 and driving to Ameriprise at 10:30, and drive to an advisor at 11:30. I liked the idea of doing my own thing, and I liked the idea of doing it the way I thought was right. I thought I could make a living doing it. It was that simple.

I'd love to tell a story about a vision and be super intentional about it, and all of that. Definitely, not the case. But the second I saw I was onto something, it was the case. And then I became very focused on, you know, how do I get to the next level? All the time I was looking, you know, hopefully, a couple of steps ahead saying, "What do I have to do to get there? What do I have to do to get there? How much better do we have to be to get to that next phase?" and figuring out what we needed to do to compete.

The Big Change That Led To What Creative Planning Is Today [1:01:05]

Michael: So tell me about that transition when you go from like, "I think we can do things a certain way. I just don't want to drive from one advisor's office to another to keep doing these wills and trusts." You know, like you start doing it, it starts to work, and then you find you want to create a vision, and be more intentional about it. Like, was there a like a transitional moment? How does that shift happen?

Peter: I mean, there are a couple of moments you look back on, and that seemed super high risk at the time. There was one advisor that had referred some clients to me, his name's Todd Shepherd. I didn't know him that well, but I knew he was a high integrity person that was very smart. He was a CPA and a CFP. He became the first person, I think, I hired to actually take clients besides me. I remember that being a very big moment.

I hired advisor Jim Williams, who our Co-Chief Investment Officer today to help manage all of the money. I didn't know him really that well when I heard him. I considered that a big moment. And then we hired a few wealth managers that were, you know, more expensive. They were incredibly, you know, very high performers where they were, and I just said, you know, I'm just going to basically take everything that's coming in this year and hire these folks and see how this goes. But I was so scared about harming our reputation, that part of it was fear, and part of it was wanting to get to the next level.

But I wanted to make sure I had people that if I was going to meet a client to talk to that client about coming on Creative, I wanted to hand that client somebody that was very, very strong: you know, consultation, caring, and compassionate, certified financial planner, or a lawyer, or CPA, and knew what they were doing. So I kind of went over the top with those folks that I hired. So I think that wound up being a really big moment because I realized, you know, that's really the way to do it. I think firms that think that people are commodities, and that they're interchangeable, and it doesn't really matter, and the client's really focused on the end product, absolutely do not get it. Absolutely, do not get it.

So I think that for me, was the really big transformation. When I was going, you know, I could just chill out right here and make a very, very good living, or I could make no living, and go hire these people. That was really a very big change, and that really started the beginning of what Creative is today.

Michael: Yeah. I find for so many of us advisors, like the true transition moment when you go from a practice to a business is when you decide like, I don't want to just be doing financial planning, I want to be hiring people who do financial planning, creating a business of financial planners and financial advice. That involves all these scary transitions of hiring people, usually very expensive people. You know, selling and pulling all the client relationships that you know personally at risk by having someone who's not you being in charge of that relationship, yet at the same time, for anybody that really, really wants to grow a business, like, you cannot possibly grow a sizable firm by having all the clients yourself. There's just not enough time. You you will hit a capacity wall. But it's an incredibly difficult transition to make.

So was there something that pushed you over the line, that just so many clients were coming in, you were doing well but drowning in them, and you had to make a change? Or was there some other transition moment for you that just said, "Okay, I want to do this"?

Peter: Well, I mean it was really literally a no choice. We weren't going to say we're not taking any more clients, we had to hire somebody. We really sort of took off right out of the box. I mean, we were growing at, you know, 30% to 55% the very first year and never stopped. So I still see a ton of clients, and I think that that makes us very different here than I think any major RIA that I'm aware of, you know, five billion, and 10 billion and up. I still see a huge number of clients personally, and I love doing that.

You know, if you made me choose between owning the firm and seeing clients, I would choose seeing clients. So I really get a lot of satisfaction out of that, helping somebody get into a better spot. I try to hire people that aren't really just in it for the money, that also get satisfaction trying to put somebody in a better spot, more of a consultative person than a salesperson.

But for me it wasn't about moving clients I had. There were hundreds of people coming, and I just said it was impossible to do it, so I had to hire somebody. And if I was going to hire somebody, I wanted to make sure I wasn't going to be embarrassed. I wanted to have the, if something went wrong, I didn't want it to be because I didn't spend the money or do my best to find the very, very best person. I wanted to find the best people.

Michael: So how are you finding your people at this point? I get it when it was you, and you go out and you meet some people who do good stuff, and you say, "I'm excited to work with you," and you try to attract them in. But you guys are now hundreds of employees, so I'm going to presume you don't, you know, personally lead the search on every single employee, or you just do that full time. How did you guys get to the point where you can systematize or institutionalize, we want to find great people? Again, I feel like that's one of those things. We all say we want to find great people for growing businesses, but then some manage to do that, and others don't.

Peter: Right. In the beginning, it was very easy. I mean, I knew a lot of advisors because I had made my living supporting other advisors. Then we hit a point where we were maybe three billion to $10 billion where it was just chaos. I didn't really know how to weed out talent, and I didn't really know how to find the talent. I made a lot of mistakes.

But what happened once we got larger, is people really started coming to us. So every day we get, you know, many resumes and we go through a screening process. Somebody will review it, then it will go to a department head, and they'll meet somebody. Once all that's done, I will meet every single person before we extend an offer.

So part of my day, every single day, is to meet the people the firm wants to extend offers to. This morning I had seven people. That's more than normal, in an average day, it's one or two. But I had seven people I met that were in the final phase of being hired here. So now it's actually easier because we have a lot of talent coming to us because they see the safety, right? A lot of people want to leave the world that they're in and go to a firm that's an independent firm where they can do just what they want to do. They don't have to sell, they can just do planning, or they can just do tax, or law, or wealth, or whatever. But they're worried about going to a firm and getting fired in the first recession, right?

I think there's the safety in our size that's attracting a lot of very talented people that's just very different than it was a few years ago, so it's become much, much easier to hire good people today than it used to be.

Michael: So I'm fascinated that you still meet with every single person you're extending an offer to. What does that look like? I mean, there's a lot of people, so they just, they come through your office and you just spend 10 or 15 minutes with them just trying to get a feel for what are they like, and are they a good fit? Or do you have like the three magic questions you can ask them that they have to answer, or they're going to get flagged?

Peter: Right. Well, I would say…I think that, if you think, Michael, when you meet somebody, how long does it take you to figure out if you like them? I mean, it doesn't…

Michael: Like a minute, or two. Like you either connect, or you don't, usually. It's that that.

Peter: So before they get to me, they've got the right credentials, they've got a background check, we've had the compliance check. We've had the meet. We do phone interviews. They've met their department head. All of that is done. I'm not figuring out, "Do you have a clean background? Do you have the credentials? Do you know what you're doing?" That's done. I'm just figuring out, can my mom and dad be in front of this person? You know, can my brothers be in front of this person? When this person is walking up and down the halls, are the colleagues going to go, "I'm proud to call this person a colleague?"

That's all I'm trying to figure out. I'm not trying to figure out all that other stuff. Other people can figure all of that stuff out. I really just want to know are they energetic, and are they consultative, and are they likable? I'm looking for those traits. I'm not looking for qualifications. The qualifications have been handled already.

Michael: So have you had people that went all the way through that vetting process, all those stages, they're meeting with you because by definition, they're in the final stage of getting an offer, and you just flight them, like, "Sorry…"

Peter: Oh, yeah.

Michael: Sorry to talk to them, this just isn't happening?

Peter: At least a third. Yeah, and it happens all the time.

Michael: At least a third? That's a big number.

Peter: That is a big, big number, yeah. You know, sometimes people that are hiring on teams hear that we're short of people, and they might get a little more aggressive while trying to hire. I would rather be short than compromise. So yeah, no, it happens all the time. It happened this week a couple of times.

Michael: And that's basically, like it's a culture check, like a personality culture check for you? How would you describe it?

Peter: You know, I interviewed somebody for a city in the south where we had an opening. And the person, has a clean compliance record, nothing bad in the background check. Certified Financial Planner, only had two employers. He was a subject matter expert, but just, you know, when I met him I just said, "You know what? I don't…" See, this person had a tinge of arrogance to me. You know, when I think of that, I think of my dad telling me about…my dad's an immigrant, and my mom is. I remember him telling me how frustrated he was, you know, he's a doctor, he didn't know anything about money, and he's an immigrant. He would go to his lawyer and his CPA and his planner, and how he didn't understand anything anybody was saying and they talked down to him. I think of that, you know? So if I even see a tinge of that, I'm not interested. It just doesn't really fit the culture.

So the person might be amazing, and I'm sure going to be successful somewhere else. I don't like that kind of edge. And so that's an example of one of many things. You know, that's not the main thing, but it's just something that happened very recently. I can't just put them through a screening thing and have them check a bunch of boxes. There's got to be something else there.

Why Peter Still Spends 70% Of His Week In Front Of Clients [1:11:35]

Michael: So can you tell me what a typical week looks like for you? I mean, I'm just imagining like, you've got to end out leading a fairly structured world if you're managing this company. You know, I know you like you keep investment duties, you have management duties, you're keeping clients. You're meeting with every prospective employee you're hiring, and you have hundreds of them, and you're growing fast. You're hiring a lot. Like, what does a typical week look like for you?

Peter: Well, you know, it's interesting because I'm not really big on management. I mean, no one would ever accuse me of being a micro-manager. I like what Henry Ford said about layers of management is where mediocrity hides. I don't like management. Even the people that are directors in our firm that lead teams are hands on. What I mean by that is our head of trading, is still trading. Our head of client service is actually doing some client service. I want everybody to be sharp and in tune with what's going on. And I'm very much the same way, so when I write a newsletter for clients what they want to hear about isn't coming to me in some ivory tower two weeks, too late. I'm sitting with clients every day.

So I would say my typical week, one day a week, I'm traveling. I go somewhere and I try to see a client, or prospective clients, and our local advisors, and all of that. So that would be normal one day a week to do that. I interview a couple of people every day, but those are very, very short. I probably spend 70% of my week in front of clients, actually doing planning.

Michael: Seventy percent of the week is still in front of clients, doing the planning work?

Peter: Yeah. If I had to break it out at 70% meeting existing clients, or prospective clients, maybe it's 80% or 90% actually. Eighty percent or 90% meeting clients and perspective clients. Maybe 5% interviewing, and 10% or 15% talking to our team, you know, one way or another. But I'm not going to conferences. I'm not running workshops. There's no management meetings. I'm not doing any of that. So it's just not the way I believe in running things.

I'm an advisor, and I'm hiring people that are talented that don't need to be babysat. There's a way to tell if they're delivering or not. And they deliver. If they don't deliver, they're not here very long. I was at a conference recently, actually that Michael is the one I saw you at, and it was the only one I went to the whole year.

I went to one session and it was two guys that own $10 billion plus RIAs, and somebody said, "Well, you know, when you have to let somebody go, you know, what's it like?" and the guy said, "Nobody's ever left…" and he said the name of his firm. So the moderator asked the other guy, he is very high profile, you know $10 billion RIA. He said, "No one's ever left our firm either." I just thought, "Wow, that's interesting." I mean, can you imagine a professional baseball team where you never cut anybody? You're not going to win very long, right?

So to me, you either deliver on what we thought, you're either somebody that I don't need to micromanage and you can get everything done, and you can do everything we expect you to be, and you can… If that's the case, I don't think there's a firm in the country anyone can grow in more than Creative Planning. But if that's not the case, you're just not going to be here. It's just not the place for that person.

So I'm not managing them. I'm not babysitting them. I'm not talking to them every week. It's just a high performance place, and I'm looking to them to all achieve on their own.

Michael: So is there a particular way that you just track to keep track of who is delivering, or not? Are you like a firm with a whole bunch of automated dashboards that just feed all this information so you can keep track of who's hitting their numbers or producing the results that you're expecting? How do you know they're doing the things that you're hoping or expecting they were going to do?

Peter: Well, we don't do any stack rankings, and we don't do any sharing of that information with people. We don't do resetting, every January 1 you have to do A, B, C. I think that's kind of disrespectful to an employee in a way. What I do, I have information so I know, you know, that the advisor in whatever estate is getting X number of referrals for clients he has per year versus somebody else is not. And then I know when I'm talking to them, I've got some subset of information about what's going on.

But I've got to tell you, even that's new. You know, it was used to just be, I kind of knew, obviously, as we get bigger, we now full time have somebody just getting this information together, because we want to empower them too. I mean, basically the wealth manager is getting in today. We love that we don't have these goals that we have to hit every January. We love that we're not stagnant, but I'd like to know what the hell's going on. You know, I'd like to know how I'm doing.

So we're letting them know how they're doing, and at the same time, I have that information. But if somebody is not succeeding, if they're not getting referrals from clients, if they're not retaining clients, they're not getting referrals from platforms that they're working, we know that, and then we try to help them succeed there. Or, you know, Creative is not the place, because, you know, 95% of the people here are doing that.

I remember a long time ago, I used to be extremely patient with underperformers. I'm non-confrontational by nature. I don't like confrontation. I would keep people that are underperforming on, and on, and on, and on. One advisor, he really changed the way I look at things. He said, "You know, when you do that, you're not really helping that person. You're hurting all of us." I never really thought about it that way. I'm really transferring work, I'm creating reputational damage. Ever since that, I've been a whole other, way you know what I mean? Like if there's a problem, I'm going to help you get better, or I'm going to help you exit.

Michael: Or I'll help you find a better opportunity.

Peter: Or put it that way.

Michael: So is there anything that's surprised you on the journey, of like what the job has turned out to be now compared to what you were expecting in the past as you were projecting forward?

Peter: I think what I've been surprised about, I mean, I didn't understand…If you look at what's happening in the industry with all these conglomerates, I mean, I wasn't expecting. I mean, I wasn't really expecting anything. I mean, I wasn't expecting we were passive from the beginning. I think we still are the largest holder of ETFs, of any RIA in the country, but I didn't know it was going to be this big of a movement towards that.

I didn't realize there would be this many big RIAs, and this many consolidator, or that we'd see this much capital attracted to the place, or that you'd see this big of a move from brokers to independence. I mean, I've been surprised by all of these things. To me, it's just when something is different, it's just we stop doing the same thing and we do something different. I just try to focus on the client and say, in today's world and in tomorrow's world, how do I give that client more here than they can get anywhere else? If I go to bed at night with that, I know we're going to be in a good spot no matter how the industry changes, rather than being reactionary.

Michael: So what about from the management end of, you're trying to manage this growing business, these now hundreds of employees, still trying to spend the majority of your time in front of prospects and clients. Like how does that shape you from a management end? How do you manage and keep track of all of that?

Peter: First of all, I love it. So you're going to have to start with that. I remember reading an interview, and I can't remember if it was Kobe or Michael Jordan that said, "Well, what do you do after practice?" and he said, "I shoot best." You know, it's what I like doing. So I'm never going, "Oh no, I've got to talk to my team." I love talking to my team. I never go, "Oh no, another client meeting." I love talking to clients. What I don't like is management, and meetings, and all that crap, so I'm just not going to do those things because I don't think they add a lot of value.

I might spend less time with a person here than they might get if I had a dedicated manager for them, but when they're talking to me, they know I care about what we're doing for the client. They know I'm aware of what's going on. And they know I know what the client wants. So when I'm talking to a wealth manager, there's a little bit of credibility that comes from having done it, you know what I mean? So they know I'm in the trenches with them, and I'd much rather be a player-coach than a manager. So I think, you know, I might only talk to certain wealth manager accumulatively an hour or two a year, but I think that they, during that hour, they know whatever we're talking about. I'm sure they all roll their eyes on occasion, but for the most part, I think they go, "You know what, probably what Peter's telling me is guidance for how I can get better at what I'm doing, or how I can be more successful."

Threats In The Coming Years For Financial Advisors [1:20:14]

Michael: So, where does the firm go for you guys, from here? Okay, you've gotten to be the first independent RIA that crosses the $50 billion line, or the $100 billion line is just powering forward on growth and trying to keep the compounding.

Peter: I could care less about that component of it. To me, that's a reflection of where the money is going. I really want to feel like we're doing the best for the clients, and so ultimately, I'm focused on value, value, value, value, and the rest takes care of itself. I can't tell where we're going because I don't know what's going to happen for sure, with the competitive environment.

I don't know what's going to happen with all my competitors that are owned by parent companies. I don't know what's going to happen with the fiduciary rule. I mean, all these things are seismic. You know, these are massive shifts that can happen in the coming years. All I know is that when we have a dollar to invest, we invest it in, I think, a better offering, better people, or better processes. To me, if you do those things, then you can survive, you know, whatever is coming. Because I do think there will be a reckoning in the industry, and I think there are a lot of firms that will survive it, and a lot that won't.

Michael: I think it's an interesting framing, that I know there are a lot of firms that are concerned about the competitive threats. They're concerned about whether trouble advisors or custodians competing in the business, or, you know, the rights of large firms like yours that they feel are competing against them. We all have competitive threats coming from some place, that's the gloriousness of capitalism.

You know, I'm struck, though, by this philosophy of yours of just, "I'm just going to stay focused on the value of the clients. We have a good relationship, then we'll figure out the rest as we go."

Peter: Yeah. No, I mean that's the philosophy. Is just what else can I give the client? You know, what else can do for the client, and how low of a cost can we do it for? I think you're right about these competitors. It makes me think of like say, these robo-offerings that are out there. Everyone's, "Oh, the robots, they don't hurt advisors." Well, that's a bunch of BS. Of course, they do. The advisors don't feel it because the market's gone up a lot in the last five years. So if you're an RIA that was a two billion and you're at three billion, you're going, "Well, that robot didn't hurt me." Well, if you take out the market and you start to look at really how much new clients are coming, how many of those clients would have come to you that instead said, "You know what? I'd be better off going to a robot."

All of these things are taking pieces of the pie, and anybody that thinks that they aren't, is delusional. I think that's what the next fair market's going to reveal. I think the industry has gotten very fat, and I think you look at like these firms with their layers and layers of management, and I just don't see it as sustainable in a prolonged bear market.

Michael: Yeah, I don't know. I mean, I hear you that there's competition coming in, and from a lot of directions. But in particular, in areas like looking at robo-advisors, I mean, just when I look at raw numbers, I'm pretty sure you've grown over the past six years by more than betterment wealth fronts and all the other robo-advisors combined.

Peter: We have. And I, obviously, I follow you, Michael, and I know you don't think the robots are a threat, but that doesn't mean that some of that business wasn't going to come to Creative. I do sit down with people who go, "I'm considering you and Goldman Sachs," yeah, true story. So I was referred to a client that was in Delaware. He had $172 million. The dad had passed, and they were choosing between Creative Planning, Goldman Sachs, and Vanguard.

That, to me, is the world we are in now. Throwing in a robo at Vanguard versus all the proprietary sum of Goldman Sachs versus Creative. I think that's not a match up that was going to happen a few years ago. And so these things, sometimes we get a chance at the table, and sometimes people go, "You know what, I'm just going to go there." So I do think that robots aren't eliminating advisers, but they are taking a significant piece of the pie.

Michael: Well, and I would agree, with respect to competitive threats like Vanguard. You know, I don't view them as a robo. They've got something like 600 CFPs that they've hired in just two or three years. Like, they're a massive human planner service. Granted, they don't have branch locations, so they meet with their clients virtually, but, you know, about a third of our clients aren't in the DC area, we meet with them virtually as well. Like, I don't think of Pinnacle as a robo advisor, because we've got hundreds of clients that we meet with using Skype and Go-To-Meeting. Vanguard just does the same thing at a much, much larger size and scale than we do.

Peter: Nevertheless, it's an example of the landscape. I mean, the custodian, like we said, are going to start to compete even more. The brokerage houses are going to come around. They're not stupid. The robots are taking some, and places like Vanguard are. So I think the marketplace, this is not what the advisory world looked like five years ago, and I think it will look radically different in another five as well.

Michael: Yeah. Well, that's the irony, right? We all cheered when brokerages and custodial services got cheaper, and we all cheered when mutual funds and ETFs got cheaper driven by large custodians with scale, and companies like Vanguard, but, you know, the caveat from their end is they're watching their margins go to zero because of this hyper-competitive commoditized environment and trying to figure out like, we are in the value chain, can we actually make more margins? Oh, instead of giving all this money to advisors, why don't we become advisors and then we can participate in their margins? Which is now…

Peter: Exactly. Exactly. We seem to think we are immune to something that has happened in every other industry, and that happens in a capital society. If you look at financial services, you saw mutual fund fees go, first, the commissions went away, then the high fees went away, then you started to go the ETFs. Now ETFs, Vanguard's one of the more expensive ETF platforms, that's gone almost zero. Custodial trading fees have gone down. So every single thing has come down, and advisor fee is going to follow.

Michael: For which your view is just we're just going to try to stay focused on doing whatever we can to give value to the client, and we'll deal with it as we go?

Peter: Yeah, and to implement technology so we can be ahead of that, so we can maintain a margin even in a lower fee environment.

Michael: So, as we wrap up, this is a podcast about success, and one of the things that always comes up on the podcast is that just the word success means very different things to different people, sometimes different things to us in different stages of our own lives. So, you know, as someone who's built what anyone would objectively call a phenomenally successful RIA business, I'm curious just for you at the personal level, like how do you, how does Peter Mallouk define success?

Peter: Well, you know, it's interesting. Obviously, one of the interesting parts of my job is I'm sitting with some enormously successful people now. And it is one of the funniest things, is just to see this American dream over, and over, and over again, and how every everyone's story. It is an amazing country we live in. You really get to see that in this profession, like the people really can do amazing things, largely because of scale, and sometimes because of a tremendous amount of luck, and in the case of someone like me, you know, a lot of the latter and some of the former. A combination of the two.

I've also learned that money doesn't really change anybody, it just reveals who they really are, too. So I've had a much more interesting perspective on, you know, watching what money does to people, and their relationship with money.

But for me, success is, you know, if I can come to work and I can really sit with a client and feel like they're in a better spot because they chose Creative, they could have gone to this company, or that company, but they came here, and I can feel good that they're in a better spot because they came here, that brings me tremendous satisfaction.

The other that I love is watching somebody fulfill their potential. We have so many people here on our team that they were great where they were, but they could have never become, or never…the future couldn't become what they could at Creative. That, to me, is the definition of success. That I get to be in a position to empower other people, and at the same time, I'm having financial success, and of course, I can use that money to do all kinds of good things, from support family, to support the community. So this is the greatest profession I think someone can be in at this very moment, and I've been very fortunate to be a part of it. All your listeners are very fortunate to be a part of it. I think we'll look back in this as the golden era for this, and I'm grateful to be a part of it.

So I love everything I'm doing, all the time, because of that.

Michael: Well, Amen. Well, thank you, for joining us and sharing some of that passion. I'm very cognizant of what a busy guy you are, so I'm very thankful we could have you to join us on the podcast here, and just share some of this story and perspective of what it's like to build Creative.

Peter: I appreciate that, Michael. And I appreciate all you do for the advisor community example of bringing substance to it, which is great.

Michael: My pleasure. We're doing what we can. Wonderful. Well, thank you for joining us.

Peter: Thank you.