Transcript: Peter Mallouk



The transcript from this week’s MIB: Peter Mallouk, Creative Planning, is below.

You can stream/download the full conversation, including the podcast extras on Apple iTunesOvercastSpotifyGoogleBloomberg, and Stitcher. All of our earlier podcasts on your favorite pod hosts can be found here.



VOICE-OVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

RITHOLTZ: This week on the podcast, what can I say, this was a master class in how to build a powerhouse RIA. Peter Mallouk has been with Creative Planning for 20 years. He kind of started as a junior person, eventually buying the firm for — on — on a — I guess, an earn-out basis when the then founder wanted to retire and took what was essentially a $150 million or smaller firm and built it up to a $45 billion powerhouse. If — if you want to learn the right way to manage money, to deal with clients, to provide services, to grow a business then strap yourself in, this is a master class.

With no further ado, my conversation with Creative Planning’s Peter Mallouk.

VOICE-OVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

RITHOLTZ: My extra special guest this week is Peter Mallouk. He is the President and Chief Investment Officer of Creative Planning, a firm that manages about $45 billion in assets under management across nearly 100,000 client accounts. He is the only person on Worth’s List of 100 Most Powerful People in Global Finance who actually advise clients. He was listed number one on the Barron’s Top 100 Independent Advisors for three consecutive years, and he is the author of the book, “The Five Mistakes Every Investor Makes and How to Avoid Them.”

Peter Mallouk, welcome to Bloomberg.

MALLOUK: It’s great to be here. Good to see you again, Barry.

RITHOLTZ: I’ve been looking forward to having this conversation with you. We spoke briefly at a conference in September, but that was so short. Twenty minutes, a half hour just doesn’t get it done, and — and we should be able to wrap this up by dinner time and not only get to every question I have for you.

I have to start with your career because it’s a little unusual. You get a J.D.-MBA, so a legal degree and a business degree from the University of Kansas in 1996. What — what was your career plans? What did you think you would go with that?

MALLOUK: So I didn’t have any career plans. A lot of people look at my college education history and think there was some master — master planner. I think I’m perceived as — as a strategic planner when it comes to — to business. And the amount of just good fortune and luck along the way is — is tremendously underestimated. I …

RITHOLTZ: For sure.

MALLOUK: When I was doing an undergrad, I just took business — just took business because I thought I like business, and I added other majors that were interesting to me. And then I, you know, got an MBA because I wasn’t sure what I wanted to do and the same thing with the law degree. There was a joint program at University of Kansas where I went, and so I did both. So I came out of college with a bunch of degrees, but I still — even leaving campus and heading back — back home, I had no idea what I was going to do.

RITHOLTZ: And — and somewhere along the lines, you were involved with used record stores.


Tell me about that because in my misspent youth, I used to haunt used C.D. stores looking for cheap albums and — and discs that were used. What — what brought you to that space?

MALLOUK: So, you know, I don’t know where this entrepreneurial thing came from. I know my mom really encouraged it when I was younger. And I remember always having a paper route, which meant, you know, couldn’t drive a car. When I had it I was 12, so my — my dad, you know, would throw the paper out and I — I threw the newspapers out.

RITHOLTZ: Oh, you were on the back of a bike tossing — tossing it out?


RITHOLTZ: That’s how — that’s how …

MALLOUK: Definitely not.

RITHOLTZ: … so in suburban New York, that’s how you — when I had a paper route, it was a bike with a — you would put a bunch of baskets on and you would go down the street flinging papers both ways.

MALLOUK: Yeah, I thought that we did that in movies. No, no, that was …

RITHOLTZ: No, no, that was real.



RITHOLTZ: But that’s when you’re in a tight suburban neighborhood. You sound like you were in a little more spread out.

MALLOUK: Spread out — I mean, Kansas, so it’s a spread-out suburban neighborhood. You’re one house to another, you’d get — you’d get worn out sometimes, so I just sit out the back of a station wagon and — and throw — and throw the newspapers. Then I had a lawn mowing business, and then I had a D.J. business — I loved music. And — but the music stores was probably the — the thing that was the biggest manifestation of what I really enjoyed and having a business. I had started that while I was in college and then it, you know, pretty much gone bankrupt by the time I got out.

RITHOLTZ: So you really begin your career at Creative Planning in 1998, what capacity did you join the firm? And this was, by the way, a much, much smaller firm at the time.

MALLOUK: Right. They — it had been started by three guys in the insurance business and they have an insurance arm, and they mainly did disability insurance for physicians. And one of them was really into investing like all the way back in the early 80’s, you know, when I was in — in grade school. And he — so he started Creative Planning as a sister company and had, you know, maybe a few dozen clients basically using American funds, mutual funds and — and doing planning with — with, you know, by hand.

You know, I remember when I took over, I look at — look at the plans. I mean, there was no Internet back then and — and great technology.

RITHOLTZ: We — we take things like MoneyGuidePro for granted.

MALLOUK: Yeah, I mean, that’s …

RITHOLTZ: The software today really let you dig deep and — and come up with a lot of options.

MALLOUK: Yeah, I mean, technology literally lets you scale in a way you never could before in every — in every business. By just being born now, you can do all these things that you could have never done a long time ago no matter how brilliant you were.

And I — I had worked for somebody for two years just advising this position in his practice. And at the same time, a couple of years after that, I started working with advisors doing wills and trusts and that sort of advice for them.

RITHOLTZ: Putting — putting that legal degree to work.

MALLOUK: That’s right. So never been in a court room for — for anything ever with the practice of law, but I enjoyed helping people, hey, you’ve got this problem, you want to fix it, you — you probably hate dealing with lawyers. I’m going to make this easy, it’s going to take a few days. It’s going to be a flat fee. I’m going to explain it in English. And that really took off.

A lot of advisors started to use me. I really learned a lot from a lot of those advisors. A lot of them were amazing. A lot of them were terrible. A lot of them were brilliant, but did the wrong thing. And — and a lot of them always did the right thing.

And then Creative Planning, at the same time, their financial planning team had left to start their own firm. They asked me to come in, and when I take on that department, I looked at it and thought, you know, I can do this in two days a week. It was pretty straight forward. So I was doing that from 1998 to ’04. At the same time, I was taking care of maybe 100 other advisors/clients doing estate planning.

RITHOLTZ: So now it’s 2004 and you say, “I have an idea.”


RITHOLTZ: Let’s buy the firm. So first question is what — what motivated that light bulb in ’04? By the way, before the financial crisis but not too long after the dot com implosion …


RITHOLTZ: … you know, the — the markets had only bottomed, let’s call it October ’02 and then March ’03 …

MALLOUK: Right, I mean, I can write in the industry. Basically, when I was running Creative Planning’s few dozen clients, during that period, you had the tech bubble and you had 9/11 so the markets were just, you know, a disaster during that period.

And the light bulb going off, if we really think about it, here I am for six years, I’m doing financial planning investments for some people and I’m doing estate and tax advice for other people, and you would think the light bulb would have gone off sooner, right, that, hey, maybe people would like this if it was altogether, right?


MALLOUK: And so I knew three things, I — I knew I wanted to be an independent advisor and I — I knew that I — I was not comfortable with dual registration. Creative Planning was dually registered at the time.

RITHOLTZ: Oh, really?

MALLOUK: And back then that was very normal.

RITHOLTZ: Right, that was — hey, listen back then RIAs were relatively new.

MALLOUK: Yeah, nobody knew what that was. We had …

RITHOLTZ: And — and people were just adding it to brokerage firms, says, “Oh, let’s offer these services.”

MALLOUK: Exactly right. I mean, it was innovative to even be an RIA at all …


MALLOUK: … at that point. And I — I was very uncomfortable as — as an attorney to build maybe complex a estate plan with charitable trust, irrevocable trust then find out an annuity was in there that wasn’t the right kind or shouldn’t be there at all or (inaudible) …

RITHOLTZ: But — but they have a giants commission built in …


RITHOLTZ: … and that’s where they get sold, right?

MALLOUK: Yeah. And so you go when you do the legal then that advisor might do things that aren’t ideal, so I — I wanted a firm that was independent, didn’t sell its own products. I was able to combine all those things in one place and, most importantly, could take each client and — and change the portfolio per their situation. And so I went to all my clients, including Creative Planning, and said, “You know, I’m going — this is what I want to do.”

And the owner of Creative Planning was basically like he had had those two former partners — one had died very young, one became disabled very young. And he said, “You know what, I’ve had enough of this. You know, if you want to buy, the (inaudible) of Creative Planning, go ahead.”

RITHOLTZ: So did you do this yourself? Did you bring in partners? Did you bootstrap it? How — how did this transaction …

MALLOUK: I mean, we’re talking about a firm that had a couple hundred thousand of revenue. There was — I mean, it was …

RITHOLTZ: Right. So it wasn’t a multimillion dollar Creative …

MALLOUK: No, no, I mean, we’re — there — and basically made monthly payments for a few years. And when it was over it was not — we’re talking about a few dozen clients. And so what was really the advantage for me was I didn’t have to go create …

RITHOLTZ: From scratch.

MALLOUK: … an RIA from scratch. There was one …


MALLOUK: … there, I already knew those — those clients.


MALLOUK: And so I could skip this like six-month period of figuring all that out and get on with it.

RITHOLTZ: Even — even more, it’s like 18 …


RITHOLTZ: … months by the time you’re done with everything.

MALLOUK: That’s right.

RITHOLTZ: We did ours from scratch and you find yourself spending an unknown amount of time with lawyers and accountants and compliance people just to launch the firm.


RITHOLTZ: So you bypass that, so now it’s ’04, ’05, you’re $100 million in assets.


RITHOLTZ: When do things really start to scale up? You’re now $45 billion, that’s a big jump.

MALLOUK: You know, it was — it was really instant in terms of percentage growth. I mean, every year it seemed it was 30 to 50 percent or 30 to 100 percent growth, and it’s never really stopped. I mean, there have been a couple little more than that, a couple of years a little below that. I mean, the number has changed. Obviously, you know, three years ago or $18 billion and now we’re at almost $45 billion, that seems crazy but it might even be a slower growth rate than when we went from $100 to $500 million.

I think what we were doing in the beginning was very innovative and — and it doesn’t sound like it today to have a firm that was, you know, dropping as dual registration, was totally independent. We were using ETFs. I remember hearing from our Vanguard rep that we had larger holding indexes than any independent RIA. I remember hearing that in ’09 or …


MALLOUK: … I don’t remember having to explain when ETF was to clients, what past investing was. And then we were doing the legal and tax and all of that in one place. The way we delivered, it was very efficient and we were — we were doing — including the planning about a separate feedback then and reading all the financial stuff and said, “This is stupid, no one will value it if you do it for free,” and that you always have to charge. And so we’re just a — maybe six or seven things we were doing that no one else was doing, that today a lot of people are doing.

But the difference is today that’s not enough.


MALLOUK: But today you have to be more specialized, you have to be faster, you have to cost less. You have to have much, much more credentialed people that’s gotten way more competitive. You know, if you had started this today it wouldn’t work, right? I think that back then it was very unique. It was — it was very on the frontend of things and it allowed us to build a lot of — a lot of momentum.

And you have a — a colleague that — that sent me wonderful article about cumulative advantage, which is you start to — one of the things …

RITHOLTZ: That’s right.

MALLOUK: … that people want in this business is they want to feel safe. You know, I mean, you — you — if you’re looking at hiring an advisor, it’s sort of like a restaurant. You know, we’re — we’re here in New York City. The way I picked where I was eating last night is I watched TripAdvisor. TripAdvisor told me where to eat last night, right? So part of it is probably going to go to a pretty good place. And the other part is I’m probably not going to throw up, right? I’m probably not — it’s more like going to be horrible.

And I think people look at advisors the same way. I think they want to feel like, okay, I’m at a place that’s pretty safe. Okay, yeah, this place has lots of clients, big clients, pretty sophisticated, probably did a lot of due diligence. I — I feel safe there. I’m probably going to do all right. I’m probably not going to have a really bad outcome. So it’s just the — so I think as you — as we’re sitting in this world today, people have been at 9/11, the tech bubble, ’08, ’09, Bernie Madoff, just there’s so much crap happening, right?

If you’re an investor, you’re really looking at — at this landscape and going, you know what, the guy with $200 million makes me a little nervous. Now, not everybody thinks that. There is a path for the guy with $200 million.


MALLOUK: But there are going to be some people that person encounters that goes, you know, when you’re bigger, they might not use those words but that’s what they’re …

RITHOLTZ: But that’s what they’re thinking.

MALLOUK: I had a lot of people that didn’t sign up with me in the first few years that signed on years later, like say my mom and dad.

RITHOLTZ: I’ve been calling you president. Is that right?

MALLOUK: Good enough, yeah, I am the President.

RITHOLTZ: CEO, Chief Investment Officer, Chairman. Is there a preferred title?

MALLOUK: I really — it doesn’t matter.

RITHOLTZ: But — but you are the head honcho at Creative Planning, which is a …

MALLOUK: Let’s go in that — I like — I like that.

RITHOLTZ: … $45 billion — can I call you $45 billion? Is that — are you just about that?

MALLOUK: Very close, yeah, depends on — I guess …

RITHOLTZ: Depends on when this broadcast.

MALLOUK: … what’s going on. That’s right.

RITHOLTZ: Depends on where the market closes.


RITHOLTZ: So let’s talk about those numbers because they’re crazy. When you — when you took over the firm in ’04, was — it was 100 and changed, $100 million. Not a lot of firm funds. How do you scale up that AUM from a few million dollars to almost $45 billion?

MALLOUK: Well, I think you — you have to have a couple different things. So I think that, one, you have to have a sound investment philosophy that’s kind of worked out for people, right? You’re not going to get through all of those things and have your clients referring other clients, an aggregator assess with you unless you deliver on your promises. So one, you have to have an investment approach that works.

I think second, you have to have more than that. And I — and so we — we have more than that with planning and legal, and tax, and trust services, and institutional services, and all of those things.

Third, you have to have the people. And I — I — I think this industry and I’ve spoken about this a couple times before with you, the people in this industry are tremendously underrated. And I think they’re viewed as interchangeable.

If you watch the behavior of a lot of financial services/firms, they view the people as interchangeable. You look at some of these firms now, there’s a lot of press around them preparing for the next recession. Low rates, they’re not going to make as much money, holding money, so what do they do? A lot of them aren’t firing their bottom performers, they’re firing their highest compensated people which, you know, presumably are their highest compensated people because they rose to level …

RITHOLTZ: High performers, that’s right.

MALLOUK: … highest performers. And they go and they go, “We’re going to fire all this people,” which — obviously the assumption is that other people will just naturally make that work out. I don’t hold that view at all. I — I think that, you know, when I have a — looking for health care for someone in the family or myself or I’m looking for a lawyer, I do not view all physicians …


MALLOUK: … all lawyers equally, but this industry really views people as equal, and I never have. I mean, from the very, very first hire, I knew the importance of people. And I’ve personally witnessed and received the consequences of mostly wonderful hiring and, you know, a couple of really bad hires. And if you — I attribute almost, you know, huge percentage of success to getting the right type of people and really the biggest grief I’ve had in my career to one or two people I hired that were mistakes.

RITHOLTZ: How — how many employees are you up to now?

MALLOUK: About 680.

RITHOLTZ: So at a certain point, you’re no longer interviewing every single person, right?

MALLOUK: No, I’m — I’m interviewing them all, but …

RITHOLTZ: You — you — you’re the final check off even (inaudible) …

MALLOUK: Yeah, that’s a better way to put it. I mean, I’m not running — I mean, before they’re getting to me, they’ve been through a background check …


MALLOUK: … compliance check. They’ve — they’ve interviewed with the — a talent acquisition team, the head of their department, usually somebody else. Then they’re coming to me. But I would say, you know, one in three is not getting past me …

RITHOLTZ: Really, it’s that high.

MALLOUK: … so even after — even after all of that …


MALLOUK: … it’s just — for — I have a view of the firm as a whole. And I have a — you know, sometimes if you’ve got a head of department they really have a need.


MALLOUK: Right, but you — you have this — you want to fill it, right?


MALLOUK: … so interviewing somebody and you’re looking for reasons to hire them …


MALLOUK: … and I really looking for somebody in going if this doesn’t work out a year from now, why is that? What is it about this person I’m interviewing that’s not going to feel? That could be the reason for that.

I can look at vestments the same way. I’m looking at a new investment. I’m — I’m saying if this blows up in my face, right, I’ve got to explain this to clients a year from now or 10 years from now, what — what was the scenario that made that happen? And so I’m — I’m trying to think my way through those sorts of things. Sometimes the person is a wonderful person, but I don’t think they’re going to be satisfied in that role. They’re taking — they’re switching under the wrong circumstances.

There was one person interviewed with us from another firm. He just is so treated badly at the other firm, and I — I really did not want to hire somebody as leaving something or hire someone that’s coming to something. We got hiring them a couple of years later. But I’m looking at more of those things and — and that I am all the things have already been figured out by others.

RITHOLTZ: I’ve had a number of CEOs both from within finance and from other industries say hiring is the single hardest thing they do …


RITHOLTZ: … and it feel sometimes like the outcome can be random, people that — all right that person will work out and there become a superstar or someone they are convinced is going to be perfect for the role and it doesn’t work out. Do you think hiring is — is that challenging and that important?

MALLOUK: Well, that important you can’t …

RITHOLTZ: For sure.

MALLOUK: … it really can’t overstate how important it is and — and the positive and negative side of this business.

On the randomness, I don’t think it’s random. I think you could have some round of random outcomes, but I think our hiring process is probably more likely to have success than say another one. And there’s probably somebody that is more likely to have success than we are. So I think there are certain things you can control that are going to narrow the field of outcomes.

I had a person who, at the time, had a much bigger firm then me had said — had — had told me about hiring the — the looks at the world, and there’s a — there’s a — a social curve out there. There’s some crazy person that’s going to screw up your firm, there’s some malicious person, there’s some psychopath, you know, whatever percentage of the population fits those things. And then there’s all these wonderful people but they’re not bright. There’s bright people that aren’t wonderful. And he’s like I’m looking at this whole social curve. And when — and I’m trying to keep the bad part, you know, that standard deviation that’s, you know, way off — I’m trying to keep that away from my firm and I’m trying to get the other end.

And I thought that was an interesting way to look at it. You — hiring is not random like just pulling somebody off the street, you could really do a lot of things that are objective and some that are subjective to really narrow the range of outcomes you’re going to have. They’re still going to be surprises. But I will tell you, every year, we have lesser prizes than we’ve had before, and I think we’ve just gotten better at — at identifying all those things that derail somebody.

And part of it’s — there — every — every culture has something different. Our culture is a very rapid pace. It’s a very high energy culture, very high expectations. Sometimes you could have somebody that’s brilliant and wonderful, but it’s just not — that’s just not their style, right? So some of this is stylistic, too. You could screen for some of that.

RITHOLTZ: So you mentioned you worked with Vanguard. I think you also worked with DFA, is that correct? (Transfer funds).

MALLOUK: DFA, BlackRock, State Street.

RITHOLTZ: So you — basically, we do the same thing.


RITHOLTZ: You basically have a bias towards passive, but not 100 percent purely passive. Is that fair?

MALLOUK: That’s fair. And then we use a lot of alternatives for our clients that have $5 million or more with us.

RITHOLTZ: So that’s a question I had for you later on, but we might as well talk about it now. Private equity is hot as a pistol. As we work our way towards some of the larger, more sophisticated family offices and ultrahigh net worth investors, they’re very interested in alternatives. How do you reconcile — hey, look, we’re passive over here, but we’re going to put some money in with alternatives. They’re a little pricey and we don’t exactly have a lot of transparency into things, but some of the returns have been really good. How can you reconcile those two?

MALLOUK: Well, I don’t — I don’t think I — I mean, to me, as I don’t have to reconcile the bond market and the stock market, they’re different markets.


MALLOUK: They have different outcomes. And so I don’t view it as conflicted, you know, whatsoever. I think that I believe that the U.S. large market and international markets are generally efficient or efficient enough that I’m not going to outsmart them, right? I know your firm feels the same way. So I’m just not going to play that game, right? I’m going to figure out what the client needs, what return they’re trying to hit, how much volatility they can handle to get there, and I’m going to create some mix that I think has the highest probability of creating that outcome.

And, you know, when I add bonds, my expectation is the bonds are going to underperform, right?

RITHOLTZ: Underperform equity.

MALLOUK: Right. So I mean, I …

RITHOLTZ: Although we could point out that there have been long periods of time these past three decades where …


RITHOLTZ: … bonds did really well versus equity.

MALLOUK: Yeah, but in general, right, most of our clients their — their time line is multidecade.


MALLOUK: And the odds they’re going to underperform with bonds are very high yet …


MALLOUK: … yet we introduce bonds to the portfolio. We do that because they might have short-term income needs. We got to make sure we can deliver that to them even if there’s an ’08, ’09 crisis or a tech bubble or 9/11. It’s not about, you know, maximum performance to introduce the bonds. You’re — you know you’re introducing something that will probably underperform in exchange for making sure we don’t blow up the portfolio by withdrawing from stocks when they’re down, right?

RITHOLTZ: Right. What — what about the behavioral side of I know a number of people who advocate 100 percent equity portfolio which, in theory, does well until you hit an ’08, ’09 wherein things get cut in half and people have a tendency to jettison stocks at the worst possible moment, at the lows and then they miss the whole recovery. How do the bonds fit into the behavioral side of a portfolio?

MALLOUK: I really think that behavior, most of it, can be controlled through education and empowerment. So I think if you’re a pure money manager, I think, getting somebody to get through, a 50 percent drop is going to be pretty tough …


MALLOUK: … what you’re seeing them throughout the year and you’re educating them on, hey, you — you’re 100 percent stocks, you’re 90 percent stocks. If the market goes down 50, you can expect to go down 50, maybe more, you know, depending on what other — other asset classes we have, some asset classes whether it’s international emerging markets or small cap or whatever. And here’s what’s going to happen and here is why the dividends are enough to meet your needs and so you don’t need to worry about it, and here’s historically what’s happened. If you’re having those discussions all the time, then when it happens you’re more likely to get through it.

But I think the reality is most people can’t afford that. So even if you’re …


MALLOUK: … sitting with a — a couple and it’s a doctor and he’s 68 and he’s got $4 million because she and her husband have been saving for forever. And, you know, they need a couple of 100,000 a year, they can’t be all stocks …


MALLOUK: … because if the market goes down at half, the dividends are not enough to meet their needs. So almost everybody has to have bonds in their portfolio even the top one percent. Now when you get to the top one-thousandth of one percent, they don’t need bonds in their portfolio.


MALLOUK: Right, the dividends really are enough. And they are more focused on even tying it up more than markets with, you know, things like alternatives. So for me bonds are about how — how much bonds do I need to meet their needs if something goes wrong in the short run and then in stocks for the long run?

RITHOLTZ: And what about — since you mentioned this in terms of — of income, what about people who are living in high tax states …


RITHOLTZ: … where there is a fairly robust municipal bond market that can generate tax-free income?

MALLOUK: Well, I think that the municipal bond market is completely distorted now because of what’s pension plans having to allocate the bonds and the aging population of people that are in those pension plans, and the tax law really pushing money to bonds. It’s very hard to take a client today and say, “Let’s go put 30 percent of your money in municipal bonds.”

RITHOLTZ: Was that an option 25 years ago?

MALLOUK: Absolutely. Yeah, I think that — I think three years ago, you know, it was …


MALLOUK: … it was — it was an option. I think that when you’re — now where you’re out, it’s — it’s just — you can’t justify it. You — you look at the — the dividend on stocks and — and you compare it to bond yields, and it’s — it’s hard.

RITHOLTZ: You and I had a conversation over the summer about the acquisition space that I found fascinating, and I wanted to delve back into that because, quote, “It’s the hottest it’s ever been and possibly the hottest it will ever be.” It’s just bonkers right now. I don’t know where the top is, but it ain’t going to get a whole lot better than right here. I’m paraphrasing, but it’s pretty close to what you said. Why is M&A in the registered investment advisory space so hot today?

MALLOUK: So I think you have a lot of different things. So first I think you see this rotation institutional investors moving money out of hedge funds where they’ve looked historically and said, “Hey, hedge funds haven’t done that great for us for the last 20 years, but these other alternatives have, in many cases, outperformed the market for us, and so they’re rotating to those and one of those asset classes is private equity.

So you have the big funds are bigger than ever. I mean, you just — you can’t go a month or even a week and not see about a big private equity family raising their biggest fund ever.


MALLOUK: So that’s number one, the big …

RITHOLTZ: In fact, McKinsey, the data point I just was reading about McKinsey said, by the end of 2017, that calendar year private equity had raised $750 billion in new funds and fresh capital.


RITHOLTZ: That’s a lot of money.

MALLOUK: It’s crazy. So the big have gotten bigger. The second is there’s a lot more private equity funds. There’s now over 8,000 private equity funds. There’s …


MALLOUK: … way more private equity funds than there are stocks. So — so we have more funds with more money, so that’s number one, right, just a bunch. There’s this huge slosh of liquidity out there.

Second, we have very, very low interest rates. And when private equity goes in and buys a business, they don’t usually just write a check, they usually do the same thing a real estate fund. When they — does when they buy a property, they use leverage. So they’re borrowing money to buy the firm, right? The — the company they’re buying.

And so if interest rates are lower, they can obviously pay more just like your listeners can buy more house if the mortgage is lower …


MALLOUK: … right? So you have very low interest rates, more funds, bigger funds, and high net worth investors are starting to move more to private equity, too. So all — there’s all that money over there.

Now what do they want? They want to be in an industry that is growing fast, has recurring revenue, has built-in inflation hedge where people are sticky and where there’s a need for consolidation, right, where they can take, you know, Mary (ph) over here is doing a pretty good job, and Joe (ph) over there, he’s doing a pretty good job, but together, wow, they could really be impressive because Mary’s (ph) good at this and Joe’s (ph) good at that.

Well, what checks the boxes on all of those things on the RIA space?

RITHOLTZ: Sure, money is sticky, market goes up, there’s real inflation hedge.


RITHOLTZ: And it’s recurring quarterly revenue stream, although I think a handful places or annual handful places monthly, but for the most part, it’s a quarterly invoice.

MALLOUK: Right, and they compare that to all the other areas of the financial space where there’s more client turnover and people leaving and they’re going, you know what, this is the space to be and — and not — what a coincidence the space to be, and it’s the space that’s really in its early stages. You know, there’s a lot of room to improve some of these places.

So, yes, it’s huge slosh of money with very low interest rates going into a space that is attractive for a bunch of, you know, fluke reasons and all this timing comes together, and you now have private equity coming into the space to — to buy up firms. And the other thing is they’ve been very successful at it, right? So somebody who’s just built a $500 million firm or a $10 billion firm is probably not the person usually, right, to run a much, much bigger firm. And they know that and they don’t want to do that like I know I don’t want to run a publicly-traded company, right?


MALLOUK: So I’ve been approached several times about, hey, you guys should the public. That’s never happening with me.


MALLOUK: I’ve got clients that are CEOs, CFOs of publicly-traded companies, that they are not happy, no. And I am very focused on my quality of life, and I just — I look at them and they just look like they’re aging. Every — every review they’re aging twice as fast as all my other clients.

RITHOLTZ: So — so back up a sec, this is really a fascinating digression. Most companies, when they go public, they’re going public for one of two reasons. Reason number one, they need capital to either grow or make acquisitions or some other financial engineering that’s part of their long-term business plan, or two, they and their staff and their outside investors — typically venture capitalists or whoever — are looking for an exit.


RITHOLTZ: You don’t seem to have either of those issues.

MALLOUK: No, I — I don’t, so that would be another reason I would — I would never do that.

RITHOLTZ: So — so — and you are still the — the main owner — the sole owner of — of …

MALLOUK: Sole one today, yeah.

RITHOLTZ: Sole one really? At — at what point does that changed? Because I know we went through a whole process of setting up a path to equity for employees. You guys have been growing so crazy fast for so long, that — that hasn’t really come up to the fore yet.

MALLOUK: No, I mean, as part of it — I have a lot of partners in our affiliated entities, so there — I have partners with the — the law firm and the — the benefits firm and the 401(k) firm and the — and the — the …

RITHOLTZ: Those were all separate corporate entities.

MALLOUK: Yeah, all Creative Planning entities, all — operating out of the same place, all helping the same clients. So once there’s been stable growth — I’ve always, you know, had partners in favor of them in those areas, I mean, Creative Planning has just been such rapid growth and it’s required so much capital. I mean, it — it — there’s — this never made sense to — to do it. I don’t know that anyone would have really enjoyed the ride …


MALLOUK: … and — and what it was going to take financially along the way to do — to do the — or the commitments or the — the deferral of the patients to — to do this.

But we — we were — are considering and have for a long time considered raising money by selling a minority stake to a private equity firm because I do think that valuations are high, and I do think that the world moves very, very, very fast. And you are going to need money to get through it.

If you look at how these big financial firms are doing it, they’re doing it by preemptive layoffs, right? That’s — that’s what they’re doing now. And I would like to do it by a preemptive pile of money sitting in the bank so that no matter what happens, when there’s a contraction, that we can go take advantage of that. And that — that’s what we did in ’08, ’09, we grew rapidly through that crisis. And I want to be able to grow rapidly through the next one, which means I not only want to keep my team in force, I want to go find more talented people and focus on getting clients, not worry about — about reserves.

RITHOLTZ: So you mentioned ’08, ’09, I have to ask, how do you grow in the middle of a crisis where every time you buy equity a week later or — or a fund or an ETF or anything a month later it’s down five or 10 or 15 percent. How did you manage both existing clients in growth throughout the great financial crisis?

MALLOUK: So back then there were only a few of us, and so I was in every single client meeting of every client of Creative Planning back then, and — and a very, very big part of this was education. So when you’re doing needs-based investing instead of risk-based investing, so most places are like, well, this is your risk tolerance and here’s your portfolio for — for you or you’re this age, here’s your portfolio, you have five models, you go to the closest model, we’ve never done that even on day one and — and we don’t do it today. We’ve really said, “You know, you’ve got real estate, we’re going to leave that out here.” You — you — your belief system doesn’t match these, we’ll leave them out. You want more of that, it does work for your situation.

But here’s and we’re going to cover your short run and your long run, and here’s all the horrible things that are probably going to happen in the investment world with your life. But when you’re going through that with people over and over again, they’re sticky. And remember, we were doing their planning, we were doing their — we were doing a lot of different things for them.

And so when they were going through this crisis, they were not surprised. I think people panic when things are not aligned with their expectations.


MALLOUK: And so it was a big shake up and a lot of people were leaving their advisors, and our clients were referring people to us. Now there are a couple things we were doing, too, but I think we’ve proven out very quickly, very, very basic things. So we were tax harvesting, for example, which you didn’t hear a lot about back then.

And the other thing we did is we — we — we have a feeling we don’t balance at the end of the year. We don’t balance every quarter, we balance on chart market drops. So let’s just take the ’08 crisis that you brought up. It bottomed in the beginning of — it bottomed around March 9th of ’09, and the market — just those nine days of March — had dropped about 30 percent. We’re buying, right? So we’re calling our clients and we’re buying and we’re harvesting.

By the end of that month, the market had recovered. All of the losses for ’09 and not all from ’08, it was just up 30 plus percent.


MALLOUK: So if you take just a 70-30 portfolio and you’re buying not at that in the quarter year, but on — when it’s dropping and you’re harvesting, what did you get? You’re not breaking even when the market does four, five years later, you’re breaking even — you take — it’s taking you half the time to get to break even. And you have losses on your tax return, and that creates advocacy, right?

And so that was really the explosion for Creative Planning. Was those 500 clients gone, you know what, I feel confident to tell my friends. I think there’s a lot of people that are happy with their lawyer or their CPA or their financial advisor or their doctor, but they’re not positive that they’re going to look good if they refer somebody to you, right? And I think that what you do through a crisis is you get a chance to prove yourself. So I — I really view all of those as tremendous opportunities of, hey, we told you this is the scenario that would happen. Here is why you’re okay, here’s exactly what we’re going to do, and then they see the outcome. They — they go from clients to advocates, and that was the turning point for us.

And so, you know, you talk about the — the — the — the power of luck in all of this. And I don’t want to say I would root for another ’08, ’09, I mean, it’s painful to go through long hours and a lot of stress, and not everybody is — not every clients like hooray, I — I get the opportunity here. But there’s no question that without it, Creative Planning is not what it is today.

RITHOLTZ: Quite fascinating. One last question I have to ask about acquisitions because it circles back to your reference that it’s the hottest it’s ever been, we met with a bunch of consultants early on and pretty much the number everybody uses is 2X trailing years revenue or 2.2 times trailing 12. That was, you know, six, seven years ago. You and I had discussed the numbers today that are being used for acquisitions, they don’t even remotely resemble that anymore, do they?

MALLOUK: No, I mean, I — I think that what’s — I think what people have figured out is — is we’ve now moved to a level where a lot of these are enterprises and all anyone cares about now is — is the future earnings of these businesses, and so you can have a $500 million firm that’s running on a 10 percent margin, and you can have a $500 million firm that’s running on a 35 percent margin. They’re going to have wildly different valuations when a strategic buyer or a private equity buyer comes in. That’s definitely changed a lot in the last few years.

RITHOLTZ: So — so what sort of multiple are you looking at for? Let’s take the average one percent firm, which is now probably a high fee. We were playing with numbers the other day and we were about 62 bps …


RITHOLTZ: … on average across everything …


RITHOLTZ: … but the typical firm is one percent or so, and their overhead is primarily their technology, their rent and their employees yeah …


RITHOLTZ: … what’s a reasonable multiple for the average firm on either revenue or profits?

MALLOUK: Well, revenue is — I don’t …

RITHOLTZ: You didn’t pay attention.

MALLOUK: No one that — yeah, that no one would pay attention to that. I mean, it is a — a great example as — well, I mean, the — the expenses of those places could be wildly different depending on …


MALLOUK: … where their rent is and how — do their employees produce on their own and get bigger payouts or, you know, the — it’s very, very wildly different.

I’d say if you look — you’re looking at these $500 million firms, the multiples could be as low as five and as high as seven or eight or …

RITHOLTZ: Times profit.

MALLOUK: Yeah, times profits. And I think that people are looking at even the profits isn’t enough like if the average client is 78 and there’s no new clients coming in …


MALLOUK: … you’re looking at declining earnings, right? So you would have somebody say I’m not going to buy this at all or it’s going to be two times or three times earnings …


MALLOUK: You could have a firm like yours, you know, where you’re growing, but there’s a mojo factor, right, like …


MALLOUK: … there’s a — there’s something that — that could really spark great — greater growth. A different buyer might look at it and go there might be more risk here, right? And so I think that you’ve got that as a very big factor, especially when you’re looking at these firms that are $300 million to $800 million where is it’s totally dependent on one person or are people tied to other people, what’s the average age, are accounts growing, are people referring or they not referring? So you really need to look through all that, but you’re getting the mid — the mid-range.

You know, when you get up to firms your size where you’re a billion more, you could be talking double-digits and you get to the — a very large firm, you’re definitely in the — in the double-digit.

RITHOLTZ: So it’s — it’s much more complicated than we tend to see in the headlines.

MALLOUK: Way more complicated than that.

RITHOLTZ: Because CCO (ph) so and so bought such a company or here’s the fifth acquisition …


RITHOLTZ: … done by this company and they kind of make it, oh, there’s this much revenue, here’s the multiple and this is their seventh acquisition this month.

MALLOUK: Yeah, I don’t think that ever — that ever happens where — where someone looks at the revenue anymore and makes a decision based off of that.

RITHOLTZ: Let’s talk a little bit about investor expectations. Ten-year bond yields are under two percent. It’s hard to look at U.S. stocks and not say there — let’s call it fully valued, richly valued. I don’t …


RITHOLTZ: … I don’t know what phrase you want to use. What sort of future expected returns should investors have today?

MALLOUK: Well, I think you can never figure out the stock market completely, but the bond market is largely math, right? So we — we know we can’t replicate in the next 30 years what the bond market did in the last 30 years. So — and since it’s all a function of — of where the yield is, I think when you look at the Treasury, it sets the tone for everything else, right? If the Treasury is under two and corporates are a little bit higher, then our expected return for large stocks is a little higher.

Some would argue for small stocks might be a little higher or maybe emerging markets, and you — you go out that way. So you got to get rid of this double-digit return expectation and move yourself into the — squarely into the single-digit range somewhere in the mid to higher single-digits depending on your allocation of bonds and your beliefs around markets that are certainly not overvalued like emerging markets or small-cap international. And do you believe that they’re low — valued at a low price now because it’s just gone and it’s never going to recover or …

RITHOLTZ: It’s done right.

MALLOUK: … or — or do you think they’re at a low price because things are a little messy and they’re going to get worked out like they did in the — in the U.S. So you can make your argument, but it’s very hard to make an argument for the double-digit, you know, returns of people were making in the 90’s.

RITHOLTZ: So a — a blended portfolio 70-30, including exposure to international and emerging markets, five, six, seven percent, is that a reasonable …

MALLOUK: Yeah, in our projections we’re using a four percent real return, I mean, six percent return and subtract inflation and we feel pretty comfortable with that.

RITHOLTZ: So that brings up the issue we briefly talked about earlier, which is alternatives, most notably, private equity.


RITHOLTZ: People have a history of saying I’m not getting the sort of returns I want, so I’m going to either look for something that perhaps has more risk and try and achieve those returns. I don’t get the sense you look at private equity that way or am I — am I oversimplifying it?

MALLOUK: No, you’re right, and I think this is a point, you know, that we disagree on, right? I think that — that when it — when I look at the public markets I don’t think you’re going to find a bigger advocate for — those markets are pretty efficient. My entire book, “5 Mistakes” is basically about here’s all the evidence that you just got to quit market timing, quit …


MALLOUK: … stock picking and focus on allocation and discipline.

RITHOLTZ: So, by the way, you and I completely simpatico with that.


RITHOLTZ: Let’s — let’s see how much space is between us …


RITHOLTZ: … on venture capital hedge funds and private equity.

MALLOUK: Now venture capital I would put it — so I — I think one of the problems with alternative investments is everyone talks about alternative investments like it’s one thing.

RITHOLTZ: And it’s not.

MALLOUK: Right, it’s not — it’s not. So alternative investor — investments is basically an alternative to anything that’s not a publicly-traded stock or bond, a real estate, right? So, you know, if you’ve got a listener that owns a duplex that they’re running out, they’re in the alternate investment business, right?


MALLOUK: And so you own a farm and someone is actually farming it, that’s welcome to the alternative investment …


MALLOUK: … business.

RITHOLTZ: Direct investment in real …


RITHOLTZ: … estate or something else.

MALLOUK: Exactly. And so — now when you take alternative investments, we can divide them out in a couple things. One area we — we agree on, I don’t think hedge funds work. Now, why do I not think they work? Is it because the evidence in the last 20 years it doesn’t work? No, it’s not really that, it’s because there’s evidence that the stock market is fairly efficient.

And what is a hedge fund? A hedge fund is basically overpaying somebody to create even more negative tax consequences to trade within the stock market usually — usually, right. So now we’ve got a market that’s pretty efficient and we’re increasing the taxes and fees and somehow expect to beat that market. It doesn’t surprise me, right, that that hasn’t worked out well for the overwhelming majority of people who have invested in hedge funds. And you see institutions saying, “Hey, this doesn’t work great. We’re not doing this anymore,” and they’re taking their money and they’re moving it to private real estate and private equity.

Now, why are they doing that? Because there is evidence that private real estate and private equity has worked out. So the question is, is it a fluke? Is it an aberration or is it sustainable?

Now I think we now have 8,000 private equity funds instead of a few hundred.


MALLOUK: So it’s — you’re going to have diminishing returns just with all this money chasing businesses. But I think what you’re seeing is a fundamental shift in the way that the U.S. economy is running, so I — like on Monday, I went to Los Angeles and I met two guys that started a keto diet food business, and they just sold it for $280 million, but they are getting $280 million …


MALLOUK: … sold for much, much more than that.

Yesterday, I was in Fargo and I met with somebody who was in the pharmaceutical business that’s also getting a nine-figure check. Who did they all sell to? They sold the private equity. This is something that in my whole career has never happened.


MALLOUK: And in the last three years it’s happening like crazy. You brought up earlier how it’s happening in our — the space. We happen to be …


MALLOUK: … in the RIA space, but it’s really happening everywhere. What you’re seeing is these guys that are starting businesses. They get it to a certain size and they’re not the same person to take it to the next level.

I believe that good private equity firms are better at taking those firms to the next level than they would be themselves. They know how to institutionalize, they know how to bring in a strong financial team. They — they have some sophistication around mergers and acquisitions. They have a lot more ways to exit.

A good firm can take you public. They can sell you to other sponsor. They can …


MALLOUK: I mean, that’s what they do from when they get up in the morning and when they leave and say how do we take this business, this idea and help grow it. Are there bad apples out there? They’d go ahead and got the business and screw it up, and yes. Are there complete idiots out there private equity — running private equity funds? Of course.

But I don’t view it like mutual fund managers where if one mutual fund manager outperforms the other, it’s probably but not always due to luck. I think when you see certain private equity funds that persist in outperformance, I do think the fact that Private Equity Fund A has 40 McKinsey consultants that have been doing it since the 80’s. It’s probably going to do better than the one that’s, you know, four blocks away from my office that’s like two guys that open up shop three years ago.

They’re not the same. Manager — managers make a difference in the private equity space. So I think you can take that universe of private equity funds and go who’s got the history, whose outperformed, why have they outperformed, is there — is there — is there a repeatable pattern here?

And my personal experience of watching my clients, now I still am seeing clients. I see hundreds of clients, and I’m involved with our ultra-fluid practice that’s mainly focused on people who have tens of millions or hundreds of millions or even more than that, and many, many, many of them got there because they built a business to a level and they sold their private equity fund.

Let me tell you when their biggest payout was, Barry. It wasn’t their first buyout, it’s their second.


MALLOUK: So what’s happening is a private equity fund is coming in and they’re taking a stake, like the recent example I — I talked about was somebody had sold a majority interest, but the private equity funds want them in there 10, 20 percent because they want them engaged. You know, those people are the people that got the business to that level, and so they still have 20 percent or whatever the business.

The second sale that’s happening four, five years later almost always, in my experience, is much, much bigger than the first one, which is the proof that the private equity fund has more than doubled the value of that business …

RITHOLTZ: Right, right.

MALLOUK: … when they stepped into it.

Now I’ve seen this in the restaurant business, in the consumer staples business, in the financial — over and over and over again. I have seen a couple of times where it’s not worked out, but the overwhelming majority of the time, the client I’m sitting in front of that finds themselves worth $25 million or $150 million was never going to get there without the institutionalization of their practice that private equity brought.

Now, does that translate into the private equity investor? Private equity investor is participating there. And I don’t buy the fee thing either, like when I look at the stocks side and I look at the mutual funds, yeah, if you divide out the world of mutual funds and take the ones that charge one — more than one percent, they’re in the bottom quartile performers …


MALLOUK: … and the ones that charge less than 25 basis points are the top quartile because the market is pretty efficient. Fees matter. Of course, fees matter in the private equity space. If you get the same performance and pay less, of course, you would want that, but it’s not the same thing. In the private equity firm, the good ones are involved in running the business.

Now, the — the ones that are not so great, they — they just go put money in a firm and go keep doing your thing and we’ll sell you three years later, no value added. I think that’s thousands of private equity funds. All those — a lot of the small ones, that’s what they do.

RITHOLTZ: So there’s a lot less space between our views than you originally imagined, but for academic purposes, let me — let me push back a little bit.


RITHOLTZ: And there’s two things that stand out. The first is I heard very, very similar things about hedge funds and, to a lesser degree, venture capital. We talked about cumulative advantage earlier. Hey, our guys are unique and special and because of our track record, we get to see the best deal flow. We get access …


RITHOLTZ: … to the best entrepreneurs. We get, we get, we get. And we heard that about VCs, we heard that about hedge funds, and it’s still very much a fad, had long tailed distribution …


RITHOLTZ: … a handful of giant winners which if you have a couple of billion dollars, come on in, we’re happy to bring you aboard …


RITHOLTZ: … so — so that’s pushback number one. And then pushback number two is sort of the Softbank Vision Fund idea.


RITHOLTZ: When you raise $100 billion and you have to put it to work quickly …


RITHOLTZ: … you just distort the valuations in the space. We’re watching private equity raise almost a trillion a year, and you mentioned 8,000, I guarantee you that’ll be 9,000 and 10,000 …

MALLOUK: Oh, yeah.

RITHOLTZ: … and 11,000.

MALLOUK: Absolutely, yeah.

RITHOLTZ: So how does somebody who says I appreciate the lack of volatility, the non-correlation to equity which private equity actually is much more — much less correlated to stocks than venture capital or — or …


RITHOLTZ: … hedge funds are. And I’m interested in this, but how do I pick out of these 8,000, 9,000, 10,000 funds? And, by the way, I don’t have $1 billion, I have $25 million or $50 million …


RITHOLTZ: … to put to work.

MALLOUK: Well, first, well, the hedge funds they — they had that argument 20 years ago. We get — we’re — we’re smarter, bigger and faster …

RITHOLTZ: We’re non-correlated with this, with that.

MALLOUK: But I mean, 20 years ago we — we had a lot of evidence that — that markets are pretty efficient. I mean, even in early in my career we had that evidence, and I think all we’re seeing is, you know, that they’ve been called out that — that that’s just not true and that they can’t beat the efficient markets.

RITHOLTZ: Well, and the — the argument is in the 80’s and 90’s they did, and then once it was this rush of capital and people to hedge fund space, it’s, you know, the — the whatchamacallit, Jim Chanos had said — I’m always quoting him on this — “Thirty years ago there were 100 hedge funds, they all created alpha. Now there’s 11,000. It’s the same 100 hedge funds creating alpha.”

MALLOUK: Yeah, I see a different — I see a different reason. I think when you look at the 80’s, there was no Internet, right?


MALLOUK: So the market really wasn’t efficient — as efficient, right, because I did — you can’t buy the argument in the 80’s. You could find mutual fund managers that would outperform and hedge fund managers that would outperform. When the market really became efficient in the 2000’s, all of that stuff went away. I don’t think there’s more hedge fund managers and mutual fund managers came in the space, although that helps make a market more efficient.

I think the reality is there’s a — a kid in the garage in Malaysia that knows everything that — that the hedge fund manager does. And so …


MALLOUK: … it’s game over.

Now all this money going to the private equity space is going to dilute returns just like all the money going to the real estate space is going to delete returns. If you have a bunch more money changing the same amount of property, you’re going to have lower expected returns.

RITHOLTZ: Higher prices, lower expected returns.

MALLOUK: Right, more private equity firms coming in to buy firms like yours, you now have higher valuations than you did a few years ago just because they’re in the space, which means the competition has, by definition, created a lower expected return. As early two private equity funds chasing RIAs, they wouldn’t have to compete on price so much, they have a better expected return. But the return can still be better than the stock market.

And I think in the private equity space that you can find those firms more likely to outperform way easier than the stock market space if you believe the space is not efficient. I believe the private space is not completely efficient. I believe if — if I bought your firm, my expected return going forward after I paid you some monstrous valuation that you would insist on …

RITHOLTZ: Excessive, right.

MALLOUK: Absolutely, it would be ridiculous. I would be …

RITHOLTZ: I — I would have to advise you that that was a …

MALLOUK: … I would be insulted at what you would tell me, your price. But if we did that, my expectation would be I would have a better return than if I invested in S&P 500.

RITHOLTZ: It’s in the equity market.

MALLOUK: And I just think that’s — that’s the reality of it. And I think you think that.

RITHOLTZ: To some degree, I mean, the — the — you — you talk about randomness and a little luck in things working out in the right place. I spent the first 20 years of my career turning money down.


RITHOLTZ: And then my epiphany was, all right, I’m just sending people out to the wolves to be, you know, having the — being shorn, we might as well do this. I’m telling them the right way to do it, I might as well execute at myself, that was quite the a-ha moment. And if you would have asked me five years ago, hey, you’re going to be a billion years in five — billion dollars in five years, I would’ve laughed at you. But people respond to something that’s a little different, a little outside of the box.

What you were offering ‘in ’04, ’05, ’06 and through the financial crisis, nobody else was or very few people were talking in those terms and offering those services, so, of course, you’re going to see faster growth and better returns.


RITHOLTZ: The big question that has to be on anybody’s mind who’s making investments in the RIA space is how long can this continue to go for. Are we going to see continuing consolidation? Can we continue to pay five and seven and nine times profits to these small companies and expect an above-market return or at what point does that become, you know, just too pricey?

MALLOUK: Well, I think like — let’s take a — a business and just assume you paid them 10 times earnings …


MALLOUK: … and they have a modest growth rate, that expected return by itself is higher than this to be 100, right? If you …


MALLOUK: … instructed to do the math.


MALLOUK: So it just shows you that — that it’s not — it’s not totally crazy now, it’s the highest it’s ever been. I don’t think — I — I think there’s a lot of things that are going to make this party stop. One is there’s going to be fee compression in the industry.

RITHOLTZ: Still it’s ongoing and has been for a couple of years.

MALLOUK: I think Creative Planning has been the largest driver of the hidden fee compression in the industry, which is …

RITHOLTZ: Meaning …

MALLOUK: … which is, hey, we’re not just going to manage your money for that fee, we’re going to charge you a little bit less than other places and we’re going to do 10 times more. And so we’re — that’s a type of fee compression, right?

RITHOLTZ: So in other words, you’re doing planning and you’re doing — you’re not charging additional for trust in the states or you have to pay those lawyers something?

MALLOUK: So, you know, they’ll come in and they’ll get planning, investment management. When we use alternatives, we don’t have a separate fee, we don’t have a pooled asset fee. That’s all part of it.

RITHOLTZ: So now how do you deal with the fact that these private equity firms tend to charge much more than financial planning firms charge? How does that fee — in other words, you’re just passing along the fee or is it built in?

MALLOUK: It just goes straight through — straight through the client so.

RITHOLTZ: So it’s a pass-through, you’re not charging them.

MALLOUK: Yeah, that’s …

RITHOLTZ: But you’re not attacking anything on top?

MALLOUK: That’s exactly right. And sometimes we’re able to negotiate breaks for them, but yeah, we’re definitely not marking it up. So you’re adding some complexity. We have to have a whole other team, but we don’t have a separate fee. We give legal advice and do trust funding without a separate fee. We give tax advice without a separate fee. We won’t prepare a document …


MALLOUK: … (inaudible) without a separate fee.

RITHOLTZ: And then you don’t — you don’t create the trust or the will …


RITHOLTZ: … that goes out to some …

MALLOUK: No, we do — we do create them. We have a separate fee …

RITHOLTZ: Oh, you do.

MALLOUK: … for it, yeah.

RITHOLTZ: Oh, and there’s a separate fee for that.

MALLOUK: Right. So there’s all of these — all of this advice and — and specialists that they could access when our clients are trying to figure out they’ve retired and they’re — they’re not in Medicare yet, we have a team that does nothing but advise them on what health plan should they get and helping them implement it and all those things. So you have all of these different things that cost something, but we’re not adding anything to the fee to the client.

RITHOLTZ: And that’s what you mean by hidden fee compression.

MALLOUK: That’s hidden fee compression so, you know, we’re set-up that way because that’s what we philosophically believed in from the beginning. I am super passionate about this business. I’m going to be in this business until they — you know, I’m going to die working in this business. I love this business. I love sitting down with a client and saying here’s where you are right now. And by the way, we can do these seven things and all of those things you talked about that you’re dreaming about, I can increase really a lot the chances, all those things are going to happen for you. I love that. That’s my favorite part of the — of this whole thing.

But that has different components to it. There’s charitable components, there’s legal components, there’s tax components, there’s investment components. That, to me, is what the client values the most is getting that — that advice delivered in a way that is actionable and make sense to them. That’s the part that I’m most passionate about, but that’s — that — if you look at the larger RIAs, we were the first to do that. And almost all of the other large RIAs have changed what they’re doing to try to put together some semblance of what we’re doing, but they’ve done it too late. They’ve done it with private equity money, they’ve done it with people that are CEOs that have never been advisors or are not advisors today, and it’s just clunkier.

And so I think that’s the competitive advantage we have today is from top to bottom, the president, the vice-president, the COO, all of us are planners. All of us are certified financial planner certificates, all of us sit in front of clients. All the directors and the firm do. We understand how that deliverable works and that becomes a big — a big differentiator. And — and that is created a lot of fee compression in the industry because for someone to compete with us and, on a large scale, they’ve had to start to add these things without changing their fee.

Now once that’s done, what happens? Once that’s done, the next way it happens, you’ve got lower fees, and I think we’re going to be on the frontend of that. The second it could happen, we’re going to do what we can to push those down and — and push our competitors out.

RITHOLTZ: Where do you think those fees drop to?

MALLOUK: I think if you’re a pure money manager, you’re going to start looking at 50 basis points. If you’re a money manager with planning light, you’re going to look at 60, 65 basis points. If you’re a comprehensive wealth manager doing everything customized and need space with a lot of other services, you can go a little bit higher than that, but that’s, you know, that’s substantive. And — and I think it’s going to be quick.

I think a lot of people think all this happens over 20 years and blah blah blah, that’s — that’s not …

RITHOLTZ: You’re well 10 years into the fee compression at least, so …


RITHOLTZ: … maybe it is over 20 years.

MALLOUK: Look what just happened with trading fees. So they went from 20 to 10 to five. We’re on this trend that could be another 10 years.


MALLOUK: Then Trump goes to zero, and at the end of the day, T.D. goes to zero, the next week Fidelity goes to zero so you’re 100 percent drop from five in a couple — in a couple of days, right.


MALLOUK: So there will — there is always a tipping point. We sought with mutual funds, working out commissions or fee only who cares, but all of a sudden commissions were gone, right? Then high cost mutual funds, who cares, is the — the prospective clients I met in ’07, ’08, ’09, it was too easy. They’re coming in, they had five mutual funds. They’re going to — they’re paying mutual funds more than they’re going to pay out, so I’m going to do a lot more. I’m going to lower their taxes, I mean, what’s — what’s not to like?

Now, all of that’s out the window.


MALLOUK: ETFs, now all of a sudden five basis points for S&P 500 fund is crazy ridiculous, it’s free now. You know, and so your we’ve seen that tipping point with everything else, and this is the one space that’s left. And we don’t see it here yet because there’s not a firm that has the scale to really — to do it. And I think firms are emerging that have the scale and aren’t entirely motivated by profits that might be the one to deliver it and that just might be Creative Planning.

RITHOLTZ: So I have to ask you one follow-up question on the die at my desk comment. We’ve seen Personal Capital get acquired. We’ve seen United Capital get acquired.


RITHOLTZ: We’ve seen a number of big firms 20, 30, 40 billion dollar firms get acquired by places like Goldman Sachs was one acquirer and Financial Engines was another acquirer, and there’s a handful both coincidentally publicly-traded. What’s to prevent someone from coming along and making you an offer you can’t refuse?

MALLOUK: Well, I think I’ve already seen that a couple of those offers where I’ve looked at them and said, you know, I — I really truly believe that I can double this business, and five years from now not get that number. I think the — I think the market is so insane now. But — but I mean …

RITHOLTZ: So what you’re — you’re saying, hey, five years growing 20, 30 percent, I’ll double the size. And even if I don’t get that number, you don’t care?

MALLOUK: I don’t think I’ll get that. I don’t think I’ll get that number (inaudible).

RITHOLTZ: In five years.

MALLOUK: I think rates will be different and private equity …


MALLOUK: … will be different and the — who know — it could be a recession, there can be — who knows what’s good? But there’s too many things that are perfect right now and I — that I’m not confident are going to be perfect in — in five years. I don’t think there’s any precedent for them (inaudible) for that one.

RITHOLTZ: But you’ve never been tempted to take the money and run?

MALLOUK: No, because I — I really …

RITHOLTZ: What are you going to do?

MALLOUK: I — no, I know what I would do. I — I still have a good talk. I could be in this industry and — and have a great time. I don’t have to, you know, do it on this scale and at this pace, but — but I do enjoy it. I enjoy the clients and I enjoy the team that I work with. And I don’t — it’s easy for somebody who is worth millions of dollars to say they don’t care about money, so I’m not — I’m not going to say I don’t care about money.


I obviously do. I don’t care about more money. I just — I just don’t …

RITHOLTZ: You don’t care about more money.

MALLOUK: I just don’t. And so I feel like, you know, I don’t have to maximize, right? So we’re not — but I’ll tell you, when I’m sitting with clients and they tell me, “I’m worn out, I’ve grown my business to this level. I got this — this offer from private equity, what should I do?” I tell them, look …

RITHOLTZ: Hit the bit (ph) .

MALLOUK: If you — if you are not in love with what you’re doing, take the money and run …


MALLOUK: … because this is really, really good times right now …


MALLOUK: … and we don’t know what it’s going to be like in four or five years, you know. So — but — but for me, I mean …

RITHOLTZ: That’s — that’s regret minimization.

MALLOUK: Right, right, right.

RITHOLTZ: If you don’t do it and this offer goes away, are you going to feel worse? Then if you do …


RITHOLTZ: … do it and maybe got a slightly better offer in five years.

MALLOUK: Right. And I would have no regret minimization because I just — that’s not what’s motivating me. I — I want — I want to build the best offering. I want to be able to look back and go anybody that came to work for Creative Planning said, you know what, I was challenged, I learned something. I — you know, Peter never put anything in my way, in fact, if there’s obstacle in my way, he removed it. And I was able to achieve the very best I could there. That matters a lot to me.

I want clients when they’re at our annual event and they’re talking to each other, I want them to say, you know what, Creative Planning promised some things to me and they delivered all those things. And I feel great about my decision to come there.

I am very motivated by those things. It’s great that we’re in a business that happens to be very hot right now. But if it is half as hot five years from now, I’m going to be fine. You know, you can only — one steak — steak dinner a night.


MALLOUK: And I feel like — I feel like I’ve already achieved that. I’m in my 40’s, and I’m just motivated by different things.

RITHOLTZ: So you mentioned earlier about being able to take advantage of the next financial crisis the way you did with the last financial crisis, what would you do to accumulate some sort of a war chest? You — you had hinted at that earlier. How does the firm put together a war chest to go out and make acquisitions when things are, let’s say, less perfect than they are today?

MALLOUK: I mean, you have two choices. You can hope nothing happens the next couple of years and …

RITHOLTZ: Well, that’s kind of …

MALLOUK: … and build it from cash flow …

RITHOLTZ: Right, that’s pound-foolish.

MALLOUK: … or you — or you can sell a — a minority stake where you still control everything. And you know when you sell a minority stake, you don’t get a full valuation, you get a discount, right?

RITHOLTZ: Oh, really?

MALLOUK: Yeah, if somebody is going to buy a minority stake, in general, they’re going to pay you 25 percent less. And they’re going to do that …

RITHOLTZ: That makes sense.

MALLOUK: … doesn’t have any control, I mean …

RITHOLTZ: Right, no control exactly.

MALLOUK: So they’re really betting on you to continue to do a good job and not be an idiot about something strategic, right?

RITHOLTZ: Oh, so I was halfway there, right.




MALLOUK: So I think that — I think that because I’m not into the maximization of it, that — that fits, I think, our needs where we could take, you know, sell five to 18 percent, somewhere in that range, raise enough money that when we go to the next crisis, you know, we’re at our annual meeting I can see what I always did, which is we’re never ever going to let anybody go because of what’s going on in the markets or with the economy. In fact, I’m going to keep doing what I’ve done every quarter of my entire career, which is find — hire good people and bring on new clients. You know, Creative Planning, in its entire history, has never had in a month that didn’t have positive flow.

RITHOLTZ: Right, even in the financial crisis?

MALLOUK: Even in the financial crisis, more money was coming into Creative Planning than leaving every single month from ’04 to today, and we’ve never had a period of time of any significance where there wasn’t a tremendous positive employee flow, right? We are attracting clients and employees with our behavior, and I think a big part of that is the — that they know that this is a place where, through thick and thin, I’m going to be with them, you know, to the end. I’m going to be in the — in the — in the battle with them.

RITHOLTZ: Well, you — you’re the, you know, the old expression is fish rots from the head down. You set the tone as the leader of the firm and that, obviously, permeates out to the rest of the 600 employees.


RITHOLTZ: So I have a ton more questions for you. Can you stick around a little bit?

MALLOUK: Yeah, I love to.

RITHOLTZ: We have been speaking with Peter Mallouk. He is the CIO and President of Creative Planning, a $45 billion firm headquartered in Kansas City.

MALLOUK: That’s right, yeah.

RITHOLTZ: If you enjoy this conversation, well, be sure and come back for the podcast extras where we keep the tape rolling and continue discussing all things RIA-related. You can find that at Apple iTunes, Google Podcast, Stitcher, Spotify, wherever your finer podcasts are found.

We love your comments feedback and suggestions. Write to us at Give us a review on Apple iTunes. Check out my weekly column on Follow me on Twitter @ritholtz. I’m Barry Ritholtz. You’re listening to Masters in Business on Bloomberg Radio.

Welcome to the podcast. Peter, thank you so much for doing this, and I — I’m just going to share a little inside baseball. You and I really met for the first time in September at the Wellstat (ph) conference that my firm is one of the host of. And I was fascinated to learn you don’t do a lot of media.


RITHOLTZ: You don’t go — that was your first conference.


RITHOLTZ: And it’s astonishing because here in New York, in the media center of the world, everybody is buying for some exposure. You guys really built this with practically no national news exposure. Am I — am I overstating that or is that right?

MALLOUK: No, I think you got it right. We — we tried for a long time to do nothing, you know, to have no exposure. And there was one industry publication that — that had called maybe for the third time to do an interview, and I didn’t respond and I got an email from the reporters who said, “Hey, we’re — we’re doing a story on Creative Planning, and right now we just have quotes from your competitors. So do you want to be interviewed or not?”

RITHOLTZ: That’s a smart — smart approach.

MALLOUK: Yeah, and they made — the — the headline was “Outing a Reluctant Star,” and that was the beginning of the end of …

RITHOLTZ: That’s a great headline actually …

MALLOUK: … being — of being totally under the radar. That — that was the end of that. And …

RITHOLTZ: See I would have gone with the biggest firm you’ve never heard of. That — that would have been my headline.

MALLOUK: (Inaudible) .

RITHOLTZ: And so I — you know, it’s got a — it’s a little edgier.


RITHOLTZ: But — but outing a reluctant star is — is pretty accurate because you guys have built something that’s unique and, you know, can I call it special? Is it a special firm?

MALLOUK: Please do, right. Well, yeah.

RITHOLTZ: Well, you can’t help but look at those growth numbers from ’04 through ’08, ’09 and then from ’09 forward for the past decade and not say …


RITHOLTZ: … wow these guys have to be doing something right. You don’t grow that fast. There are firms that have been around longer and there are firms that have grounded out that — that are just grinding out in sales, the sales process. I don’t get the sense that that’s your — your approach.

MALLOUK: Now I think that — I think that we’ve got a lot more attention now obviously as we’ve gotten to — to this size. And we reached just a point where we either had to embrace it or it was not going to go great. So we’re to be — we’re to be embracing it (inaudible) .

RITHOLTZ: So that was my — actually, that’s a question I didn’t get to, but I wanted to. Why are you now finally saying, all right, I guess we have to participate in some selective conversation through the public media? Is it simply just it’s unavoidable at this point?

MALLOUK: Well, you know, I had a — I had a — a client that was in P.R. and she sat across from me at an annual review we had, and she said, “Peter, I’ve never seen a firm do so little with so much.” And I said, “What do you mean?” She’s like, you guys don’t have — you’re not even on — we weren’t on social media …


MALLOUK: … which is funny talking to you because there’s no firm as present on social media as yours in this space. I mean, we — we — I mean, I think my Facebook page was controlled by Russians. Literally, if you went to my Facebook page …

RITHOLTZ: You were hacked.

MALLOUK: … it’s like — yeah. And she’s like, you know, when people are looking at Creative Planning, they’re Googling and they’re going to the — they’re not seeing anything you’re saying, right?


MALLOUK: They’re just seeing what other people are saying. And so you should at least tell your story. And, you know, it was kind of a light bulb for me that you really can’t — there is no under the radar.

RITHOLTZ: Right, anymore anyway.

MALLOUK: And so if — if you want people to learn, it — it’d be nice if they at least heard your voice and you telling the story of what you’re all about. And I mean, she was right, and I don’t like back now as — as probably being so under the radar as for that time period was probably good, but that was probably the best piece of advice I’ve had in the last, you know, three to four years.

RITHOLTZ: So there’s really two types of communication. One is with the world at large …


RITHOLTZ: … and prospective clients, but the other communication is with your existing clients. How do you — and you mentioned you really — when you’re building a plan, you’re really drumming it into people’s consciousness, hey, markets go up and down expect to correction or a crash at some point in the future, recessions are cyclical. Everything isn’t great all the time, but after the — that initial review, how do you keep in touch with clients? How do you keep them informed about the state of the world, where we are in the market cycle, how the portfolio is doing. What — what sort of client communications do you guys manage?

MALLOUK: So I write newsletters many times throughout the year. And anytime there’s a big event, you know, Brexit that night they get a — they’ll get a newsletter. You know, it’s just — instantly we’ll send out a communication.

Others in the firm write newsletters. We do several different podcasts that we share with our — our clients …

RITHOLTZ: Internally.

MALLOUK: Internally, yeah.

RITHOLTZ: Interesting.

MALLOUK: We — we have an annual symposium that we invite clients to. We had almost 3,000 at our last one that was …


MALLOUK: … a great experience. We emailed the videos of the speakers that will allow us to send videos to our clients. And then for us, we see our clients in person beyond the onboarding, so they’re coming in to do all kinds of stuff throughout the year and they do interviews with us. So they’re seeing — they’re talking to their advisor and multiple people within Creative Planning plus hearing the voice of the investment team in the firm, you know, many, many different ways throughout the year.

RITHOLTZ: How do you keep that message consistent? So you have 600 people …


RITHOLTZ: … where a fraction of that, one of my concerns is always we have a lot of people in the office who do research, who publish …


RITHOLTZ: … who write about different things. Philosophically, we’re all more or less on the same page so the message is consistent, but the concern is as you scale up and it’s that many more people, does that become a challenge to keep the message the same across every advisor to every client?

MALLOUK: No, I think that we are definitely a one-voice firm, and I think that that’s a — different firms have different decisions. When you look at larger RIAs, they tend not to be that way. They tend to look like a brokerage house …


MALLOUK: … you know, you can build a Morgan Stanley and the guy in the office, one might be a guy that does options for all of his clients and Office 2 is the guy who does bonds for all of his clients. At Creative Planning, we — it’s the same thing. Every client is going through a planning process. It doesn’t matter if they’re on the Forbes list, which is somebody we started with a couple of weeks ago, is going through the same process and somebody who’s got $500,000.

And we have that process in place because we know in our — we’ve developed a way that we think is the best way to get the information we need from the clients to figure out what their needs, their dreams, their vision are. It sounds cheesy, but sometimes your goals are not your dreams, right?


MALLOUK: We want to know what they’re really trying to accomplish and how feasible at all is. So everyone is going through that same process. And then we have a philosophy, so when we were talking earlier about, you know, we don’t believe in hedge funds, but we — I believe in — in — in private equity and alternatives, and I believe that the markets are fairly efficient so we use indexing instead of most — instead of large-cap mutual funds.

When I say that’s what I believe, that’s what Creative believes, right?


MALLOUK: So if you’re coming and interviewing at Creative Planning, you’re not coming to Creative Planning unless you believe that or close enough, and you’re going to — you’re going to — you’re really going to act that way.

There is no — oh, by the way, we’ve got a hedge fund thing over here and the large-cap mutual funds over there and it’s one voice, one philosophy, consistent messaging. If a client gets a newsletter from me, they’re not going, “What the hell is this?” You know, I’m in Los Angeles and my advisor is doing something completely different.


MALLOUK: That’s not — that’s not happening. And what’s great about that is we don’t have to write — write vague garbage, right? We can be very specific about what we believe and what we’re doing at any point in the market cycle because everyone is going to read that and go, yeah, that’s what I’m experiencing.

RITHOLTZ: So I don’t remember if it was you or someone else who used the phrase Frankenfirms …

MALLOUK: Yeah, it was me.

RITHOLTZ: … where — that is you, right?


RITHOLTZ: So where you have hedge funds over here and — and covered call options over there and some wacky S&P sector rotation here, and a firm just becomes a conglomeration of 10 smaller firms and no consistent …


RITHOLTZ: … philosophy, is that — is that a survivable model these days?

MALLOUK: No, I look at like some of these — some of the private equity firms in this space, they come and they buy out a $1 billion, $2 billion firm, they call it a platform.


MALLOUK: And then they take that firm and they go by other firms and go, “We’ll do your compliance in H.R. and financial stuff for you and give you a big check. Come join us.” Oh, you use this software, oh, that’s fine. Keep — keep using. Oh, you — you believe in, you know, exiting the market when your signals from your bond does say this, “Oh, yeah, go head and keep doing that.”

And you wind up with a firm that grows to $10 billion and that’s really just 25 small firms …


MALLOUK: … that don’t operate the same, don’t do the same things. That’s what I think of as a Frankenfirm.

I think that buck is getting passed from one private equity firm to another, and it’s going to explode in somebody’s lap. In a lot of the larger firms, that’s what they are. They’re just an amalgamation of a bunch of stuff that’s not philosophically consistent. I do think this is that one of the negatives of private equity is you have private equity come into a space like this, let’s say they want to exit in three years, you take a $2 billion firm, you buy eight firms, you make it $4 billion, you — you exit, you make 50 percent. Everyone is high fiving, but somebody now has something that doesn’t really probably isn’t best for the client anymore, and probably isn’t best for the employee anymore. And everyone can smell it, right?

And — and eventually, the smell will get bad enough that you’ll lose employees, you’ll lose clients. But by then the person who put it all together is long gone.


MALLOUK: A hot potato.

RITHOLTZ: So one of the knocks against private equity and RIAs years ago — and I don’t know if this is still true — and is the gym in your office — and I had a whole conversation about this …


RITHOLTZ: … was in the old days private equity would come in, they’d buy a firm, they basically loaded up with variable annuities that have a giant commission on it and didn’t work out for anybody except the P/E guys and whoever sold the firm and exited. I’m getting the impression that that old school model, maybe that’s more than 10 years ago, that that’s not what we’re talking about in this space anymore.

MALLOUK: No, no, I don’t think you’re seeing that.

RITHOLTZ: That’s long gone. Now it’s sticky money, regular revenue on — on an ongoing basis, that’s the appeal of this.

MALLOUK: Yeah, I mean, I see two — two — well, a couple different things happening. One is you see someone comes and actually make sure place better and helps institutionalize it and grow it. That’s — that’s one group. And there’s another group that’s like, hey, we’re going to come in, we’re going to buy it, we’re going to get rid of a bunch of people, we’re going to put in some new people, we’re going to go buy 23 firms, we don’t care what they look like.


MALLOUK: We’re going to put all this crap together and we’re going to sell to somebody else because there’s a bunch of money sloshing around. And eventually someone is going to get stock, right?



RITHOLTZ: When the music stops …


RITHOLTZ: … you don’t want to be that person.

MALLOUK: Right. And — and so — but — but I think there’s more of the good guys than the bad guys.

RITHOLTZ: So let’s talk about a couple of things with Creative Planning that I wanted to ask you about that I didn’t get to. You had previously mentioned 401(k)s are less than 10 percent of your practice.


RITHOLTZ: How do you grow that space? It’s a very slow and sticky space even when employees and management are not happy with their 401(k) providers, right?

MALLOUK: I think we — we probably have $3 — $4 billion and — and 401(k) assets is growing very rapidly. And we’re — we’re divided into two segments. One segment is takes care of the bigger plans where employees want to sit down one-on-one with somebody, learn a lot, have help. Another one is very technology-oriented startup plans, small plans where the economics of building a 401(k) are very difficult. For those folks, maybe it’s two — two dentists starting a practice.


MALLOUK: But what we bring to our clients is almost always they’re going from the traditional model of an insurance company providing it to a fiduciary providing it, and there’s a lot of liability around 401(k) plans now. So if you’re on the board making decisions for 401(k)s …


MALLOUK: … you have liability. If you’re in H.R., if you’re — if you’re the owner, you’ve got liability. So they — they love transferring that liability to a fiduciary and we offer that full fiduciary service.

Second, almost every single time we lower the fees very substantially. And then third we bring a commonsense investment approach, you know, low-cost index funds in the — in the portfolio along with ways where the client can choose a model and — and get their money managed that way. And so we’re seeing very fast growth in that space, it’s just the private side is growing much faster.

But I think that the key in the 401(k) space is to be competitive, you have to be able to drive fees way, way, way down. We found a way to do that, yeah.

RITHOLTZ: Twenty-five basis points. How — how low is low in 401(k) space?

MALLOUK: I think like even a startup plan for us might pay a fee of 30 basis points.


MALLOUK: I mean, like — and you’re talking about someone starting with zero assets, now they still have their — when you look at a 401(k) plan, there’s administration costs …


MALLOUK: … that you have to pay for the fines, right.

RITHOLTZ: Well, it’s record-keeping.

MALLOUK: Right, right.

RITHOLTZ: Right, there’s three or four other …

MALLOUK: So when you get done with all of it, they should be less than one — one percent in the plan but appreciably …

RITHOLTZ: Appreciably less than …



MALLOUK: It should be appreciably less than one percent, that — that most plans are 1.5 plus, and so it’s kind of like very easy. If we’re coming …

RITHOLTZ: You cut your fees in half, that’s a huge …


RITHOLTZ: … win for everybody.

MALLOUK: Most of the time when we’re talking to somebody about a 401(k), where are we going to get that 401(k)? The issue is 401(k)s are much harder than the private side because private side, somebody walks in and they’re going to make a decision.


MALLOUK: With a 401(k), somebody walks in and they’re the owner, but they’ve got a — there’s a CFO, there’s H.R., you’re talking to H.R.


MALLOUK: (inaudible) , so it’s a process and it should be a process. It’s a big decision for the business.

RITHOLTZ: So in the old days, it was somebody’s brother-in-law …


RITHOLTZ: … was the running the 401(k).


RITHOLTZ: Those days are over now, right?

MALLOUK: That’s gone. I think on the private side that’s gone. It was very …


MALLOUK: … very common where everyone just had their money with their — with their buddy …


MALLOUK: … or their neighbor, whatever. That — that stuff’s gone. And I think that’s another thing that ’08, ’09 and Madoff, and all that just got rid of that. And people are getting much, much more serious (inaudible) their advisor is.

RITHOLTZ: Let’s — let’s talk about the institutional side, which has its own set of challenges, how do you deal with pension funds, foundations, larger entities may — even family offices that might have a different set of needs and a different investment target than a — a family who has a portfolio with you?

MALLOUK: So this is the smallest part. You know, people that have family offices we manage a lot of money for those folks, private family offices.

RITHOLTZ: Separate from endowments and institutions.

MALLOUK: That’s right. But — but institutional, as I think of it like you do, is endowments and universities and things like that. That — that’s basically entered about five years ago. It is, by far, the smallest part of our business. And I would just take the 401(k) space and — and make it even harder and a lot more decision-makers and a lot lower fees. And you’re seeing a very big migration away from alternatives towards low-cost passive investing complemented with certain alternatives seems to be where that space is heading.

RITHOLTZ: Quite, quite interesting. And you have described the tiers of your clients as private wealth group, ultra-affluent and emerging wealth.


RITHOLTZ: How do these segments differ and — and do you offer different services to each of them?

MALLOUK: So we used to just call everything private wealth, and you went through the process. We built a portfolio. Our typical client was the multi-millionaire next door. You know, the — the doctor or dentist or lawyer that worked their entire career, the business owner or guy who made money in real estate, they put together $1 million or $12 million and they became a client of Creative Planning.

About four years ago, we segmented out emerging wealth group. We had so many family members of clients, and it — we didn’t really have a great way to handle it, but it’s very difficult to sit with somebody who’s got $7 million and they’ve got three kids and their kids are all 28 and say, “We’re not going to work with your kids.”


MALLOUK: But they would wind up maybe with the wrong advisors because the advisor who is somebody who has $12 million, at that point, would be our most — was our most sophisticated advisors and they’d be working with somebody who got 50. So we created emerging wealth group to deal with that and opened the doors to people who had less than half a million and it exploded. I mean, that group has thousands of clients, about 20 employees and interestingly has become one of the biggest lead sources for our ultra-fluid practice, which is where we really try to date only take on people that have 20 million, 25 million or more like a few this week that came on at 100 million or more.

And there’s a — a group that’s probably our longest running group, as a whole, within the firm that’s used to dealing with those kind of clients. And the — there is a lot more sophistication needed there, not necessarily for a large part of the portfolio, but for a small part of the portfolio and from a legal and tax perspective. If you’ve got somebody who’s got $150 million, all this debate we’ve been having about our stocks can do better than bonds and too small do better than large and will emerging markets do better than stocks and will private equity do better, these are what I call one percent conversations.


MALLOUK: Right. We’re going to move them — you know, you’re going to make one percent more or less. If you’ve got $150 million, you really don’t care about that. You care about the 40 percent of state tax, you care about the 12 percent state tax. You care about how your kids are going to get the money and is it going to screw them up. You care about asset protection. And these are very sophisticated concepts that most of the RIA space is not equipped to handle.

And we have a — I think a very substantive group within Creative Planning that’s used to dealing with hundreds of those families, and I think we bring a very unique perspective there. And I think what’s interesting is when they’re comparing it’s — it’s always between us and say a place like a J.P. Morgan or a Goldman Sachs, and the RIA story resonates so much, you know, independent and we don’t have our own products. But we also practice tax and law and they don’t, and we’re used to dealing with folks your size. And that’s not something I could say seven years ago …


MALLOUK: Right. So it’s — it’s allowed us to become very competitive. And — and the — one of the fastest-growing parts of our practice is that very, very, very large family.

RITHOLTZ: So one of the issues we’ve noticed amongst RIAs, especially independent RIAs, is that there’s sort of a barbell across the age spectrum. You have a lot of advisors in their 60’s, late 50’s, and then a bunch of people in their 20’s who are — you met at the conference very social, very active, very specialized in different areas. But there’s this big gap across the middle. So question number one is what does this mean to your future growth? And question number two, do we have enough young people coming into the RIA industry?

MALLOUK: You got to read a lot about this. And I — I view it very differently, so as running Creative Planning, our market share is your .002 …


MALLOUK: … right, your .001 (inaudible) .

RITHOLTZ: Nobody is market share in this space.

MALLOUK: Right. So I don’t — to — to me, even if they were half the advisors, I don’t need to have 400,000. I’m not Merrill-Lynch.


MALLOUK: You know what I mean? So …

RITHOLTZ: No thundering herd in Kansas, is that right?

MALLOUK: No. I mean, I just need to find a few awesome people every quarter, and I’m always going to be able to find that, right? And so I just don’t — I spend any time worrying about — about that and, frankly, about the industry. I think the industry could use less advisors.



RITHOLTZ: Do you think the head space compression like the fee compression we’ve seen over the past 10 years, does that continue?

MALLOUK: Well, I think — I think that there are advisors that do a lot of good. And there’s a lot of advisors, which is not fantastic. And I think having a bunch of really good advisors that survive is better than having a whole bunch of advisors.

And so I don’t see this is an industry crisis. I think if the industry contracts a little bit, that’s just fine. We’ve got the technology for it to contract. I’m just focused on finding the right people for our little tiny, you know, section.

RITHOLTZ: Your little tiny section of the wealth management industry.


RITHOLTZ: And — and, you know, it’s funny I was shocked to read about your little tiny firm. I think once you cross the billion dollar 0 threshold in AUM, that puts you in like the top eight percent or so of advisors.


RITHOLTZ: It’s really that they’re 40,000 advisors. Mostly, I think, someone else called it lifestyle practices.


RITHOLTZ: So — so you have a unique perspective on what’s going on. What happens with those people? Is it just a massive consolidation or can you just have a very nice little $100 million practice and that’s fine?

MALLOUK: You know, I know there’s a lot of people running around like all those guys are going to get crushed. And I — I don’t — I don’t necessarily agree with that.

RITHOLTZ: If you go to the conference, here are the same three people …


RITHOLTZ: … who coincidently have been on an acquisition …

MALLOUK: Right, they’re all buying the $100 million …

RITHOLTZ: … so — so maybe they’re talking their books a little bit.


RITHOLTZ: You know, I’m assuming like us you don’t really buy into that.

MALLOUK: I don’t buy into it totally, so I think that — I think that most — most $500 million firms cannot compete at the level they used to. You know, I’m hearing that from firms that call us to be acquired, I mean, they’re just saying, look, I used to be able to grow and it’s gotten a little more intense, a little more competitive. And I feel like to bring on larger clients I need to be a larger firm.

There’s no question that’s a force, but it reminds me of like when the robo advisors came out and everyone said, oh, everything is going to go to the robos. Well …

RITHOLTZ: Not really.


MALLOUK: And it didn’t go to the robos, but some did, right.


MALLOUK: So that came from somewhere.

RITHOLTZ: And you guys don’t have a robo, do you?

MALLOUK: We don’t, no.

RITHOLTZ: Any thoughts of setting up a robo for that sub $200,000 client who may be eventually moves from under $100,000 to emerging wealth to high net worth?

MALLOUK: And I’ve thought about it and I just thought, you know, that’s just not what we do. It’s not our style. And I went to one Creative Planning client to talk another Creative Planning client and go this is what they do for me. And I don’t want anybody to go, I never saw a person ever and everything was online. And I know there’s people that want that and that’s totally fine, it’s just not what we do. You know, to — to me, it’s just we don’t sell ice cream either, it’s just completely …


… it’s just completely different.

RITHOLTZ: And then before I get to my favorite questions, I have one last general question about the firm. You actually made your first acquisition this year a $500 million firm that was part — was that — is that this year or last year?

MALLOUK: That was this year and that was — it was amazing. To me, this was really fascinating because I was very focused on — on building out all our services and building a culture. And, you know, we — we did that. And really in 2018, we moved to headquarters, we made a bunch of shifts in technology, we finished our hiring push, got all the right people in all the right places, finished building out our trust company, institutional arm and so on, and really we’re in a place where I could finally start to think about that a little bit, but I’ve kind of put it on the shelf is not a priority.

And a guy Brad Johnson gave me a call literally out of the blue, and just said, “Hey, I’ve talked to all these firms. I thought …

RITHOLTZ: Wait, wait, wait, wait. Brad Johnson, guy you don’t know …

MALLOUK: No at all, yeah.

RITHOLTZ: … calls you and Peter Mallouk says, “Yeah, I’ll take the call.”

MALLOUK: So actually I don’t know. He winds up talking to Jim …


MALLOUK: … (inaudible) office. And Jim is like, you know, maybe you should talk to Brad. I’m like, oh, we would — I just — we just got done with this, let’s give it a little time before we do a couple acquisitions, so we just — just had a conversation.

So Brad comes to Kansas — he (inaudible) he comes to Kansas City, brings an advisor. I find out the advisor is his son, so I’m like, well, maybe they’re just kicking tires, but I really like them. They’re from Minnesota and all the stuff …




MALLOUK: It’s — it’s true.


MALLOUK: I — I don’t understand it, but I really liked him. And, you know, they left and I told — Jim is kind of like I really liked him but, you know, I think they just want to know what we’re doing. And anyway, you know, Brad called me the next day and said he’s interested in getting a dialogue. I think it was 30 days later they were part of Creative Planning.

RITHOLTZ: Really, that fast.

MALLOUK: Yeah, and even though it was our first one and we — we — they didn’t know what they were doing, we didn’t know what we were doing, you know, they never been acquired before, we’ve never required, I — it was wonderful. And our — and I looked at Minnesota and said, you know, we had a presence there like it might have been around half a billion. And now all of a sudden we’re about $1 billion enterprise …


MALLOUK: … and we’ve got some scale and we’re going to get noticed and we’re in the — just like you said, how many billion dollar firms are there, right?


MALLOUK: So now all of a sudden, we’re in the conversation on cases we weren’t before, and it got me looking at the whole country and saying, “You know what? In Dallas, we manage about a billion.” We were approached by a firm that has about $600 million. We’re now having LOI with them. And so …

RITHOLTZ: So you’ll be close to $2 billion in Dallas and now you’re a player there.

MALLOUK: Yeah. And so I think that — that what’s happening now is the description I use is we have a very, very strong tree trunk with very strong branches that we’ve built. We built them, and they’re — they’re — the Creative Planning DNA. And we can add leads to that tree and have that tree flourish without damaging the tree.


MALLOUK: And so we’re not $1 billion firm where the whole trunk was put together by 25 firms, right? So when people come into Creative, they know this is how it works, right? This is the culture, this is the investment philosophy, this is what the people are like, and it’s not different from office-to-office because it’s not 23 different firms. So it’s really opened my mind to that. We’ve now done to acquisitions. We have two other firms under LOI and we don’t have a mergers and acquisitions team. You know, it’s just someone has a conversation with Jim and then — and then they meet me and — and we’re off. And — and — and if — if they’re philosophically a fit and, look, maybe one in 10 times it is, right?


MALLOUK: You’ve got to be philosophically a fit. You’ve got to like the people and all that, so you get to that 10 percent. With that 10 percent, it’s happening pretty quickly. I think that we’re finding there are a few people are very like-minded out there, and I think they’re finding that, hey, this is a firm that’s kind of like me. It’s not really an amalgamation of a bunch of stuff.


MALLOUK: And so they can — they can be a part of something that’s kind of what they were doing, but turbocharged.

RITHOLTZ: That’s fascinating. It’s really interesting to hear you guys have — have scaled that up because that was one of the questions I had, how the hell do you get to be that big organically with no acquisitions?


RITHOLTZ: And imagine if they did acquisitions, you guys are going to be $100 billion not too — not too long from now.

MALLOUK: Yeah, it’s a crazy industry. You can never predict what’s going to happen.

RITHOLTZ: True, true.

MALLOUK: But — but I — I feel like a — I feel very good about the offering that we have from the people, the process. And I think, you know, you — well, you have to be — you don’t have to be the — the fastest person in the world, you got to be faster than the — the people you’re racing against, right? And I — I feel like we’re in a good spot right now.

RITHOLTZ: The — that — that makes perfect sense to me. I know I don’t have you for forever, so let me get to my favorite questions we ask all of our guests. These have been designed to be revealing about who you are. Let’s start with the first car you ever owned, year, make and model.

MALLOUK: 1985 Oldsmobile Omega, crashed at teaching my younger 14-year-old brother how to drive.


RITHOLTZ: Teaching the 14-year-old, there you go.

MALLOUK: It was not a good lesson.

RITHOLTZ: Where — where did you go?

MALLOUK: You don’t start with a left turn. That’s not …

RITHOLTZ: Were you in Kansas or …

MALLOUK: Yeah, we were in Kansas, yeah.

RITHOLTZ: So to me, I’m — first question is how do you crash something in Kansas?

MALLOUK: Well, it’s — I mean, it’s an actual city, Barry. They’re like …


MALLOUK: … two million people there.


MALLOUK: Kansas City, I mean, so (inaudible) …

RITHOLTZ: Oh, so you’re in Kansas City, you’re not in the sub …

MALLOUK: I’m in Kansas City, yeah, we’re not in like a town of 300 in (inaudible).

RITHOLTZ: Got you.

MALLOUK: Yeah, we’re in Kansas.

RITHOLTZ: So easy enough to have an accident.



RITHOLTZ: Because when I think Kansas I’m thinking farms and ranches and lots of open space.

MALLOUK: Most of the — Kansas, yes. Kansas City, no.

RITHOLTZ: Got it. I didn’t realize you grew up in — in …


RITHOLTZ: … Kansas City, that’s interesting. Who are some of your early mentors? Who affected the way you look at the world of investing and financial planning?

MALLOUK: Well, I would say that the — the person that owned Creative Planning before me was just such an incredibly — I mean, he’s an incredibly positive person and — and was an incredible influence to watch. He treated people so well and — and he would always had a positive attitude. He always looked on the bright side of things. And this is a business that — that you — you need to infuse. It’s interesting because you need to be an optimistic person, but you have to take a pessimistic point of view when you’re doing planning. You have to plan for the worst, right?


MALLOUK: So I — I really liked that kind of style that he had. But really the biggest influence was very early, I — I had had a t-shirt company and I made a bunch of money. And — and I was a few thousands of dollars. And — and my dad so I just put it in an index fund, and I remember watching the Asian Contagion on TV. I can’t remember what year it was but …

RITHOLTZ: Ninety-eight.



All right. Well, that’s impressive.



RITHOLTZ: I could be wrong, it could be ’97.

MALLOUK: All right. And my dad is like, hey, yeah, don’t worry about it. It’ll — you know, it’ll work itself out over five years, and that was interesting. And I went and read a bunch of books and found out he was right, and that probably wound up sending me all the trajectory into reading some Bogle books and Jeremy Siegel books, and — and the rest is history.

RITHOLTZ: So I’m going to say Asian Contagion ’97, long-term capital management ’98.


RITHOLTZ: But around — both around the same time …

MALLOUK: Still super impressed, yeah.

RITHOLTZ: And — and both with the same results temporary setback …


RITHOLTZ: … which is what we tend to see all market. Yeah, corrections are temporary even if they list from 1929 to 1954, it’s still temporary. Hopefully, you’re not retiring went into that.

Let’s talk about books. Give us some of the favorite books that you like to read, be they — you mentioned Bogle. Who else …


RITHOLTZ: … who else?

MALLOUK: So I read a couple books every week, but I can’t get away from the same two books, I think, as being super influential to me. One takes like 20 minutes to read, it’s called “How Full is Your Bucket,” and it’s basically just says, you know, everybody you encounter, you’ll leave feeling better or worse. And it’s so much are you filling buckets up or you’re you draining their buckets, it’s really informed the way I interview, the — who I work with, the — the way I get through a day, making sure that I’m in the right mind frame all the time and it was — it’s so obvious, such a light quick read, but it’s — it’s really informed my thinking.

RITHOLTZ: How Full is Your Bucket?


RITHOLTZ: I don’t know if I’ve ever heard of that. I’m going to — I’m going to have to put that on my list.

MALLOUK: Really short — really short book. I mean, I got it for my kids, I got it for all our employees at the time. And — and it’s really interesting, I mean, like when you — when you talk to the client, when you talk to a colleague, when you talk to a family member, are they leaving feeling better about themselves in their day or worse? And it — and it’s — it’s an interesting …

RITHOLTZ: Pretty straightforward, it makes a lot of sense.

MALLOUK: Yeah, very, very straightforward. And then a — a book that really kind of transfer my thinking was “Awareness” by De Mello. And he was a Jesuit priest who …

RITHOLTZ: Awareness.

MALLOUK: Awareness. He was a Jesuit priest that lived in the Far East, and so it’s got a combination of all these things. But the — the basic message of the book is get over yourself, you know, you don’t matter. Whatever you accomplish, a couple years from now no one’s s going to know who you are, you know, we don’t know who anybody from Mesopotamia is. You know, we might remember Abraham Lincoln but …


MALLOUK: … you know, you go far up for the future, very, very, very little matters. It sounds like really horrible. What it does is it clarifies for you the high shouldn’t be too high, the lows shouldn’t be too low and …

RITHOLTZ: Very Solomonic in its wisdom.

MALLOUK: Yeah. And I — and …

RITHOLTZ: This too shall pass.

MALLOUK: This too shall pass. And it really — if you start to take that attitude, for me, I’m not sure this is what the book was about, but it really crystallized, you know, if I look at like all the stuff that comes at you all day everywhere and all the stuff you encounter, the reality is 98 percent of it doesn’t matter at all.

RITHOLTZ: It’s a femoral.

MALLOUK: Right, just like investments, right? It’s — there’s so much stuff out there. Part of being good in investments is to know the 98 percent that doesn’t matter at all.


MALLOUK: What you don’t need to read, what you don’t need to watch, what you don’t need to care about, what you don’t need to invest in, what you don’t need to research. And then you get — you carve away all that stone, you get the masterpiece, right? And I think that — that that book for me really just changed my thinking of who do I want to be around, who do I want to spend my time with. What things matter, what things don’t, how do I get everything that doesn’t matter away from me and focus more on the things that do matter.

And so I — it was — it became an interesting time in my life to read that book, it’s the only book I’ve read more than once. I enjoyed it a lot.

RITHOLTZ: That — that is quite fascinating. Tell us about a time you failed and what you learned from the experience.

MALLOUK: So I’ve — I’ve failed many, many, many times, so I’ll give you just some growing up experiences. So, you know, I — I started a lawn mowing company with a friend and — I mean, it was a real deal. We were making some good money. And back then you had to bag all the grass.


MALLOUK: And then some other people came along with these big machines and — and you didn’t need to bag grass, it turned out — it turned out people thought you needed to but you didn’t need to, so it’d take us like five hours to do the lawn. They would do it in 10 minutes and, you know, we were like, well, we’re — we’re out of business. That was super quick. You know, we didn’t understand where this industry was going.

I had an idea for a t-shirt. It was against drunk driving. My school wouldn’t let us do it. It was a Catholic school and it was a little racy, so we created the t-shirt by (inaudible) :37:27 I should just go make it, so I made it. Wind up selling like 100,000 of this t-shirt.

RITHOLTZ: What — what was the t-shirt saying that the school wouldn’t let you …

MALLOUK: On the front it says, scenic drink, scenic drive, scenic die. On the back, it said don’t — don’t be, you know, basically. And so — and so this winds up selling like 100,000 shirts (inaudible).

RITHOLTZ: Scenic — scenic drink, scenic drive, scenic — give us this — the front of the shirt.

MALLOUK: It’s scenic drink, scenic drive, scenic die.


MALLOUK: I’m really regretting …

RITHOLTZ: I remember …


RITHOLTZ: … I remember those shirts.


I had no idea that was you. Those shirts went giant.

MALLOUK: And up until now probably nobody did. I don’t know what — what door I’ve opened here. But I have found you can’t find one online, thank God. So anyway, then they wound up creating like scenic smoke. All the — created a whole line around this thing.

RITHOLTZ: Were — were you doing anything with the proceeds involving any drunk driving or mother is mad or …

MALLOUK: Yeah, there was a donation that went back and sad and mad.


MALLOUK: And so this went on for, you know, like two years. I’m like, hey, I’m — I’m not even in — do I need to go to college?


MALLOUK: Well, here’s what I learned about patents. So all of a sudden the shirt wind up all over the country and I hadn’t had a trade, and that was it. I was out of business.

RITHOLTZ: No trademark …


RITHOLTZ: … people were just stealing it.

MALLOUK: The — the printer I used stole it, and so they basically took the art my mama drawn and the sayings, and then just copied the whole thing. And so that was a hell of a lesson.


MALLOUK: The — the biggest lesson though was the music stores. You had one store, save the money out, got to two, save the money, got to four, save the money, got to eight, have three partners, bought out the three partners. I was about to graduate from law school and I’m like, “You know what? I might — I bet if I stopped opening stores I can make 100 grand doing.” I — not going to work. You know, this is what I’m going to do.


MALLOUK: Napster came out.



MALLOUK: I’m — I think it was 100 days after the last door was closed.


MALLOUK: Yeah. My total take over my, I think, six years of — of running these and buying out all my partners was $8,400. It calculated into cents per hour …


MALLOUK: … spent in the store, but — but you know what, it was worth more than any college degree that I got. It was an incredibly valuable experience. But it — it taught me about how fast technology changes there.

RITHOLTZ: For sure.

MALLOUK: And you can be growing and you can think your competition some music store across the street, it’s not. It’s something you’re not even thinking about, right? And I — and I constantly look at Creative Planning and say, “What am I not thinking about? What can I do better? How can I stay in front of somebody else? How can I be the better offering? How can I, you know, do more for less?” All the time I’m asking that question because I’ve been on the receiving end of capitalism. Capitalism is a death blow several times or — yeah.

RITHOLTZ: Couple of times, well, Andy Grove had it right. Only the paranoid survive, right?


What do you do for fun? What do you do when you’re not helping people plan for their financial futures?

MALLOUK: So I — I love short trips. It’s probably my favorite thing where I can — if I’m going to see a client in — in Boston I’ll, you know, take the whole family and I’ll go make a weekend of it. And — and I can kind of Griswold (ph) about it. You know, my kids — my kids are like — so I’ve …


RITHOLTZ: Explain the European …

MALLOUK: That’s true.

RITHOLTZ: … vacation reference. I find myself the problem with getting older …

MALLOUK: That’s true.

RITHOLTZ: … isn’t the body falling apart …


RITHOLTZ: … it’s all of your cultural references …

MALLOUK: That — that’s true.

RITHOLTZ: … fail with the younger generation.

MALLOUK: Yeah. I try to cram too much trip into two little types, so I’ve tried to lay off that and just go, if I go into a city, we’re going to do two or three things that are fun, but I — I think that America has amazing cities and so we’re trying to hit every city that has a baseball stadium or three-force the way down. That’s been a — a complete blast and I try to cram that in wherever I possibly can, which is rare because we got three kids that are teenagers and they all have like 27 sports and events.

RITHOLTZ: Have you seen the book “36 Hours”? And I think it’s the New York Times puts it out.

MALLOUK: I haven’t.

RITHOLTZ: Oh, so this is basically every — the top 200 or 400 cities in the country. You’re going to spend 36 hours in the city, here’s what you need to see, here’s what you can do.

MALLOUK: Man, I can use that book like eight years ago.



… how many — you’re still I’m sure …


MALLOUK: I do, you know …

RITHOLTZ: But it’s a — it’s a really interesting book you should look at it. Let’s talk about the industry for a second. What are you most optimistic about within the financial services industry today? And what might you be pessimistic about within that same industry?

MALLOUK: I think I’m optimistic about is I think the consumer is very close to finally getting what they deserve, right? I mean, I …

RITHOLTZ: Staying long enough, right?

MALLOUK: It’s taken a long, long, long, long time. And I think we’re almost there. I think we’re going to get to a world someday where every advisor is a fiduciary that the firm that’s advising the client doesn’t own their own products, that they get to know the client a little bit before they invest their money and that they do all that at a reasonable price. It’s taken a long, long, long time.

I think we’re well on our way there. That gives me a lot of optimism. I felt like the industry has been broken for a long time now. We could be really close there and have it not be fixed, you know, by the — when you and I are still working, it might not be thing.


MALLOUK: It still might not be fixed.

RITHOLTZ: But certainly on the path to getting closer, even if the government decided not to embrace the fiduciary standard, it seems like the market is.

MALLOUK: That’s exactly right. I think the market is what’s forcing most of this. The market is what is forced, lower mutual fund fees and lower commissions and …


MALLOUK: … disclosing proprietary products and all — the market is pushing that. The government has done a phenomenally horrible job, I think, in this space. And so I think that — that you’re right, I think capitalism itself is forcing us to get where we need to be.

Pessimistic, I worry about two things. I think — one, I think there is going to be a cyber-security attack on a major financial institution that succeeds at some point in the coming year.

RITHOLTZ: That is horrifying, isn’t it?

MALLOUK: And I don’t think — I don’t — I know institutions are worried about that, the very biggest institutions. I don’t think we quite know what that’s going to do to the average American when that happens. Is everything going to be in mattresses? One …

RITHOLTZ: You mean the — the — the post crisis, post cybersecurity …


RITHOLTZ: … events situation.

MALLOUK: I think what — if we get a serious breach of a major institution, you know, a trillion plus institution of which there are a whole bunch of them …


MALLOUK: … that is enough to freeze capitalism for a while, I think. And so I think it’s going to be very interesting to see if that can be prevented and if it happens, how our economy is going to react to it.

The other thing I worry about is you look at what happened in Saudi Arabia where, I think, we’re debating who — who — those — those drones that went in and …

RITHOLTZ: Blew up the oil.

MALLOUK: … blew up the oil fields right before they were going public, that’s not brain surgery, right? And I think that we look at 9/11 as like an impossible, you know, we’ve got all these measures in place to do all — all those things to protect things. But at the end of the day, a kid in the garage with 10 drones …


MALLOUK: … and the Internet can cause a lot of damage. And I am — I am concerned about that. What it does to the way we live with each other, you know, from a personal level, you know, kind of your kids, grandkids, that kind of thinking, and from your specific question about the financial industry, what does it do to economics?

If you remember after 9/11, no one went to the movies.

RITHOLTZ: Everything froze for months.

MALLOUK: No one went to the malls. That was a cocoon effect for months. This, to me, would be much worse because people would be like, wait a second, you know, 9/11 at least requires some strategy and some break down in defenses, but …

RITHOLTZ: At physical events …


RITHOLTZ: … not a cyber event.

MALLOUK: Right. If — if we move into a world where there’s a cyber event or, you know, some teenager with drones causes havoc in Times Square, I think that’s going to be a cocooning effect that we’re not — we’ve never thought about are — are prepared for. I think those are the real — the real threats to the economy that — because you look at the economy is very resilient, it can get through everything to (inaudible) probably is going to cost more 10 years from now than it does today. Like issues is going to going to cost more 10 years now than they do today.

The market is going to go up to the right, the way it always has. But these kind of things are the kind of things that can change that — that narrative. And so those are the things that I think about when I think about existential threats …


MALLOUK: … to the norm.

RITHOLTZ: Fascinating. And our final two questions, a recent college grad comes to you and says they’re interested in financial services as a career. What sort of advice do you give them?

MALLOUK: So first I’d say, you know, it’s — it’s kind of like show me your friends, I’ll show you who you are. You know, give me the four people you hang out with the most. I don’t need to meet you, I can pretty much tell you what — what kind of guy you’re like.

Don’t — don’t just go somewhere for experience. Try to get to a place that is aligned with the values that you’re — you’re trying to do, right? So try to get — if you’re focused on being a fiduciary and be based, you’re fee only, get into an RIA, you start there, right?


MALLOUK: Try to get into the right environment to begin with.

Second, create separation between you and other people. And I think there’s a couple of things, one in the interview process. I’m always fascinated when somebody goes, well, I’m coming here for experience or I’m coming here because I can think I learned this and that.

Imagine somebody going to an NFL tryout and going I’m here because I want to learn to get — to get better …

RITHOLTZ: And get trade.

MALLOUK: … I want — yeah, you want somebody who’s going to come. Here’s how I can help you win.


MALLOUK: You know, here’s what I — so talk about how you can help the place that you’re coming into. Now once you show up, you can differentiate yourself by going the extra mile. This is an industry where it’s very easy to go the extra mile. I mean …


MALLOUK: … there’s a lot of things you can do more for your client or your employer, and it’s not hard to separate yourself from your peers if you are willing to stay a little later or take on a project or offer your help. I mean, even with hundreds of people, I am very aware of the people that are in Creative Planning to do that, especially those that are starting out. And so you tend to get judged in the first 30 days when you’re at work. The reality is we all judge each other in the first few seconds of seeing each other.


MALLOUK: There’s a whole book about this called …


MALLOUK: … “You Got Three Seconds.” Basically, the ideas when you meet somebody, in a few seconds, you’ve decided what you think of them and it’s up to them to dig themselves out of that hole or they’re going to go up or down later overtime, but you’ve kind of put — you put an anchor on them.

The same thing happens when you’re employed. Don’t grow into it. Come in hard, come in strong.

RITHOLTZ: Hit the ground running.

MALLOUK: It’s the same thing I try to do with the client. I try to give that client as much value upfront as I can. So if they’re going wow, this is — I made the right decision. You want the employer to feel the same way about you.

RITHOLTZ: And our final question, what do you know about the world of investing and financial planning today you wish you knew 25 or so years ago when you were first getting started?

MALLOUK: Well, I mean, it took all the way until — you know, from ’04 until 2017 to put all the pieces together, and it was really like hearing from clients, “Oh, I need this, I need that.” And then going, well, I need to build a service to do that. So I always had a very strong bias against product. I don’t want to own anything where I make more money, and a very strong bias towards service and value, how do I deliver more services.

I wish I had the vision in ’04 to go these were all the services that were needed and really found a way to build it out all on Day 1 instead of taking, you know, 14 years to build it. I — I told our team at our last annual meeting that, for the first time, I feel like I’m at the starting line. I feel like …

RITHOLTZ: Interesting.

MALLOUK: … for the first time I have an offense and a defense and an offense sub-coordinator and defense sub-coordinator. Up until now, we’ve been playing with an incomplete — incomplete team, incomplete coaching. We didn’t have all the piece, we have the special teams. We’ve got it all now.

And, you know, I wish I had a time machine I could go — go up started that way.

RITHOLTZ: But to be fair, you have — you were past-dependent. You had to travel that route in order to figure out what all those pieces were.

MALLOUK: That’s true, yeah.

RITHOLTZ: So but that’s still — still quite fascinating.

Thank you, Peter, for being so generous with your time. I’ve — I’ve had you in here for two hours and most people fade by — by 60 minutes.

MALLOUK: This is fun. You were great. I really enjoyed it, Barry.

RITHOLTZ: We have been speaking with Peter Mallouk. He is the CIO and President of Creative Planning. If you enjoy this conversation, well, look up an inch or down an inch on Apple iTunes and you can see any of our previous 300 such conversations we’ve had over the past five years. Where has the time gone?

We love your comments, feedback and suggestions. Write to us at Be sure and give us a delightful review on Apple iTunes. You can check out my weekly column on Sign up for the daily reads at

I would be remiss if I did not thank the crack staff that helps me put together these podcasts each week. Karoline O’Brien is our Audio Engineer. Michael Batnick is my Head of Research. And Michael Boyle is our Producer.

I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.



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