Welcome back to the 166th episode of Financial Advisor Success Podcast!
My guest on today’s podcast is Peter Mallouk. Peter is the founder and president of Creative Planning, an independent RIA based in Kansas City that oversees more than $50 billion of assets under management for over 30,000 client families.
What’s unique about Peter, though, is the way he’s been able to build Creative Planning to an incredible milestone of $50 billion of assets under management nearly from scratch in the past 16 years and without mergers, acquisitions, or outside capital along the way, and why, after building the $50 billion, he’s recently decided to begin the process of acquiring outside firms and to take outside equity investment from a private equity firm.
In this episode, we talk in-depth about Creative Planning’s organic growth path over the past 16 years. The way the firm built early on with RIA custodial referrals with a then-unique offering of fully customized client portfolios and comprehensive financial planning bundled into a single AUM fee, how the firm’s growth engine has shifted increasingly to referrals from existing clients and even direct inbound inquiries as more and more branch locations of Creative Planning become one of the largest local independent firms in their metropolitan areas across the country, and why it takes a very narrow focus on the kind of firms Creative Planning is willing to acquire to ensure that such acquisitions help and don’t hinder its long-term organic growth strategy.
We also talk about Peter’s perspective on broader industry trends, including why even with an increasing focus on fee compression and the commoditization of investment management, Creative Planning remains committed to the AUM model and not charging separately for planning, how the industry’s professed talent shortage isn’t necessarily a problem for firms with a clearly differentiated value proposition in the marketplace, and why he believes that independent advisory firms may be near a peak in valuation multiples, leading Creative Planning itself to recently sell a minority stake to a PE firm.
And be certain to listen to the end, where Peter shares what he actually intends to do with the outside capital that Creative Planning raised (and it’s not to fund acquisitions), the firm’s aggressive growth plan over the next 3 years, and why even as the leader of a $50 billion RIA, Peter still keeps a base of 100 clients that he sees for the bulk of his time every week and encourages most of his leadership team to keep client-facing roles with a portion of their time as well.
What You’ll Learn In This Podcast Episode
- The Creative Planning Growth Story: How They Grew From $0 To $50 Billion In Under 17 Years [00:04:43]
- The Vision Behind Creative Planning And How The Company Was Founded [00:19:38]
- How Peter Supports The AUM Model With ‘Free’ Planning Services [00:38:31]
- Creative Planning’s Evolution Over The Past 15 Years [00:46:03]
- The Leadership Team Structure At Creative Planning [01:02:17]
- How Creative Planning’s Inorganic Growth Through Acquisitions Is A Complement To Its Organic Growth [01:09:20]
- What’s In Store For Creative Planning’s Future [01:20:31]
- What Success Mean To Peter [01:22:51]
Resources Featured In This Episode:
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Michael: Welcome, Peter Mallouk, to the “Financial Advisor Success” podcast.
Peter: Good to be back with you, Michael. It’s been a while.
Michael: It has been a while. I’m excited to have you back on. You had joined us about two years ago now, back in March of 2018, so episode 65. We were just out of the first year of recording the podcast.
The firm at the time for you guys was just closing in on $35 billion, which was a mind-numbingly large number to me. We are now here 2 years later, and Creative Planning has now crossed $50 billion, which is even more of an incredible number.
As far as I know, it’s the largest independent wealth management firm in our space. The only real independent RIA that is larger is perhaps Fisher Investments at north of $100 billion, but I think of them as more of an investment-only shop, not offering the breadth of what Creative Planning does on the wealth management end. That means you’re up almost $15 billion in 2 years, which is incredible in and of itself.
And while I know there have been some headlines recently, which I think we’ll end out talking about, of some acquisitions with the firm, selling a stake to an outside private equity firm, the story of Creative Planning that has lived under the radar screen for a lot of the industry – from 0 to $50 billion of all organic growth, in barely 17 years, with no outside capital leaving – I think everybody is scratching their heads thinking, “How exactly does that work, Peter?”
Peter: Is that a question or is that a statement? I’m hoping it’s a statement. I’m ready to talk about it.
The Creative Planning Growth Story: How They Grew From $0 To $50 Billion In Under 17 Years [00:04:43]
Michael: Both. Yeah, I think there is some sort of head-scratching out there of…there’s been such a large movement towards inorganic growth, and mergers and acquisitions, for a lot of firms, which is because they’re finding organic growth is getting harder.
It’s like, “Oh, and by the way, Creative picked about $15 billion in the past 2 years while you all were figuring out why organic growth is hard.” Tell us the story of how exactly you go from 0 to $50 billion in just under 17 years without acquisitions, and just through growth and powering forward. What does this look like?
Peter: Well, I would say…I’ll give you the from-the-beginning story, then I’m going to tell you where it comes from and where it doesn’t come from, and maybe kind of do some myth-busting while we’re talking here, because we do get called.
It feels like not a month goes by when a reporter calls with a, “I heard this, I heard that.” And we’re constantly dispelling all these things that they’re hearing. And so I’m going to use this as maybe a way to address some of it upfront.
So I would say that in the very beginning, there were only a couple of people here 16 years ago, and a client would come in. We were growing really fast before there were any avenues people know about today. I remember when I was starting, it was really only in our city, but a lot of people would say, as we started to get some attention in Kansas City, “Oh, Peter is an estate attorney, and so it’s all coming from there.” And then we had a guy, Bob Pascuzzi, join us, and he was just amazing at designing and advising on 401(k)s. And everyone said, “Well, they’re just getting their clients from the 401(k).”
Then TD Ameritrade reached out to us and put us on their referral program. I think that’s been very well-publicized. TD Ameritrade was growing extremely rapidly. They were building out this program that had largely money managers. They put us on. We’re largely a customized money manager, which we can talk about a little more, that was doing financial planning. That was pretty unique on their platform back then. And so we did exceptionally well there. And of course, we had relationships with Tony, we’re on the Schwab program, and we get a huge number of referrals from our clients.
But from a breakout perspective, and this is the question I get the most, less than a third of our assets came from the TD Ameritrade referral program – less than a third. If you take that, all of the Schwab referrals, and all the Tony referrals, you put them together, that would make less than half. The rest is one client telling another, or they read a book, or they heard us on a podcast, or something else outside of those things.
So I would divide it into a couple camps. You can say one way people grew, that you referenced at the top of the podcast, is through acquisitions. That’s obviously a new thing for us. We’re just starting to add that to supplement our organic growth. The second would be everything else, which is organic. But you can take the organic and say, “Well, what was referred to you?” And divide that out. You still put all that together; it’s less than half.
To me, the story is that we’ve got people, a process, and an offering that attracts clients. That’s what we’re relentlessly focused on here every day, is how do we make this more appealing to clients? How do we make our services broader? How do we make them deeper? How do we have better people, more credentialed people, more educated people in front of our clients so that we can deliver them something of value? Because I think it’s a highly commoditized space.
So if you want to win, you have to be a little bit better at a lot of things, or you have to be a lot better at one thing. We’re trying to come in and be a lot better at a lot of things. I’m not saying we succeed at all of that, but that’s our mindset – how do we get a lot better at a lot of things and be different?
The number one radio station gets listened to more than 5 through 10 in most cities. The number one ice cream gets selected more than 5 through 10, I bet, in most ice cream shops. And so if you can create a spread, you get a disproportionate amount of the referrals.
I saw, oh gosh, I don’t want to credit the wrong person, but I think it was somebody out of Pershing, I think it was Mark, who said somebody had a study that in every market, the top three firms on average get more than half of the new prospective clients. And I’ve found that to be true. I don’t know if it’s true. I don’t know what study it’s based on, but I can tell in markets as our profile grows, I can see that happening.
So it’s definitely an area where the further ahead of the game you are, the more likely you are to be able to continue to succeed. And as it’s getting more and more competitive, that’s becoming more and more important.
Michael: Interesting framing. So you’ve got a lot of stuff there that strikes me as fascinating. I want to start, actually, with this last piece, this idea that the more ahead you are, the easier it is to succeed; which to me, at least, essentially comes down to wearing my marketing and business development hat, the firm getting to a certain size, and you have a certain amount of resources to invest towards marketing and visibility and awareness.
As you put it, you get to go into markets, right? For most advisors, you get to stand up a firm in a new city, in a new location, and immediately start building visibility with local media, local COIs, and other organizations saying, “We’re this firm with tens of billions of dollars, and here’s the story of what we do, what we offer, how it comes together, and why what we do is great.” And you’ve got all the implied credibility of the size of the firm and the depth of the firm. And what I’m presuming is just a pretty polished story, because you’ve told it a bajillion times to people that you’re working with.
And that there is this effect that comes when a firm gets large enough at a certain size that you’ve gotten the ability to execute on brand in a way that the average advisory firm just flat-out doesn’t have the math and resources for and probably won’t for any foreseeable future.
Peter: Well, and I use the TripAdvisor example. Tomorrow I’m going to go to Kerrville, Texas, and Addison, Texas. And I usually don’t plan where I’m going to eat or figure it out. TripAdvisor tells me where to eat, right? I’m basically looking for the collective due diligence of everybody else to find a place to eat where it will probably be good, and I probably won’t throw up, right? So if you’ve got a firm and you’re bigger, more people are going to feel comfortable.
If you think about the way people choose a wealth manager – one, they want to do better, but two, there’s a lot of fear in this decision, right? All the way from “Someone’s going to steal my money”, all the way up to, “Do these people really know what they’re doing?” Right? So if you have a firm that a lot of very affluent people are hiring, it just naturally gives you comfort. That’s how we all make decisions.
The story I tell my team when we’re in training about why it’s so important to be good in each market is I was looking to have somebody build a deck at my house once, and I had three people come out. The one I hired was the one who pointed to a couple of neighbor’s decks and said, “I did those.” And I knew one of those neighbors, and I knew that was the kind of person that was pretty smart. And it just gave me comfort that made my decision for me, right? So I think as you’re bigger, you start to see opportunities you might not otherwise see. It’s risky for a client to refer another client to you. It’s risky for a very high-net-worth client to choose you.
If I look at the clients in our ultra-affluent practice now, which is, it’s billions of dollars, and it didn’t exist a long time ago. We didn’t have enough clients to segment it out as its own deal. Yesterday, there was somebody that was in our office who had flown in from out of town. Net worth was between $250 million and $350 million. And this guy just found us on his own, right? Not a referral from anyone. If this guy had somehow stumbled across us back when we were a $7 billion firm, would he have called us? I would think no.
I think the reason he’s calling us is, “Hey, this is a firm with scale and expertise. They’re clearly doing something right. I’m going to investigate.” And he’s not just talking to us. He’s talking to Goldman Sachs. He’s already at JP Morgan. He’s examining his options, but we’re only having the discussion because of the credibility that comes upfront from the size and scale and experience.
And I don’t think that’s an invalid thing, by the way. There is no question that Creative Planning can do more for a client today than it could do 3 years ago when it was less than half the size or 10 years ago. That’s not debatable. Anyone that works here would tell you it’s a very, very, very different place than it was 3 years ago or 10 years ago. We just didn’t have the scale.
As an example, our estate planning arm, we have a 40-person team. We used to just do wills and trusts. Well, now there are attorneys that just do trust settlement. There are attorneys that just do real estate, corporate and mergers and acquisitions, or just tax law. There are more places we can go for a client now than we could a long time ago.
So when the client infers that there might be more breadth, there might be more depth, there might be more experience, this person might be able to really help me in a way that a Goldman or JP Morgan can’t, they’re actually right. There’s something to it.
I think that’s a very, very big part of the perception of how things happen. I think it’s also based on reality. I also think people are smart enough to know the difference between a roll-up and a firm that did it organically, right? If you have $20 billion and $15 billion of it was acquisitions, I think most people in 30 seconds go, “Well, there is no proof that this offering is a good offering. There is no proof that this offering is something that attracts and retains clients or makes clients refer other people. All this is proof of is that someone bought it as a platform and started to buy other firms and put it on there and probably leverage it and get to sell it in two years. That’s what it really proves.”
So I think it’s very different…from the perspective of a client, a prospective client, I think they’re going to look at it very differently. And that’s what I mean when I say as you grow, it becomes a little easier to compete and see opportunities
Michael: Interesting. To me, it is one of those things that we tend to underrate in the industry, this kind of raw impact of social proof in the face, particularly in the face of uncertainty, when we don’t know how to make a decision. For example, I can’t tell all these financial advisors apart. When we don’t know how to make a decision, one of the biggest cues that we take is, well, what do other people do? Because at least if I’m standing with the herd, I’m probably safe, right?
It’s sort of hardwired into our brains. The people who stand out from the herd are the ones that get picked off by the predators. And so, in the face of uncertainty, in a world of advisors where not only do we struggle to differentiate, consumers struggle to differentiate us from each other. It’s why the primary way a consumer finds an advisor is you go to a “find an advisor” website, and you type in your zip code, right? Which means at the end of the day, we don’t differentiate on the depth of our planning services or our quality or our expertise or any of the rest; clients find us because our zip code is most convenient to their home or office. And that’s how little they can tell us apart.
Peter: Yeah. I would say, though, people are a little more discerning than that. I agree that it’s hard for them to figure it out, but they figured out a couple things. McKinsey came out with a study, and I was just looking at it this morning. It was in “RIA Intel.” They were referencing it. Now, I might not get the statistic perfect, but they were basically saying what we’re seeing is this millionaire next door, the people with $1 million up, they tend to be moving to independent advisors.
So somehow, the general public has figured out, I’m probably better off with an independent advisor than a broker, which is why every year we see market share moving more and more from brokers to independence. But let’s not kid ourselves about the progress that we’ve made, right? The brokerage world is a factor of thousands of percent bigger than Creative Planning, let alone any other RIA, right?
So as you see these people start to go, “Well, I want to look at an independent firm,” well, now they go, “Okay, well, now I’m with a fiduciary and they have to act in my best interest,” all of that stuff, but they still have to differentiate because there are lots of independent advisors. And so it’s messy for the consumer, and you’ve just got to do all you can to provide as much value as you possibly can. So they see the value, and when they sign on, they’re happy enough to refer somebody else to you.
Michael: Yeah, the statistic that always blows me away is still at this point, even with all the shift to RIAs and breakaways and the rest, Merrill Lynch and Morgan Stanley combined, just the two of them, and that’s only two of the four wirehouses, Merrill and Morgan combined have more assets than all RIA custody at Schwab, Fidelity, and TD Ameritrade put together. Like, all the RIAs at all the big three…
Peter: Yeah, that sounds amazing.
Michael: …custodians are still less than just Merrill and Morgan, never mind UBS and Wells Fargo. Just the sheer size and magnitude of big firms are still kind of astonishingly large. But, as you noted, you see this consumer preference emerging where every year a percent or two of market share bleed from wirehouses to the independent channels.
Peter: Right. I think it’s all what you’re comparing to. At our annual meeting, we were going through a chart of, if you look at all the spaces, there is a big leader, whether it’s a private bank with Wells Fargo or a custodian like Fidelity. And you get to the RIA space; it really doesn’t exist. You were referencing us as the largest that…and I think it really depends how you look at it. You’ve got to kick out the 401(k) firms and the hedge funds and all that. But the largest RIA, we’re less than 1% of the independent space and we’re probably less than one, several thousands of percent of everything else, which just shows you how small this group is.
Michael: Yeah. When Goldman Sachs bought United Capital at almost $25 billion of AUM and three-quarters of a billion in cash for the deal, you look at the press coverage for Goldman Sachs afterward, and their characterization is basically, “We bought this tiny wealth management startup thing. It’s really kind of a minuscule business line for us, but we think we could actually grow it into something that has size.”
Peter: Well, I love that. Just last week, the CEO of Morgan Stanley was on a call with analysts and was asked about the advisor business, and he didn’t even know that RIAs were custodying at E-Trade.
Michael: Yeah. It was like, “Oh, E-Trade has an advisor business. I guess we’ll look into that.”
Peter: Right. So it just gives you an idea of the world we live in versus the reality of how much longer there is to go for all of the RIAs out there with this competition we’ve got going on.
The Vision Behind Creative Planning And How The Company Was Founded [00:19:38]
Michael: So take us back a moment to the origin story. How did Creative Planning actually get founded? What were you doing when you got started and did you have a vision of actually making this thing that’s now been made? What did you do at the start, and was this the vision?
Peter: Definitely not planned out, or we probably would have got here quicker. But when I started, I started as an advisor to other advisors. So I’d go to brokerage houses and insurance companies and independent RIAs. And from ’98 to ’04, Creative Planning was one of my clients. Creative Planning has been around since the early ’80s and had been founded by three guys that owned an insurance agency.
One of those guys died young, one became disabled young, and the other guy in his early 50s said, “Hey, Peter, I’m not going to do this anymore. I’m going to do something else. And I’m more of the insurance guy. I wasn’t the investment guy.” The investment team had left. I had been taking care of Creative Planning’s clients (there were only a few dozen of them) from ’98 to ’04 while I was also taking care of clients at brokerage houses and other independent RIAs and everywhere else.
Michael: And taking care of in this context, this was when you were doing estate planning work as an estate attorney and taking care of them in that context or something else?
Peter: That’s how I had met them because I had done legal work for their clients just like I had done for hundreds of other advisors in different settings. But when their team had left in the late ’90s, they asked me to take over the actual planning and investment piece for them too. So I did that while I was also still doing everything else.
The difference was, in ’03 I said in the following year, in ’04, I’m going to go ahead and have a firm that customizes portfolios, brings legal and tax in-house, includes planning in the process, all of that stuff. When I decided to do that, he said, “You know what, I’m ready to retire. So why don’t you just take over? You already know these clients. There are only a few dozen of them. Why don’t you take over?” And that’s how it got going.
But the things that we had put in place then, conceptually, they’re still the same. We’re still independent. We just have a lot of experience. We still customize portfolios. We just have access to a lot more investments we couldn’t access back then. And we’re still holistic. There are just a lot more things we can do when we say that than we could do back then.
But there were some principles we put in place that I think were big keys to our success. And they were really kind of the antithesis to everything you would read in an industry magazine or that you would hear an industry consultant say. And one of the things we said was, “You know what, we’re going to take every client, and we’re going to treat their portfolio differently. But to do that, we’re going to have to do a plan for them. And if we have to do a plan for them, well, we’re going to include it at no cost. We’re not going to charge a separate fee for the plan.”
Now, this might not sound radical to you, but I can assure you, in the mid-2000s, that was a radical idea. Everyone was like, “No one will value the plan if you don’t charge for it. You shouldn’t be giving away the plan. And the plan and the investments are different,” and all of that stuff, right? And our attitude was, well, if we’re really going to try to customize a portfolio and customize other solutions, legal tax planning, well, we can’t tell them it’s an option to do the plan. And if we’re going to make them do the plan, it should be included in the fees. Well, that became a big difference back then. It’s obviously not a difference today, right? A lot of people are doing planning today.
I remember when we got on the TD platform, we did free plans. Everybody went nuts. Like, “Oh, my God, here’s this firm giving away a plan. And then they’re going to take the clients through the planning process, and they’re not going to force the client to change their investments right away. And they’ll even give them a couple of quarters to figure out what they want to do with their investments. And how are we supposed to compete with that?”
Well, today, that’s the norm, right? The norm today is, if we look at our top five competitors on the platform, all of them now have a financial planning department. Most of them do the financial planning for free. Most of them have added ancillary services like Creative. They had to, to compete. And I think the industry and ultimately the clients – the consumers – are better off because of it. But this idea of a free plan was a big difference back then. And then the way that we managed money I think really was.
And so obviously, if you go to Vanguard, and say, “I want to be in your target-date fund,” they go, “Great, sell everything you have and put the money in the target date fund.” There are a lot of advisors that sell a strategy, right? They go, “Look, this is my small-cap value strategy,” or, “This is my momentum strategy,” or, “This is my market timing strategy or my dividend-paying strategy.” And the way you get into that strategy is you sell your stuff, pay your taxes, and you go into the strategy.
Then there are advisors that have models, some have 5 models, some have 250 models, and they go, “Look, we can’t keep track of all your crap. We don’t want the liability of it. We’re going to sell everything. If you come over, we’re going to put you in model number 187.” And we never did that. We didn’t do it in the beginning, and we don’t do it today.
So what we would basically do is we’d say, “We’re going to spend a few hours with the client upfront. We’re going to spend a few hours developing recommendations. We’re going to spend a few hours delivering the recommendations to the client.” And in that, we’re going to look at the portfolio, and we’re going to determine what do we have in bonds to meet their short-term needs? And in that particular situation, should it be individual bonds, which will go to our fixed income team, or bond funds? Should they be state-specific bonds, given the tax bracket and where the municipal bond environment is?
And then we go from there and go, “Well, what should we include in equities? And what positions do we need to work around?” If the person has $2 million in a mutual fund, we wouldn’t normally buy because it’s more expensive and creates more taxes. But 80% of it is capital gains; we may make the decision to hold that fund and work around it. And it might not be our favorite, say a large-cap growth position, but we would reduce our large-cap growth position, and we would keep that one in there.
If somebody had $3 million in Facebook stock, we could use an exchange fund to diversify it. Not an exchange-traded fund, but an exchange fund. We could send it to our options team if they had an exit price that they wanted to get out of it in the future, but in the meantime, they wanted to earn income on it, or we might sell it, or we might hold it and work around it, or the client might decide on a combination of those things.
And then some clients need alternative investments and some don’t. And so you might have one person with $30 million that has alternatives and one person worth $30 million that doesn’t. A lot of people that show up here with a large amount of money already have some alternatives. So, if I’ve already got private equity, we don’t recommend our private equity, but we might include something else, private real estate or private lending.
We have a client event every year, and there are thousands of clients who come to that event. If the client to the left turns to the client to the right and says, “What process did you go through at Creative Planning,” they would all describe the same process, whether the client has $350 million or whether the client has $5,000. They’re going through the same process.
But if they said, “What do you own in your portfolio,” they would not match, okay? They would be different. And maybe it’s very substantially different. But if they said, “What’s Creative’s philosophy on investments,” it would be the same. So we’re also not like Morgan Stanley where in office one could be a fixed income guy and office two is a guy that believes in trading stocks for everybody and option three is a guy who believes in only using regional stocks. We have a philosophy. I think it’s pretty well known how we feel about investing.
And what we’re trying to do is take the client through the planning process and say, “These are the investments we think make the most sense for you within our philosophy. But because of your tax bracket, your time horizon, and the tax consequences of some of the things you’re coming to the table with, because some of the things you’re bringing are illiquid, or because you work in a tech business and we don’t want to overweight tech, here are all the adjustments we’re making to your portfolio to make it do what you need it to do.”
So you could have somebody that has some money with our options team, some with our fixed income team, some with our alternatives, some with a combination, some with no bonds, but they would all know the philosophy. They know we don’t market-time. They know we believe in asset allocation and diversification. They know we believe in keeping costs down and having part of the portfolio be passive. They know we don’t believe in hedge funds. They know we believe in some alternatives like private lending, private real estate, private equity, and some other things. They know what our biases and our feelings are, but they know that we’re taking into account what they’re bringing to the table.
Sometimes what they bring to the table isn’t something we can’t change for tax consequences but just something they like or don’t like. Somebody might come to us and say, “Look, I agree with everything you’re saying, but I don’t want to own emerging markets.” And we’d say, “Okay, you’re the boss.” Someone might come to us and say, “I agree with all your advice, but I don’t want to own alternative investments because I don’t want to deal with the headaches or K-1s or whatever.” Fine, you’re the boss. Someone might say, “I want to have more things in this asset class,” or, “I just like this stock. And even though there are no tax consequence to sell it, I want you to hold it.” We would work around that.
I think that upfront, that commitment to doing the plan without a separate cost and going through the effort to customize – that was very, very, very unique back then. And so when you put us anywhere, on our own, we were growing very, very fast, but say you put us in the TD platform – in the TD platform, other people aren’t doing planning, the few people that are, are charging a fee.
They certainly didn’t have as many people that were as credentialed as our firm was or as strong at planning as our firm was, we were not selling everything and converting into a portfolio, and we would give them time to figure out is that the right portfolio for them? That was very, very, very unique. And I think that’s held up through today, with the difference just being experience, breadth, depth and the different types of investment vehicles we can bring the clients.
Michael: So with the sheer size and breadth and the number of advisors in the firm, I’m kind of wondering, on the one end, when every client gets customized portfolios and they’re all running different exceptions or preferences and not on standard models, how do you actually ensure that advisors across the firm are all doing something consistent when you can’t just look at the portfolio to see if it’s consistent because it won’t be, and how do you just actually implement this systematically across $50 billion when every client is different, and you have to manage a bajillion different portfolios at your size and scale?
Peter: Well, I think this is a great…this is something that is an advantage, and it’s also tough to scale, right? A lot of people don’t want to do this because it’s a lot of work, a lot of money and a lot of liability. And all of those things are true, but it’s also a differentiator. So if you’re willing to take the liability and so on, it can make sense.
I’ll give you an example of how this goes wrong. We had a client that came on board, and he was working with an advisor in Texas. And he had $2 million, I think it was, in one energy company that he worked for. And the advisor had set a meeting to build a plan and said, “Hey, even before we get to the recommendations meeting, this plan doesn’t work if this stock doesn’t work out for you. I recommend we diversify this right now. We don’t need to wait two weeks for the recommendations meeting; we should be selling the security.” The client says no. The advisor says, “Okay, I’m going to email the client that I told him.” He emails the client.
Then they have the recommendations meeting. And in the recommendation, he goes, “Hey, you should sell this security and diversify.” The client says no. Now, internally, we have reports that show us concentrated positions, cash positions. So all this is being monitored. We also have about 50 people that do nothing but trade, separate from the advisors, right? So even the advisor can’t go off reservation because there’s a trader that knows everything that’s going on and is going to know what stands out and so on and be touching base with the advisor.
Well, after three or four recommendations to this client… We have a policy that, look, if they’re still here after two quarters and they’re not following our advice at all, we’re not working with the client, right? So that client can come over here… I’ll give you a better example where a client had Apple stock, $13 million. He wants to think about our options strategy, our alternative strategy, and so on. We do the plan for them; we deliver the recommendations. We’ll hold Apple and whatever other stocks they have. But after two quarters, if he’s like, “I’m not sure what I want to do,” we’re like, “Look, why don’t you come back when you’re ready.” And the reason is, if I go back to that energy guy, what happened to that guy’s energy stock was it wound up going down dramatically. And he had margined the account against our advice. He called the custodian directly for that.
Michael: Not only concentrated, but concentrated with the leverage just to make sure this works.
Peter: That’s right. So what happens is his account blows up completely. And he gets an attorney, and the attorney says, “Well, Creative Planning, you’re responsible. You had the account.” And now, we wound up winning that and paid nothing to the client. But the point was, we’re a fiduciary. We’re advising the client. The reason that we wound up not having an issue there is because it was documented about 7 or 10 different ways that we had told that client to diversify.
But the typical RIA, they’re not doing any of that, right? They’re going, “Listen, we’re selling this today. You’re paying the taxes and it’s going in this portfolio or you’re not a client.” Whereas our typical client comes to us, and if they’re at Facebook or Apple or Boeing or whatever and they’ve got a bunch of stock, we’ll wait to develop a strategy, and when they’re ready to pull the trigger, we’ll pull the trigger. We’re patient. And we’re not going to push the client into a model right away. And if they want to hold half their Boeing stock and diversify half of it, we’re going to say okay to that. And that’s also resulted in a lot of questions around our AUM. Because I think it’s pretty well known that that’s how we manage money.
Michael: I was going to ask, do you still bill on that? Do you not bill on that? Because there’s a pressure for a lot of us advisors of like, yeah, I understand the client wants to keep the position, but when I bill on an assets under management basis, sometimes they can’t even meet my minimums if they keep almost everything and something outside that they don’t want to liquidate right now. So how do you handle that just from a business model perspective?
Peter: Well, I guess from an AUM perspective, I just describe it this way. So on our ADV, today, we manage around $50 billion. You’ve got the coronavirus stuff happening, who knows what it is today, but it’s around $50 billion. All of the dollars on the ADV are managed billed accounts, right? So let’s just start with that to clarify that. Separate from that, about 4.5% of our overall assets are in unmanaged no-bill accounts. And that’s the same whether it’s inside the TD program or outside of the TD program. So all the clients, wherever they come from or any program we’re in, it’s about the same. It’s a little less than 5%.
So they don’t go on the ADV. And we will hold an unmanaged no-bill account in a separate account. And then we want to document a clear understanding with the client, like, “Hey, we recommended these things, and you’re not ready.” Or some clients, they just have a sister account that they want to manage on their own, right? You’ve got a client that has $1 million with us that they’re managing, but they have $200,000 that for whatever reason, it’s in 12 things that they never want to change or that they want to handle themselves, but they don’t want to deal with separate reporting and all of that. We will leave that in a separate unmanaged no-bill account. And that winds up not on the ADV and winds up being a little less than 5% of the overall assets.
But you have a risk with every account you hold, right? So you’re making a decision as an advisor to make life easier for the client, to accommodate the client, to account for those investments with what you’re doing. Of course, there’s an easier path to manage those assets later, too, right? So there’s that as well because they’re more likely to call you with questions around it and so on. But it’s the business decision that’s not as simple as it appears.
Michael: And obviously, if you’ve got the relationship, at some point, if the liquidity event does occur and they’re otherwise happy and working with you, we kind of know where this is going to end out.
Michael: So does that mean…does the firm still have some kind of asset minimums it takes to be a Creative Planning client? Will you work with anyone up and down the spectrum as long as there’s a total net worth, even if they’re going to be unmanaged no-bill accounts because we know we’re going to have a shot at it in the future? How do you manage that from the business end of clients with a significant unbillable asset base?
Peter: So it really depends on the situation, but we have a lot of ways to service clients. Most of our clients are what we call in our private client group that they’ve got around half a million or up, that’s probably $30 billion-plus of what we manage. There are a few hundred clients that make up a lot of our assets under management as well that have $10 million, $25 million, $100 million and up. That’s probably the fastest-growing part of our practice asset-wise. So it definitely is.
Then we have an emerging wealth group that has people that have $50,000 to around $500,000. So we have three different ways to work with clients. That latter group is only 2% of our assets and mainly the family of existing clients, but also, it’s people that are on the right path that are starting out, but they don’t naturally fit in those categories based on their assets.
So I’ll give you some extreme examples. We might have somebody come in here who’s got a negative net worth and nothing to invest, but they’re two married surgeons that are going to save $100,000 a year. We are not going to put them with the emerging wealth group and then move them. We want to move people as little as possible. They’re going to work directly with the private client group because that’s where we think they’re going to end up quickly.
We might have, and this is normally how the ultra-affluent practice works, somebody come over. We might be working for them for free for two-plus quarters, sometimes longer. We had somebody that had a restaurant chain, we worked with him for free for a year, because we knew he was going to recapitalize and have money to invest. Or we’ll work with somebody who has an event. We had a bunch of people at a couple of high-profile companies that we knew were going to IPO, and they were going to have investments. We’ll start them in the ultra-affluent group. So they’re getting the legal and tax and planning advice that’s commensurate with their situation.
It’s not necessarily about where they are; it’s about what they need, which is usually tied to where they are, but not always.
Michael: So you’ll handle them across the spectrum then, with just different tiers. And are these all still AUM tiers and AUM structures? You may work with clients for limited billing for a period of time because we’re expecting that eventually we’re going to work in a holistic relationship or do you start compartmentalizing fees, planning fees versus investment fees as you start moving up the wealth scale where there’s more illiquidity or do you move down the wealth scale, where, as you said, they might have income but not a lot of assets?
Peter: All of our fees are asset-based. So if we’ve got somebody who’s worth $50 million but has a $500,000 account, we’re only billing on the $500,000 account. And it doesn’t matter where you fall. That’s how we’re doing things.
How Peter Supports The AUM Model With ‘Free’ Planning Services [00:38:31]
Michael: So what about all the people out there? I’m curious today, as you’ve noted, there was criticism then and now of, if you don’t charge separately for the plan, people won’t value it. There’s a lot of discussion around commoditization of investments and fee compression of the AUM model. Some people are calling for the death of the AUM model, depending on where they are.
How do you look at this, of these discussions of still running AUM fees, or charging separately for planning? How do you respond to people who say clients won’t value the plan if they don’t pay for it? And how do you respond to people who say AUM fee compression, fee compression?
Peter: Well, I think we are living proof that people can value the plan and not pay a separate fee for it. I think that the reason we are where we are is not because we do the plan at no cost, but because the plan is valuable to the client, okay? We educate them. We empower them. It’s delivered by people that are credentialed and educated. It’s thorough. That’s why they value it. Because when they get the recommendations and they get it from the people that we have, they say, “You know what, I’m going to follow these recommendations.”
And that’s what creates the advocacy. Now, in terms of the AUM model, look, I think that fee compression is coming just like it has come everywhere else in the industry. And I know that you want to touch on that later, but I would just tell you that I think the model is going to change, and I think it’s going to change substantially over time.
Michael: So I am struck by just that sort of simple but powerful point that clients don’t value the plan because they pay for it, they value the plan because it’s valuable, from people who have knowledge and credentials and the skill sets to back that.
It is a trend that I’ve noticed broadly in the industry as well that the challenge that a lot of firms have that don’t charge separately for the planning is not that the client won’t value the plan if the firm doesn’t charge for it, it’s that in some cases, the firm doesn’t really value the plan when the firm doesn’t charge for it. It’s easy to lose perspective on like, “Remind me again why we’re paying for all these CFP certifications and other designations and master’s degrees and a financial planning department.” Right?
If your revenue is all AUM, it’s hard sometimes from the business management end to start viewing AUM-related activities as revenue drivers and financial planning activities as a cost center or like a cost to be controlled because it doesn’t…it’s not the thing you’re charging for. And anytime something is a cost, you as a business manager, you tend to naturally start minimizing it and managing it.
And then you run the risk that you make the plan less valuable because you put fewer resources into the firm. Not because the client doesn’t necessarily value it if they don’t pay for it, but because it’s hard for business management and for the firm to keep the value focus on planning if they’re not charging for it.
Peter: Yeah. I will tell you that we get a lot of applicants here and we’re like, “Well, you’re at a big firm, you’re doing planning, what’s the difference?” And they’re like, “Well, they don’t really believe in the planning, or they don’t support the planning.”
I think that what’s happened is, we don’t have fee compression of substance yet in this industry, we have value compression, right? You’re charging the same fee, but you’re having to do more. And I think a lot of folks are doing planning because they feel like, “Well, I have to now.” But it’s not in their DNA. It’s in our DNA, right?
I don’t know in the top 10 RIAs how many of them are run by Certified Financial Planner practitioners, but I am one, right? And I’m an estate attorney. And it’s in the DNA of this firm to do that. The majority of our registered reps are Certified Financial Planners. A huge majority of people that are in the wealth manager category here are Certified Financial Planners; the people that are advising behind them – they’re CPAs, attorneys, and so on.
I think we are incredibly committed to delivering advice that is actionable to our clients. Not just trying to check a box so that somebody who’s doing marketing on the front end can say, “Yeah, we do planning too, and we’re going to include it.” It’s in the name of our company and it’s in the DNA of our organization. I think our clients can feel that. When they go through our planning process and they compare it to where they came from, and most of our clients are coming from another advisor, most of them go, “Well, this is a whole other level than what I’m used to getting.” And I think that a big part of it is that you’ve got to be committed to that.
And the things we’re talking about are expensive, right? The second you deal with every portfolio differently instead of block trading some models, you’re now increasing your liability and you’re increasing your costs. If you start to do financial planning without a separate cost and you invest very, very heavily in it so that your front line is mostly planners and the people supporting them are planners, you’ve increased your liability and you’ve increased your cost, right? So you have to be very committed.
That doesn’t really fit the PE model, where the majority of a firm is owned by a PE firm, because they don’t have the time for that commitment to pay off. They’ve got three years, they’re not really interested in that. They’re interested in saying, “How can we say we do planning so that we can compete from a marketing perspective? And we’re not going to be around more than three years to really see anything other than the marketing angle pay off.”
Michael: Right. So I do have to ask just one other question around the sort of investment end and having clients with different portfolios. Do you get worried that clients will compare returns? Like, why is my neighbor’s portfolio doing so much better than mine?
Peter: Well, I think we’re so engaged with the client, the planning is ongoing. We don’t do a plan then put them in a portfolio. Every time we place a trade, we email the client. The client comes in for overhauls of their plan ongoing. None of it is a one-and-done thing. So they know that the whole point of being at Creative Planning is that we’re going to be figuring out where they are and where they want to go all the time. And we’re going to review it all the time.
And we’re going to adjust the portfolio to match that goal. So they know that, “Hey, if I own 30% bonds but my neighbor owns 10%, our returns probably aren’t going to be the same, but I know why I own 30% bonds.” And so I think it actually discourages that because the client is educated and the client knows…
To me, it’s like a custom home builder versus a spec home builder. I’m not going to question why the staircases in my neighbor’s house is one way versus mine. It’s because I went through a process with an architect and a builder and I got exactly what I was supposed to get, right? So I think that’s how they look at it.
Michael: That’s an interesting point, that just when you’ve set the brand and expectation, everything we do here is custom, everyone kind of gets it, right? Like, why does my neighbor’s house look different from mine? Because you hired a custom home builder who built it for your specs and your neighbor likes different things. That’s not a complaint. We sort of expect it.
If you hire someone that does custom stuff for you, it doesn’t look like everyone else’s. If anything, that’s not a negative or a drawback. That’s literally a positive feature and the point is that I got a thing that’s different than my buddy’s.
Peter: And the higher the net worth, the more they value that, okay? The more they appreciate that they’re not going to be the same as somebody before or after them and the more they appreciate the process that’s going in to make sure that everything that’s recommended to them in the portfolio is the best that we can possibly…the best foot forward we can give them.
Creative Planning’s Evolution Over The Past 15 Years [00:46:03]
Michael: So talk to us a bit about changes in what you do at the firm over this journey. For most firms, like, your world changes just as you go from $100 million to $500 million or $1 billion or $2 billion, never mind $100 million to $50 billion as you guys have gone.
The model still seems to be the same anchor and core. It’s an assets-under-management fee. You do planning bundled into that, but you’ve got a strong planning focus. That was where you started and that’s where you remain. So as you view it, what changed? What stayed the same in wealth management world over the past 15 years?
Peter: Well, I can tell you here, a lot has changed. In the beginning, there were just a handful of us. And the first few thousand wills and trusts that got done here, I did them, right? Or the first whatever financial plans, me and Molly, who’s now the vice president, we did them together.
Then we started to have very great demand and we started to hire as fast as we could. I would say we were just trying to keep up with demand until about three years ago. We just couldn’t build out everything we needed to keep up with the inflow of clients. And about three years ago, we hit a tipping point. The best evidence, you asked in the beginning, did I see this happening, and the answer is no. My employees believe that because there was one point in Kansas City where we went from being in 1 building to being in 2, then 3, then 4 all in 18 months as we hired to meet the demand.
What we finally did was we hired enough people everywhere to meet the demand. So we have all the wealth managers and planners and lawyers and attorneys in place finally. We have a leadership structure in place across all the departments. We have a headquarters that’s a third empty because we’ve got room for a lot more people. And we have a technology team that didn’t exist 3 years ago that’s now over 20 people and that’s built out and is building out I think best-in-class tech.
So from a people space and technology standpoint, we can go to $100 billion and not really have to change a lot from where we are. That’s very, very new here. Like a wealth manager who started six years ago and was in Florida, it was nonstop, right? He could be at Jacksonville one day and Naples the next and Miami the next. We were just trying to hire to meet the demand. Well, today, that wealth manager…I mean, there’s a wealth manager in Jacksonville and there’s a team in West Palm and there’s one in Boca and there are people in Naples, in Miami and the Panhandle and Tampa.
No one is getting on a plane in Florida, right? We consider it a failure if an advisor regularly has to get on a plane to see anybody because we’ve localized things. We used to have 1 advisor in California, now there’s very large teams, maybe 15 people, 20 people in San Diego and a bunch of people in Orange County and then L.A. and San Francisco and so on.
So we’ve finally been able to make it where if that prospective client or our current clients call, there’s somebody localized to them, whether they’re in Montana or Denver or California or Florida, that’s a big, big, big change. We’ve gone from a place where it was very hard for a wealth manager to keep up to a place where the wealth managers staying in their backyard, they’re getting to know clients whose kids go to the same schools, work in the same communities, go to the same grocery store and everything else.
They have a very large internal support team, and all those teams have leaders. And so there was a turning point in the firm, I think three years ago, where we finally were able to catch up and get ahead of the demand. And I think we finally have the framework now to get to the next level from where we need to be. Whereas before, it was just like, “How do we meet this demand?”
Michael: And what was the turning point? Was there a catalyst or just suddenly like, “Oh, geez, I guess we’re large enough, this is working now?”
Peter: Well, I think what happened is we just couldn’t hire and train quickly enough. We could have filled every seat in a week. That wasn’t the issue. The issue was filling them with the right people. I’m a big believer, not just that you have to have people, we needed to have the right people. And if you want to have a good garden, you better start with good seeds, right? And then you have to water it. And then along the way, you’ve got to pull the weeds before the weeds kill everything.
I’ve definitely made mistakes in the hiring plan. I’ve hired some people that were a complete disaster, and it kind of can stay with you long after they’re gone. But the vast majority of people that we’ve hired have been absolutely exceptional. And it’s because we’re delivering advice and advice comes from people. You really don’t want to compromise there.
The decision was either compromise there, or everyone was going to work hard while we got through it, and everyone worked hard while we got through it. And for people that didn’t want to work that hard, it was okay, they went to other firms, and that’s totally fantastic.
We just didn’t want to compromise…we didn’t want to say, “Well we need a CPA or a J.D. or a CFP for this position, but let’s compromise on that,” or, “We need somebody in this specific location, but let’s compromise on that,” or, “This person didn’t really pass the interview process, but we need somebody really bad. Let’s compromise on that.” We really tried to hold the bar and eventually, we got where we needed to be.
Michael: And in this world where we increasingly are talking about a shortage of talent, shortage of next-generation talent, how do you respond to the discussions around talent shortage? Is it real? Is it not real?
Peter: Well, I think industry-wide it’s real, but I think it’s not real if you’re…I don’t think you’re going to have in your firm a shortage talent. I don’t think Ritholtz is going to have a shortage of talent. And I don’t think Creative Planning is going to have one. People want to work in an environment where they’re making a difference and where they have the opportunity to grow, right? And they have to believe in the mission.
If you’ve got a firm that’s got an opportunity to grow and you are clear upfront what the mission is, you don’t want to hire people that aren’t philosophically aligned with you. I don’t want to hire people that don’t believe in planning. I don’t want to hire people that don’t believe in our investment philosophy. You want to hire people that are aligned. You really can’t just say, “Oh, it’s just business, get bodies in here.” You can’t do that. You have to have a philosophy that your team embraces or you can’t expect to have the clients embrace it, right?
I think if you’re a good firm with talented people that are making a difference, you’re not going to have a hard time finding people that are going to match up with you. Now, the problem is a lot of the industry is commoditized. So I do think industry-wide, we don’t have enough people with these designations who are coming out of school to meet the demand. I think just as it is with prospective clients, it will be with prospective employees. There will be firms that emerge with more of both at the expense of the other firms.
Michael: It’s an interesting way to frame it that for firms struggling with differentiation, it’s not just a challenge in differentiating to get incremental new clients who say, “Why you and not the other firm?”
It’s equally relevant when you’re trying to differentiate from prospective employees about why they take the job at your firm and not somewhere else. The more differentiated you are with your clients with a clear mission of what you’re doing and the value you provide, the easier it gets to find people who are willing to get excited about that mission and be a part of it.
Peter: Right. Yeah. If I’m interviewing somebody and I say, “Hey, well, how do you feel about the way this works or that works” and then I get down to investment, “Well, I’m really more of an active management guy, but I’m going to have no problem doing it,” well, I don’t want that person.
It doesn’t mean that he’s not right. Maybe active management is going to wind up winning the next 20 years. I don’t know. But it’s not our philosophy, right? And so even if the person is credentialed and smart and wonderful, it’s just you’re starting out with something that’s incongruent with the mission and the philosophy. And you kind of have to keep that out of the garden, right, if you want it to turn out the way you want it to turn out.
Michael: And how do you afford just this level of hiring and growth? I think for a lot of firms, the challenge as well is just there’s both the difficulty of keeping ahead of the hiring curve from just the talent perspective of being able to find the people, get them on board, train them, get them in their client roles, and all the things that we do in the execution of the business itself.
But there’s also just the dollar cost of when you have to hire people before you need them and what that does to the margins and the cash flow of the firm. So how do you manage this or how do you think about this from a business management perspective of having the dollars to put into this kind of growth and hiring?
Peter: Well, it’s funny because I had a call from a reporter a couple months ago who said, “Well, you’ve got this person who called and said you do planning for free and you let the clients leave their money the way it is while they get your recommendations and go through this whole process and then figure out when they’re ready to pull the trigger. And so your firm is incredibly unprofitable.” And then I had lunch with an advisor that runs one of the 10 largest RIAs in the country a couple of weeks ago and he goes, “I heard that you guys have the best margins of any of the big firms in the country.” And so it’s just interesting to see the interpretation of how people perceive it.
Let me just tell you what the reality is. I’m not going to start by saying I don’t care about money. Obviously, I do. This is not a charitable foundation. We have a charitable foundation, but Creative Planning itself is not one, right? We’re a for-profit business. I think my minority investor would not want to hear me say that we don’t care about profits.
But from 2004 to now, that has not been my number one consideration. Not even my top three or four. I just don’t care, right? I already had a long time ago made enough money to do whatever it is that I want to do. I want to make a difference, right? So when I’m coming in, I’m not going, “How do I maximize profits in three years or five years?” I’m coming in and going, “I want to build the very best thing I can possibly build for clients.”
The number two thing I think about when I come in is how can I make this the best place to possibly work so when I find somebody who’s great, they want to stay here? And the rest has historically, for Creative Planning, worked out just fine, right? The clients can feel that and they find it. And let’s say that they don’t for a while. Fine. I’m going to do whatever we’ve got to do to be the best.
The way I look at it now is, whenever I’m done, and I hope that’s not for several decades, I want the clients to look back and go, ” I picked the right place.” And I want, if we’re at an annual meeting, for one employee to turn to the other and go, “You know, of all my career decisions, this was the best one. I came to the right place.” That’s my number one and two goal.
My number three goal is to have a profitable enterprise. But if you have that attitude, then it doesn’t…you’re totally willing to invest in all of these ancillary services that are going to make you better to compete today. And I’m also going to be totally willing down the road to bring down fees when that time comes when I’ve got the scale to be able to do it. Because I just have a different series of motivations driving me.
Michael: Well, that’s an interesting angle of getting large enough to just outright bring fees down and say, “Never mind fee compression, we’re going to lead the competition on fees because we think we have enough scale to do it effectively.”
Peter: That’s something we are trying to put ourselves in a position to be able to do.
Michael: Interesting. And so does that mean from a broad perspective, well, so as you put forth, some people think your margins must be horrible and below average, some must think they’re great and above average. So do the margins sit above average or below average?
Peter: Well, there are some things beyond the scope of this podcast, Michael. So I’m not going to share that.
We’re fine. I don’t think we would have an outside investor if prospects weren’t good.
Michael: So, as we look at the business from your role, I know one of the other things that a lot of people have talked about over the years is that most advisory firms when they get to a certain size, the founder, the leader, the CEO tends to move out of client-facing roles and into just full-time running the business.
For a lot of practice management consultants, they specifically emphasize and espouse like, you cannot grow your business past a certain point if you don’t get out of a client-facing role and into just focusing on leadership and management of the business full-time.
I know you still keep awhirl; we had talked about it on the podcast a few years ago as well of keeping a handful of clients that you are directly involved with as an advisor. So I’m wondering, do you still do that after another $15 billion under management? And what does your typical week or time look like to be able to handle clients on top of a $50 billion AUM business?
Peter: Well, I do work directly with well over 100 clients. I will never stop working with clients. Whenever my last day is, I am going to see a client that day. And I do…I mean, I understand the criticism. And let me just be clear with, about everything that I’m saying today, I don’t know. I’m doing the best I’ve got with what I know, right? I could be wrong on everything we’re talking about. But the decisions that I’ve made thus far have worked out just fine for our clients and our employees and for me.
When I’m sitting with a client, number one, I enjoy it, right? I started that way. That’s what I was doing is giving planning and money management and legal advice to clients. I enjoy doing that. So I think that’s a big part of it, right? If I didn’t enjoy doing it, different story.
But second, when I’m doing our podcasts or I’m writing our letters, I am not having to wait for stuff to filter up to my ivory tower on what people are thinking. I’m in the trenches, right? So I’m sitting with clients, just like our wealth managers and planners and lawyers and CPAs are, and not just sometimes, every day, okay? Every day I’m with a client. So I’m sitting in a meeting with a client every day.
The number two use of my time is sitting with employees about various things. And I get asked the question, “Well, where do you find the time to do that?” Okay? The books say not to do that. Well, the books said don’t do financial planning at a separate cost either, right? Use model portfolios and all that other stuff. And I think the way I find that time is I’m not going to conferences. And I know you like…you speak at a lot of those conferences. I’ve never seen you speak. I’ve heard you a lot. I’ve seen…
Michael: I won’t take it personally. You’re clearly doing okay even though you have not heard me give some suggestions.
Peter: No. But you know what? I’ve been able to read your suggestions. And I’ve been able to listen to your suggestions when I’m walking the dog or on the treadmill, right? So I don’t need to sacrifice the time that I’m with a client or an employee or my family to go to a conference. And I think that’s kind of part of I think the issue with all the questions around Creative and how we do it and profitability and all that stuff is I’m not at those conferences, right? So I’m not hanging out with the 25 other big firms that are going from one conference to another.
Occasionally I will go. I will go usually one day. I usually won’t spend the night. And I’m usually because I’m meeting somebody and I’m leaving, right? So to me, it’s what brings the most value, I think, to the firm is for me to be with clients and employees. And that I don’t feel like I’m going to learn a lot at most conferences that’s going to make me want to offset that, that I can’t get somewhere else. I can’t get my time with my clients and my employees somewhere else, but I can get the education that is at those events usually somewhere else.
The Leadership Team Structure At Creative Planning [01:02:17]
Michael: And then what does the leadership team or structure look like that works alongside you? Obviously, it takes a lot of people to run any business, particularly one at the size of Creative Planning. So how does the leadership structure of the organization work at the top? How do you actually manage the business as a business?
Peter: So every group here has a department head. So there is a director of financial planning, there’s a director of legal, there’s a director of tax, there’s a director of bill pay. There’s probably 12 or 13 of those running all of the different departments here. So each team has a leader.
Then we have a COO and a CIO. And we have someone…our director of institutional runs our investment policy committee. So all of the teams have each other, and then they have a leader. And then we’ve got, obviously, the leadership above that. But we’re all player-coaches. So it’s not just me that still sees clients. The head of our legal team, Seamus Smith, he sits with clients still. Candace Varner, who runs our tax team, she actually prepares tax returns and sits with clients still. We want all of our leaders knowing exactly what’s involved so that when they start to propose new technology solutions or what software are we going to use or what type of people are we going to hire and what does the role look like today, they’re very in tune with it.
And I know that that’s not how a lot of places do it. I’m not saying the way we’re doing it is right, but I’m saying it’s working for us. And that’s the attitude that we have. We want our leaders to be player-coaches. They obviously can’t handle the same workload as somebody who’s not leading, but we want them in the game. We want them to be knowledgeable about the intricacies of their job. And I think it gives them the respect of their team too. The head of planning, the planners that go talk to him know he knows what he’s doing because he was one of the best planners. And you could do that across all of the rest of the teams here.
Michael: So talk to us a little bit about the evolution of growth for the firm. How have advisor programs changed over the years? How has the growth profile of the firm changed over the years? You noted, today, referrals from advisor custodians are only about a third of your assets. I’m assuming that was probably a higher percentage in the past and it kind of goes down as the base of the firm broadens in the ways that you’re getting clients. So how has the growth profile of the firm changed over the years?
Peter: In the beginning, it was all word of mouth and then estate planning then 401(k)s, then it was, to your point, disproportionately TD and then it was the Tony relationship, and then we added things. And you look today it’s less than a third TD and it’s more than half a combination of things that have nothing to do with a strategic relationship.
I think what’s happened is it’s just greatly diversified. We have over 30,000 clients, and those 30,000 clients, if you do right by them, they’re going to tell other people. And I think we’re doing right by them and then they’re telling other people. And that’s a very, very big part of what’s going to help get us to the next level.
I think the programs have changed a lot. They change every year anyway. The custodians change the way they decide how they’re going to compensate their teams or if they have an internal offering and so on. And look, it’s their clients. It’s their right to do whatever they want to do with all of that. But there’s no question that most of those programs have contracted quite a bit. And you’ve got a big merger going on between TD and Schwab. And I’m sure that at some point, that’s going to take a lot of their time.
I know Creative Planning is not dependent on any one relationship. And we had a recent study by an outside consulting firm before our investor came in that they had commissioned, and it had our growth rate as double that of the typical firm independent of all of those channels. I think that’s the key – you’ve got to be able to make your clients become advocates. I think that’s a very, very big piece.
If you look at Creative today, what’s the same? We’re going to include a financial plan. We’re hiring experienced, credentialed people. We value credentials, education, and experience. We are going to give comprehensive advice. We’re going to do our best to implement it. We’re going to customize portfolios and we’re going to spend whatever it takes to manage them correctly.
But what’s different is, wealth managers today have far more support than they ever had. All of the team members now have a leader to go to. All of the team members are working for much broader, more experienced teams. We have a lot more types of investments and planning solutions that we can offer clients. We have access to alternative investments we didn’t have before. We’ve got things like bill pay we didn’t have before.
So I think from a client perspective or a team member perspective, it’s such a better place than I think it was 3 years ago and 5 years ago and 10 years ago, which is why we were growing with clients and employees, but it’s such a better place with such a better offering today than it was in the past. And I think we’re ready. We’re locked and loaded to go to the next level.
Michael: So I feel like for, well, virtually all advisory firms, we all go out there and say like, “We’re going to serve our clients great and get referrals from satisfied clients.” In practice, not everyone gets those referrals. Just the growth doesn’t happen, the referrals don’t show up. What do you attribute that Creative Planning is able to get a different outcome and actually drive so much from word-of-mouth referrals? Are you a systematically ask-every-client firm? What’s actually making the execution of that go so much better for you than everybody else?
Peter: We’re not a systematically ask-every-client firm. And I think, frankly, that enough lead flow comes into most advisors here. It’s very different all over the country, but I think most advisors get enough lead flow that they don’t probably have that as top of mind as, frankly, I would like them to. And I think we’re doing a lot of education in-house on, “Hey, go ahead and ask for referrals too.” And some people are going to…will help you out but only if you ask them to introduce you to somebody.
I would say that there’s a lot of different things that go into it. Some of which we’ve discussed today and some of which are just beyond…well, I’m still competing with these…I’m not retiring tomorrow. We kind of walk you through the Coca-Cola factory, but I’m not going to give you the recipe on how to make Coca-Cola.
I think there are some things that we do that really create that advocacy. And so yeah, you’re right when you say, “Well, God, a lot of people do planning now and a lot of people do it without a separate cost.” And maybe there are firms that customize and so on. But I do think those firms are starting to see more referrals than their competitors, too.
I think there’s evidence of that. If you look at the top 10 firms in the independent space, a lot of them are starting to look a lot like Creative Planning. I think that that’s a reaction to what we’re doing in the marketplace. And so they figured some of it out – I’ll acknowledge that. I think that what’s going to get us to $100 billion is completely different than what got us to $50 billion, which is why I think I’m more open than ever to have this conversation with you.
How Creative Planning’s Inorganic Growth Through Acquisitions Is A Complement To Its Organic Growth [01:09:20]
Michael: Given all of that around the powering of organic growth, the accelerating volume of clients coming in, the expanding reach, the new markets, the brand, all of that, and now suddenly in the past 12 months for the first time in 15-plus years, Creative Planning is starting to do a number of acquisitions that have been announced and kind of going down the inorganic growth path.
So help us understand, what leads you to inorganic growth, and especially what leads you there now when it seems like organic growth is already going just fine?
Peter: So I think the best three years of organic growth we’ve ever had were the last three years. I think that that was due to our leadership, our infrastructure, our way of doing things, and me being more engaged than ever with the wealth managers drove a lot of that. I think our organic growth in the next three years will be better than it was in the last three.
So to me, this acquisition is not a replacement for organic growth but more a complement. And my attitude had always been, I am not a fan of what I call the Franken-firm, which is 25 firms put together to create a $20 billion firm. Everyone’s doing something a little bit different. There have been compromises along their way. You’re running different software programs. It’s just creating fake titles and all this stuff that goes into all of that. I’m not a fan of that.
I’m also not a fan of acquiring something and just plugging it in and just magically, that’s part of the culture, whether it’s a tax firm or a trust company or anything else. So we built everything, okay? We built our trust company from nothing. And we built the tax arm from nothing and the legal arm from nothing and so on. And so we know how we want to do it and we have the people that we want to lead it and we have the process in place and the technology and everything else. And then we went and built out the teams, and then we went and got the clients.
So now if we acquire a firm, and the first one was kind of an accidental happening. And I’ve spoken about it before, but I’ll be brief here. The Johnston Group, the father and son came to visit me. They kind of insisted on coming to Kansas City. We told them we didn’t do acquisitions. We met them. Anyway, long story short, we wound up acquiring the firm. I was very impressed with them. They used the same custodians. They had the same investment philosophy. They were financial planning-led. They did the financial planning without a separate cost.
It was just crazy. The people were exactly like our people. We’d have hired them had they walked in. And it was $400-something million. I think today there are six people in that group, and we’ve folded them in. It was the first one, so it was bumpy. But even for being bumpy, it was pretty seamless. In that month, we probably grew that much organically anyway, right?
So adding that firm where these people were already clients, we didn’t have to onboard them and the advisors were already in place, we just had to train them from doing planning their way into our way and centralizing all the processes, it went so smoothly. And that was in Minneapolis. And what we found is we were managing $400 million or $500 million in Minneapolis, they were managing $400 to $500 million. All of a sudden, we’re a $1 billion player in Minneapolis, and we’re starting to get in the conversation to be in those top firms, right?
So to me, we can add firms now, but there are a lot of boxes that need to be checked. We’re not going to have firms that don’t share our investment philosophy. We’re not going to work with firms that aren’t planning-led. We’re not going to have firms that run on different software systems or have different leadership…none of that, right? It’s got to be somebody who’s really like-minded and wants to be part of the mission of becoming that independent firm that really sets the tone nationally of what wealth management should look like.
I think if you look at the independent space, a lot of independent firms have copied the Creative model, but the brokerage world hasn’t even noticed, right? We’re not a blip on their radar. We’re not even on their radar. We want to be our blip on the radar. We want to be there and we want to make them notice and we want to see them change and become a little bit like us. And to me, we’re small everywhere. So if a firm checks all those boxes, we’re very interested in having the conversation.
After the Johnston Group happened, we had other folks, same thing. Same investment philosophy, planning-led, leaders that I personally connected with that had teams that matched us culturally. It was Susan with Stratford Consulting in Dallas, Wes and Mark with OptiFour in the D.C. metro area, Paula Hogan and Clint in Milwaukee. And it just was kind of too-good-to-be-true setups, and we made those acquisitions.
I think that as we look at it, we don’t have an acquisition team in place. We don’t have people out looking for us. We don’t have anyone in-house dedicated to it. It really is, they kind of call us or email us, or maybe they’ve hired a banker and that banker calls us or emails us and they have a conversation with someone here, and then they have a conversation with me. If we can go through all those boxes and check them, we meet in-person. And then if that goes well, I go meet them at their place. If that goes well, then we work it out.
That’s happened a lot lately, and I think you’re going to see a lot more transactions happen in the second half of this year as we’ve been approached by over 30, 40 firms of which there’s a good handful I think we’re going to wind up making an offer to and having them come on board. And in all cases, it will make us more competitive in those various cities, but they will be coming into the Creative way of doing things, which they already greatly match.
And what I found is when those sellers, they’re looking basically, what’s the best place for their clients, what’s the best place for their team, and what’s the best economic outcome they can get. And I think when they look at their clients, they see in Creative a firm that already matches them philosophically. So they want that for their clients, but they see they can maybe do more for their clients here than they could do on their own, that they might be able to gain the confidence of the bigger potential clients more here than they could on their own, that we’re a proven model for attracting and retaining clients. So they’re not really guessing. They know that we’re majority owned by me. That we’re not selling in two or three years.
I think when they look at it from a client perspective, they like that. From an advisor perspective, the advisors want the things we talked about before. They want to be a part of something that they believe in and they want to see a growth opportunity. And advisors here have the opportunity to grow. So they see that. And then it comes to economics. We don’t always win there, but we’re usually in the game enough that we’ll be the ones to make that deal happen.
Michael: So then talk to us about the other end. That’s why you’ve started buying. What led you to also be selling and putting a piece of Creative equity on the table for a private equity firm? Particularly since, as you noted earlier, not necessarily a fan of PE firms that have different time horizons than your long-term time horizon for growth. So what triggered putting a PE firm onto the cap table and why General Atlantic?
Peter: So a couple of different things. I think one, when we moved into this new building, I’ve got an office and it overlooks the parking lot, and the parking lot has hundreds and hundreds of cars in it, right? So I’m looking at that every day. It became more of a reality, I remember talking to a couple advisors here when we first moved in, that was the most noticeable thing for me.
The other building, first of all, we’ve been spread out into four buildings and my office wasn’t near the parking lot, and now it is. And when we sit with clients, and again, I’m sitting with clients every day, we help them work towards their goals. But one of the things we ask is, “Well, what could go wrong? And how do we prepare you so that your goals aren’t compromised if you go wrong?” And you basically figure out, well, look, you can invest in…you want to make this energy bet, great. You want to buy a ranch, great. You want to invest in that venture capital thing, great. But let’s have something over here that if everything goes wrong, you’re going to be okay.
Well, when we looked at Creative, we invested in the tech, we invested in the building, in the headquarters, we built over the last five years, we’ve moved into 26 physical offices, we tripled our workforce. We did all those things. We said, “We have a clear path to grow and get to $100 billion. Now, what could go wrong?” Well, what could go wrong is the tech bubble, 9/11, ’08/’09. The market is going to go down a lot at some point. And we never know when that’s going to be or why. It might not be 10 years from now; it might be tomorrow. But it might not last six weeks, it might last four years, right?
And if you look at the bigger firms, when that happens, what do they do? They just let people go, right? A lot of them do it in anticipation of it. You saw when interest rates were dropping last year, a lot of the brokerage houses, custodians said, “You know what, we think our earnings are going to be down, we’re just going to start firing people now.” I never want to do that. I would like to; whenever my time is up and I’m not doing this anymore, I would like to have them look back and say I never ever terminated anybody based on economics, about the economic environment. I want to be in a position to hire the best people in that environment. I want to be in a position to grow. That’s part one of it.
Part two of it is I think valuations are insanely high across the board, whether someone has a $300 million firm or someone has a $50 billion firm. What drives valuations is a combination of things. One, you have to be an economic expansion, right? Check. You need to have a general bull market that corresponds with that. Check. You need to have a bunch of money in the private equity space to compete with other buyers. Check. You need to have low-interest rates because they borrow to buy, just like with real estate. Check. Right? You go through all of that stuff.
You’re checking all the boxes. Is all of this going to stay this way five years from now? Are interest rates going to be this low? Will we still be at a bull market? Will we be in an economic expansion? Will there still be a record amount of money sitting in PE? The answer to that is not yes or no, it’s I don’t know, right?
So if I don’t know and I think valuations are very high and I want to ensure the security of everything for forever, you sell a minority non-controlling stake. And look, I think that to me…that to an outsider should be the proof that I’m not going anywhere because you don’t get full value when you sell a minority stake because obviously, the buyer doesn’t have control, right? They’re betting on you and your decision-making. And so there’s a little bit of a discount that comes into play there. And so that was the reason.
Now, why General Atlantic? A lot of the clients in the ultra-affluent practice, the way they got here was selling their businesses. And a lot of them got there by selling to private equity. So I deal with a lot of clients that have a lot of money, and they got that from private equity. And I have at least four clients that had sold to General Atlantic. So I knew what their experience was like, and I had heard from them what that team was like. I got to know the folks there and really liked them and respected them. I talked to them for a long time and I waited until I thought we were at the point where it made sense and then we did that minority stake.
What’s In Store For Creative Planning’s Future [01:20:31]
Michael: So what comes next? Where’s Creative Planning going from here?
Peter: Well, I think that part of it is we can…the best-laid plans. We’re so at the mercy of a lot of things, the markets and competitive forces and so on. I think where we go next is dependent on the industry. I think the industry is going to continue to consolidate. I think E-Trade going to Morgan Stanley, TD Ameritrade going to Schwab, all this stuff is happening at breakneck speed. I’ve not had that long of a career and I saw mutual fund commissions go away, the mutual fund fees go away, then ETFs come out, then ETF fees went down. Now they’re zero at Fidelity and close to zero at a lot of other places. And then I saw trading commissions at custodians go from whatever to eight to five to zero. And the next place that’s happening is here. And I think that we don’t see it yet because no one’s got the scale, we don’t have the technology. We don’t just have the ability yet to do it, but it’s coming. And I want Creative Planning to be on the front lines of that, able to go into that strong and maybe even lead the way for how that looks.
We’re on a mission to become a national brand and to have the brokerage industry notice us maybe the way that some of the independent space has. And I would consider that the ultimate legacy. I don’t think Bogle’s legacy is Vanguard. I think it’s that everyone does passive investing now. I’m certainly not comparing myself to him, but I would say Schwab’s legacy, his legacy might not just be Schwab, it might be the whole model that led to Scottrade and E-Trade and TD Ameritrade and so on.
I think that we want to build something great here. We want to be able to look back and say we did it the right way. We put a lot of people in a better space than they were before. We want our clients to go, “You know what, my goals happened and I got there. I slept better at night. And I felt like I was in the right place because I hired Creative Planning.” So we want to do that for our clients and our employees.
And then I think our other goal of doubling in size from here, we doubled the last three years, we doubled three years before that, I think it’s very, very attainable. There are a few different ways. We’re going to get from where we are now to $100 billion than just what we did in the past and acquisitions. And we’ve got a plan in place. And Michael, when I get to $100 billion, I’ll come on here and I’ll tell you how we did it.
What Success Mean To Peter [01:22:51]
Michael: Well, as we wrap up, Peter, this is a podcast around success. One of the themes we always talk about is just how the word “success” means different things to different people. So as you’re crossing a $50 billion threshold, pushing for $100 billion in the next 3 years, certainly what anyone would call very objectively successful business, how do you define success for yourself at this point?
Peter: Well, I would say the primary things that have to do with success have nothing to do with business. Really, to me, when I look at somebody and look at their success level, I’m looking at their family and their friends and what their life is like outside of work. I don’t think that’s what your question is, but that’s definitely how I see it. It’s the reason that, on average, I’ll only travel 1 day a week, and over the course of the year, I’ll spend the night away from home for work 10 times max. That would be the number one thing.
Now, if you’re saying within a business perspective, to me, it’s not enough to be liked internally, and it’s not enough to win. To me, you’re successful if you got your team to win the Super Bowl, and the next year you get your team to win the Super Bowl and so on, but the players would want to come play for you again, right? You need both. And I think if you have both of those things, then I think that’s the definition of professional success.
Michael: Well, very cool. I love it. Well, thank you so much, Peter, for joining us on the “Financial Advisor Success” podcast and sharing the journey. And congratulations on a truly incredible milestone at $50 billion.
Peter: Thanks. I appreciate that, Michael. And congratulations to you on all you’ve done. You’ve been a great source of education and I think inspiration for a lot of us to keep our game up from the subject matter standpoint. And so keep fighting the good fight.