“High net worth individuals deserve the expertise without paying the price of conflict.“
Peter Mallouk is the President of Creative Planning, which provides comprehensive wealth management services to its clients. Peter is a pioneer of the Independent RIA model, with clients in all 50 U.S. states and abroad.
"Why is it that a company is selling a client its own product and charging a fee to do so?” With Peter’s background in tax and law, he’s able to offer clients a comprehensive overview of their wealth management picture while adhering to a conflict-free philosophy. However, he warns, “Yield without risk does not exist.”
Turning to active vs. passive management, he notes that the latter has indeed outperformed the former since 1980. “Large tech companies make up almost a fourth of the S&P 500,” he explains. Should their performance change, it will have a profound effect on passive management’s appeal, and there may be a move away from yield-oriented assets to alternative assets.
LISTEN AND SUBSCRIBE
SPEAKER
Peter Mallouk
President
Creative Planning
MODERATOR
Anthony Scaramucci
Founder & Managing Partner
SkyBridge
EPISODE TRANSCRIPT
John Darsie: (00:08)
Hello, everyone, welcome back to salt talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum at the intersection of finance, technology, and public policy. We've been doing these SALT talks, which are a series of digital interviews during the work from home period in lieu of our global conference series. What we really try to do is replicate the type of thought leadership that we provide at those conferences, which is providing our audience a window into the minds of subject matter experts as well as providing a platform for what we think are big, world changing ideas, and today, we're very pleased to welcome Peter Mallouk to SALT talks.
John Darsie: (00:45)
Peter is the president of Creative Planning Incorporated, and its affiliated companies. Creative planning provides comprehensive wealth management services to clients, including investment management, financial planning, charitable planning, retirement plan consulting, tax service and estate planning services. Investment management is at the core of the services of Creative Planning, and they have almost 50 billion in assets under management as of July 30.
John Darsie: (01:13)
Creative Planning is customized tailored portfolio solutions for clients in all 50 states and I know some international clients as well. Peter's leadership in the industry has not gone unnoticed. He was one of the pioneers of the independent RIA model. He's the only person to have ranked number one on Barron's Top 100 independent financial advisors in America list for three straight years in 2013 through 2015. He's also appeared on the cover of Worth magazine's 2017 and 2018 issues of the Power 100, which is a list of the most powerful men and women in global finance.
John Darsie: (01:47)
In 2017, New York Times wrote that, "Creative Planning is at the vanguard of a profound shift in finance." I know we had Stephanie Link from Hightower on last week if you caught that episode of SALT talks. Peter is one of the pioneers of that independent RIA model that Hightower is another player in that space. Peter and his wife, Veronica are passionate about giving back to their local community in the Kansas City area. They're involved in many local and national efforts mainly focus on providing help for the less fortunate.
John Darsie: (02:16)
They've been honored for their tireless work with many causes. Peter graduated from the University of Kansas, so he's a homegrown star there in the Kansas City area, in 1993 with four majors, including degrees in Business Administration and economics. He went on to earn a law degree and an MBA in 1996, also from the University of Kansas. He's also earned his Certified Financial Planner practitioner designation. So in addition to being a business executive, he's also a CFP.
John Darsie: (02:46)
Peter and his wife Veronica reside in Leawood, Kansas with their three children, Michael, JP and Gabby. A reminder if you have any questions for Peter during today's talk, please post them in the Q&A box at the bottom of your video screen and hosting today's interview is Anthony Scaramucci, the Founder and Managing Partner of SkyBridge Capital, a global alternative investment firm, as well as the chairman of SALT. With that, I'll turn it over to Anthony for the interview.
Anthony Scaramucci: (03:11)
John, thank you, Peter. It's great to have you on even though I'm still sore at you for the 2015 World Series situation. You guys just ripped through and destroyed my Mets. So I just want you to know that that feeling is still with me, Peter. It's still with me. The pain is still with me. I want you to take it back. My colleagues often say to me, don't ask people about their backgrounds, because you can find it on Wikipedia but I find that to be the most interesting part of people's stories. You tell us something we're not going to find on Wikipedia about you, your family, how you grew up, how you got to where you are. By the way, congratulations on your great success, but tell us something that we wouldn't learn from Wikipedia about you.
Peter Mallouk: (04:01)
I think probably what you wouldn't learn and I think this is not really my story, but the people I'm most impressed with are immigrants, like people that come to the United States and have a lot of success. If you really look at that group of people, they're off the charts in terms of what they accomplish. Because if you can leave India or Southeast Asia or Africa and find your way through all of that and come to the United States, it's kind of a cakewalk when you get here because someone else has done a lot of the hard work and then you've taken that leap.
Peter Mallouk: (04:35)
So I'm fortunate that two people did all of that for me, my parents. So you've got the kind of the best case scenario I think, as an American is to not have had to be the person that had to have the guts to do all of that and I really question, I think I would have never done that. I grew up 10 miles from where my church, my school, my office, 40 minutes from I went to college. Wherever I was born I was going to be, but that wasn't my parents attitude.
Peter Mallouk: (05:05)
That's the story of millions of Americans. So when they came to the States, it really became the kind of the best case scenario because you got to see people that really appreciated all the things that the United States has to offer that really understood how tough it could be in other parts of the world and has sacrificed everything. Like all our friends, all their family. They were the only ones to come here.
Peter Mallouk: (05:30)
So it really gave me a different mindset growing up. That mindset to me, if there was one thing if you took it out of me I wouldn't be where I was, it would just be that, was just that good fortune and that to me is the difference and I'm forever grateful for that and every year that goes by, I appreciate it more. It's also given me incredible insight into our clients.
Peter Mallouk: (05:54)
So many of our clients that have reached the top of their professional United States in business or medicine or whatever, they're immigrants. It's interesting to watch what they invest in, versus just third or fourth generation Americans. They will pay every penny of education all the time, from whatever they need to do all the way through if the kid needs help, or it's advanced tutors, tutors, when they're in college will pay for all of it. Four years, eight years, six, whatever. It's just the things that they value and invest in, I can understand it better as well. So it's helped professionally too.
Anthony Scaramucci: (06:30)
Well, I mean, you are also the pioneer in many ways of this independent RIA model. Your firm is one of the fastest growing in the space, but the RIA model in general is a very fast growing concept. You were an early pioneer. So tell us about your early vision, what came to maturation for you, and where are things going now for RIAs and for your firm.
Peter Mallouk: (07:01)
So there were some very delayed aha moments for me. So I was an advisor to other advisors for the first six to eight years of my career. I would do legal work for them, give tax advice if someone was selling a business, and I really was doing that for other advisors. So I'd go to an insurance company, a brokerage house or an independent firm, and I would do that for them. After six years of that, eight years of that, depending on how much you count of my first years, I realized that hey, sometimes products are being sold that don't make sense.
Peter Mallouk: (07:34)
Why is it that this one company is selling their clients their own products? Just really got a first hand seat at the conflict, like in a really big way. I saw it, I had probably worked with over 50 to 100 firms and I really thought, this is an interesting space. There's just embedded conflict. Somebody comes in, pays an advisor a fee, and then gets sold their product or then also buys a product on commission or winds up with an annuity.
Peter Mallouk: (08:01)
It just seemed strange and I didn't have a vision of I'm going to fix the space, I just said, I don't want to be a participant in that space anymore. So I'd like to have a firm that's independent and doesn't have their own products and doesn't work on commission and so on. I also knew that it would be nice to be able to look at a client's entire wealth picture. So if you've got somebody who's worth a few million dollars, or 10 or 100 million dollars, it's nice if you can earn 1% more for them or 2% more for them, but if you can save them, hundreds of thousands or tens of millions and estate taxes or capital gains taxes, that's where you're really moving the needle and that was really my background was that tax and law component of things.
Peter Mallouk: (08:42)
So the idea was to have a firm that really did everything it could to grow and protect and transfer the wealth of our clients and also manage the money in as conflict free away as possible. That's how we got going here and really didn't have our sights set on being the leader in the industry. As time went on, it became clear that we had an opportunity to do that.
Anthony Scaramucci: (09:10)
Let's talk about that independence and that lack of conflict and how it balances up against others that you're competing against. So, go ahead, pitch me. I'm your client, I'm coming in with 100 million dollars and go ahead, Peter, why am I using you guys?
Peter Mallouk: (09:26)
All right. 100 million dollars. You're probably looking at, you've got two choices-
Anthony Scaramucci: (09:30)
If I was John Darsie, I'd be coming with 300 million but since I'm only me-
Peter Mallouk: (09:34)
I'll take you and your 100 million. That'll work great.
Anthony Scaramucci: (09:37)
Go ahead. Go ahead, Peter.
Peter Mallouk: (09:38)
All right. You just saw the Mets, right? We could have some big cash coming in, and we're going to have a conversation later.
Anthony Scaramucci: (09:44)
Amen.
Peter Mallouk: (09:46)
All right, what we do is you basically got two choices. You got the brokers world and the independent world. The brokerage world is the JP Morgan's And the Goldman Sachs and great companies and they've got some great products. You're going to go pay them a fee to manage your money, and you're probably going to wind up with their products. That's just what's going to happen, or in the products of people that pay revenue sharing. Or you might go to the independent world and say, hey, I want a fiduciary. I'm going to go hire an independent wealth manager, and 95, 99% of those firms don't even manage as much money as you have.
Peter Mallouk: (10:19)
So there's not scale or breadth and depth. So here, you've got Creative Planning, that had 50 billion in assets under management, clients in all 50 states, 100 people that come to work every day that work just in our legal and tax teams. We are going to be able to give you that breadth and depth that somebody like you requires but we're not going to be selling your own products. We have access to all what we consider the top investments in alternative investment space and other spaces, if they're applicable to you.
Peter Mallouk: (10:47)
So the key here is to a high net worth investor, really any investor deserves to get the expertise without paying the price of conflict and that's where I think we sit today.
Anthony Scaramucci: (11:00)
You're doing a lot more private equity as well.
Peter Mallouk: (11:03)
I just pitched you. Are you closed or are you going to sign on now?
Anthony Scaramucci: (11:07)
I'm going to call you afterwards. By the way, I think your pitch is very compelling. I'm just teasing you. My problem is because I deal with every single person in the universe, and all my money is stuck in my fund.
Peter Mallouk: (11:24)
I was just joking.
Anthony Scaramucci: (11:27)
I appreciate what you're saying, a lot. I want to go to another question. Darsie's itching to get in here. So before he steals all of my thunder, Peter, I got to ask a few more questions. You're doing a lot more in private equity, and private equity is flowing through RIAs and through Creative Planning. What's your thought there? Why are we doing more there?
Peter Mallouk: (11:53)
Well, I think that first when we started, we couldn't go get our clients top shelf private equity. We couldn't call a private equity firm and say we managed 5 billion dollars, we want access to your fund. That's a conversation where we had to be at 25, 35, 40 billion to be able to say, hey, we have enough very high net worth clients to have access. We really couldn't offer a best in class until recently and that's a part of it. We don't want to offer anything unless we think we can really offer best in class.
Peter Mallouk: (12:17)
Now, I think in terms of the space, what's happening is people are scared of the stock market, but they feel better in alternatives and private equity is considered an alternative. Now, I don't buy into that on its face. They're all equities. Some are public equities, and some are private equities and this idea that you're safer if you go from public equities to private equities is on its face ridiculous, but for whatever reason, pensions and universities and so on, don't think so.
Peter Mallouk: (12:44)
I do think private equity adds value. I do think that their managers matter a lot, and if you get a good history, a good management team, you've got a pretty good chance of doing better than the public alternatives. So I like having private equity if you have access to very, very tough funds and top managers. You see more demand from that from especially more affluent, at least we do for more affluent clients.
Peter Mallouk: (13:10)
Now there's 8,300 private equity funds. That was a statistic from a few months ago. So today, there's probably 9,300 because they're just sprouting up everywhere because of the demand. I think we're going to see a bloodbath across the space, at some point, with all of the leverage that's taking place and all the money that's chasing deals is driving up valuations. I think people need to be really selective about who they're partnering with in that space if they don't want to be part of that.
Anthony Scaramucci: (13:36)
Well, we agree. In your firm, do you sometimes do special purpose vehicles for your clients as well if opportunities come up?
Peter Mallouk: (13:50)
We don't package deals ourselves, for our clients. So we're always looking for a third party and that way we are never married to a manager. If we don't like one place, we just remove them and go somewhere else.
Anthony Scaramucci: (14:04)
That goes to your conflict free philosophy. Okay, so that totally makes sense. When you're looking at the fixed income space now, the yields are obviously very, very depressed and you have older clients that need income off of their corpus. What do you say to these people?
Peter Mallouk: (14:23)
I just tweeted this morning that yield without risk does not exist. I just keep getting this question from clients now. Hey, how do I get more yield without taking additional risk? How do I get more yield without taking additional risk? It simply does not exist. Everywhere people think it exists, they are someday going to pay a price. So I think the premise for this is you have to start by accepting, you're not going to get more yield without taking more risk. So now all of a sudden, I'm moving closer to equity like risk than I am bond risk and regardless of what the packaging of the product is.
Peter Mallouk: (15:00)
If you except that, you start to wonder why you're just not in equities or alternatives to begin with, because you're going to take the risk, you may as well pay capital gains instead of income, you may as well participate in all of the upside instead of part of it. I think that's the real story is that we're going to see a move away from yield oriented investments that are perceived as low risk towards riskier asset classes.
Anthony Scaramucci: (15:21)
Well, how do you feel about a package of higher yielding stocks, dividend yielding stocks?
Peter Mallouk: (15:26)
I owned those before I owned high yield bonds, because I'm going to get the upside and I'm going to get the upside in a much more significant way and either way, I'm going to get the downside. I think you have interest rate sensitivity. So if you believe we're eventually going to have higher inflation, you can suffer there, and you tend to be more value oriented. As we know, there can be very long periods of time where value can underperform.
Peter Mallouk: (15:52)
So there can be some unintended consequences in terms of correlation with the market and everything else but for someone who wants income, they're very, very focused on income, if that's your overriding factor, then I like them.
Anthony Scaramucci: (16:06)
Makes sense to me. Active management, underperforming passive management, I ask everybody this question because I'm trying to figure it out myself. I don't honestly have the answer, but man, over the last 10, 12 years passive management has by far beaten active management. Is that a permanent thing now or is that going to be re litigated post COVID-19? What's your view?
Peter Mallouk: (16:31)
I think since, 1980, passive has beaten active most of the time for longer periods of time, but usually by a narrow margin. What I think is an anomaly that's happened in the last five to 10 years is these five or 10 very large, big tech companies that are in the S&P 500, the Microsoft, Google, Facebook, Amazon, we know what they are. They make up almost a fourth of the S&P 500. So that's 500 a day is about 505 companies, five of them are a fourth of it, the other 500 are three fourths of it.
Peter Mallouk: (17:07)
Those five have outperformed dramatically all the other stocks, lifting up the index. So passive management looks like it's not beating active. It looks like it's destroying active, but it's really not. If you take those few stocks out, it's just beating it by a little bit like it always does. So to me where you're going to see the story change and I think active will be oversold is whenever these five stocks underperform for whatever reason.
Peter Mallouk: (17:34)
They just simply can't become, instead of one and a half trillion dollar companies, let's say they can't become $10 trillion companies, they can't continue to grow at 35% a year. Eventually something will happen whether it's regulatory or market forces or whatever. When those stall or slow down or God forbid, go down, everyone's going to celebrate active and not only will they celebrate active, the passive people that own small caps will go back to celebrating small caps.
Peter Mallouk: (17:59)
Foreign investors will go back to celebrating foreign. This discrepancy between the international and US, large and small, active and passive, it's not really what it is. It's really a discrepancy between these five stocks and everything else and until those turn, then we'll see the narrative change.
Anthony Scaramucci: (18:15)
So let's talk about that perspective client again, because I think you have a fascinating read on all this. This prospective client walks in and says, okay, Peter, I get that there's a low yields. I get that there are five stocks driving the market, but I'm super worried about deficit spending. I'm super worried about the Federal Reserve's inducing markets the way it is. Should I be worried about all that? Should I be worried about $25 trillion of deficit spending at the US level? Likely a $3 trillion deficit next year as well. Is this stuff I need to be worried about or do deficits not matter and life just goes on for me and my family. What do you say?
Peter Mallouk: (19:00)
So what's interesting, I read a quote when I was a teenager and I was fascinated by it. I had written it down in a notepad I had at school. I can't even Google my way to who said this, but it was someone in Russia and it was in the 1900s. They said, we're not going to have to fire a bullet to take over the world because Great Britain is going to expand itself out of existence. Germany is going to militarize itself out of existence, and the United States is going to spend itself out of existence.
Peter Mallouk: (19:27)
What an amazing, two of those three things have happened now. It's not Russia that's there ready to take everything over. It's a much, I think, more worrisome, communist regime in China, but I think deficit spending is a real problem. Now, I think the Fed has gotten away with it and whoever the president has been has gotten away with it. They've gotten away with it first, because we had explosive growth because of the tech revolution that allowed us to carry this huge debt because just incredible innovation and growth.
Peter Mallouk: (19:57)
Now, we have these incredibly low rates. So yeah, the mortgage on the million dollar house has gone from 500,000 to a million but the mortgage on the house has gone from 6% to 0.6%. So that's a little easier to carry, but we're running out of bullets here, there's no way you can dance around it. The problem with our system is a democracy doesn't lend itself to fixing a problem like this. Because it's going to have to be fixed, really not by the Fed, but by president and Congress, all of whom don't want to control certain expenditures, because they would be voted out if they did it.
Peter Mallouk: (20:33)
So the way we solve things in democracy is we wait till there's a absolute crisis, then we do something because then all of the senators and congressmen and president can go back to their constituents and say, well, it's better than what the alternative was. Here it's too complex, it's too big to do something like that. I think this is a solvable problem. It's going to take some modicum of political courage that combines some common sense tax rates with social security reform and spending across the board that really makes both parties mad.
Peter Mallouk: (21:04)
All the way from Social Security to defense spending. It's actually remarkably doable. If you look at how easy it is to fix your Social Security, for example, it's almost crazy how easy it is to fix. You push up the retirement date a few years. When Social Security started, the expected date of death was the age Social Security started. Now when you get Social Security, you're expected to live 10, 20, 30 years longer. So just moving that data up a little bit, having it be taxed a little more on people like you and me, having the contribution rate go up just 2%. That's all you need to solve all social security.
Peter Mallouk: (21:40)
So we can solve all these problems. It's just going to take some combination of political courage. Neither party has that, or has shown that they can do that and even when you have one party want to raise taxes, they immediately allocate those dollars to new spending. You can look at Biden, he's saying if he wins, he wants to raise taxes a little bit, but he wants to allocate it to new spending. So no statement on the politics of that, but the money part of that, we're not solving any of that deficit problem.
Anthony Scaramucci: (22:08)
I'm very apolitical. I don't have a political opinion. I don't share my views with anybody. I appreciate you sending a statement of politics on that. Go ahead, John Darsie, go ahead.
John Darsie: (22:20)
I've been itching to get in here. I want to go back to Creative Planning for a little bit and operationally, what do you think has really driven your success and I want to use the pandemic as an example. I know that you've been somewhat outspoken about not taking PPP loans from the government and making pledges to your employees and sticking with your staff in a time of volatility. How do you think the way you operate your business translates to level of fiduciary care for your clients and how have you guys approached the pandemic, both internally from an operational perspective, and in terms of how you've communicated to clients? We talked a little bit before we went live about how your role as an advisor is sort of half psychologist, half money manager.
Peter Mallouk: (23:03)
I think in terms of like, if you look at a professional team or I went to KU, so let's say the Kansas Jayhawks basketball team. The way a team wins the game is most of it is recruiting. With sports, we acknowledge that. When the KU basketball team gets on the field to play Pitt State, the game is over before the tip. No one expects a different, it's not always over but it pretty much is. By having the most talented people.
Peter Mallouk: (23:30)
There's something about financial services in our space, where people just don't believe that. They feel like people are commodities, and you can swap people in and out. I don't believe that at all. To my core, I don't believe that. I think that's the big differentiator. So I feel like when our team is sitting with a client versus other firms' team, if we lose, we screwed something up, because we've got the better people in my mind. We've done everything we can to get those people.
Peter Mallouk: (23:55)
If you believe you have the better people, you want to do everything you can to keep them happy. So it was interesting in our space, when the coronavirus started, I didn't really think much of it. I just said, look, everyone's got their job. I don't care if this goes on for three years, we're not cutting pay for anybody, all the salaries are guaranteed. It was almost like, of course, this is what we're going to do.
Peter Mallouk: (24:19)
They're coming in, doing the right thing for the clients of the firm every day and I'm going to do the right thing for them. What it also does is it allows them to focus on the clients. They're not having to worry about other stuff. It allows them to focus on their clients. Now what wound up being nice is, to my knowledge, no other independent firm in the country, certainly of scale, made any kind of commitment to their clients like that.
Peter Mallouk: (24:41)
So I think it also gave me a chance to prove to our team, look, it's one thing for me to say to you, that I believe in you and I think you're great and I want to keep you here. It's a whole other thing for me to have an opportunity to prove it. I do the same thing with the clients going through the pandemic. When you go through things like this, and '08, '09 was another one of them. It's really an opportunity to show your clients, hey, I told you this is what we're going to do with your portfolio when the market's down and we're doing it.
Peter Mallouk: (25:09)
We told you that if there were financial opportunities available to you, we have a lot of restaurant owners as clients, a lot of people in the medical field, we help them figure out the CARES Act, we help them figure out the PPP loans, we did everything we could to be there for our clients. So I really viewed it as an opportunity to do those things. So for us from the very beginning to today, it's been offense, offense, offense, instead of just trying to hold the place together.
John Darsie: (25:35)
You started Creative Planning, obviously, as a businessman, you wanted to grow a business, but you started it really because it was the right thing to do and you were a pioneer in the space, as we mentioned in the open, but as of late, there's been a lot of investment capital that's flowed into the independent RIA world. There are some secular forces that are driving the flow of that capital. What about the independent RIA model do you think is so attractive? What are those forces driving the really rapid growth in the space?
Peter Mallouk: (26:03)
I think you have a couple different things, and again, in the private equity space, to your point, there's other forces happening that just make private equity a very strong space. More people are trying to access it, more institutions are moving money to it. They buy companies, they borrow money. So they benefit from lower interest rates. So you have a bunch of money going into private equity, it is easy for them to borrow very large amounts of money at low rates, which amplifies returns.
Peter Mallouk: (26:27)
So you have that in the background. So then they're going to buy businesses that are private, they want them to be of a decent size and they like to be where money is moving, where business is moving and money is moving from the brokerage world to the independent world. People are getting more sophisticated and they're going you know what, why am I going to pay this advisor to sell me a mutual fund or sell me an annuity or put me in their funds.
Peter Mallouk: (26:49)
So we're seeing market share move over to the independent world every year. We're also seeing it in the ultra fluid space happened now more than ever, where you have people worth 10 million, 25 million, 100 million, 500 million going to RIAs. Why were they not doing that five, 10 years ago? Because there weren't any big RIAs. Now there are a couple like Creative Planning that manage 50 billion and they feel comfortable coming over and going, look, I get that independence and I can get it with breadth and depth of services.
Peter Mallouk: (27:17)
So private equity is looking at this space and saying, well, we've got the market moving in that direction. So the market force is moving in that direction and there's no signs it's going otherwise. It seems like there's five choices. It's the broker's world or the independent world, and the money's moving to the independent world. So they love to be in a growth oriented space, they intuitively understand wealth management.
Peter Mallouk: (27:39)
So I think that that combination of things has attracted people. The other thing I'd say that's happening that's going to change is there really hasn't been a spectacular failure in this space. So most private equity in this space is buyout equity, meaning they come buy the whole company or almost all of the company, and they really started doing this after the '08, '09 crisis. Well, the market's nothing but go up for the last 12 years.
Peter Mallouk: (28:01)
So everybody at every private equity firm that bought an RIA, an independent firm, they're just high fiving each other within the five years, like that's something amazing. The reality is I think if this coronavirus crisis had stayed at March levels for nine months, we would have seen several spectacular blow ups in the RIA space from over leveraged larger RIAs, 10 billion and up, and I think the math of the space might have changed and the attractiveness of it might have changed but of course with the Fed coming in and the coronavirus, the mortality rate not being 3% instead being 0.5 or lower, really changed the math on all of that and then the private equity is stronger than ever here.
John Darsie: (28:43)
So we talked about how equity markets are pretty fully value. They've rebounded very quickly from that March sell off. So as you look at portfolio construction for clients, has the pandemic changed the way you think about the long term portfolio construction and also what do you view as the role of alternative investments? We talked about the rotation that happens cyclically between passive and active management. As you're building client portfolios, how do you look at alternatives like hedge funds, and other active products to diversify a portfolio?
Peter Mallouk: (29:14)
So in the public markets, we definitely favor passive investments. In the bond markets, a lot of our clients are individual bonds. Summer funds, summer ETFs. We are very big advocates of alternative investments. We lean very heavily towards private equity, private lending, private real estate. I think 60-40, we had sent an email out to our firm and had a call around that being dead over five years ago, when rates had dropped and now we're talking about 70-30 is dead. You just can't get the return a lot of people are trying to get when bond yields are between 0.6 and two and a half percent and where you're taking some serious risk to go beyond that.
Peter Mallouk: (29:51)
So I think what we're seeing at Creative Planning is we're seeing a strong commitment to the passive space, even though I think it's dramatically skewed by the Big Five, big tech companies. We continue to stay global, there will be a rotation back to international. We continue to stay invested in large and small, there's 100% of the time been a rotation back to small. I think that will eventually happen. I certainly don't know when and wish I did.
Peter Mallouk: (30:14)
Those things we're still committed to. We still believe in bonds. If you have to have money in the next five years, the reality is, if you have to have the money the next five years, we don't want to be reaching for yield, but we're more committed to alternatives than ever as we try to fill that gap in the portfolio to not have everything be so correlated, try to get returns from different places.
John Darsie: (30:32)
We have an audience follow up question regarding your earlier comments about private equity, how you have an expectation there will be some level of a washout in primary private equity. Do you think that, are you opportunistic in a way that you would try to find value in a secondary PE type of strategy?
Peter Mallouk: (30:49)
No. So I think for us, we've got a six to 10 key relationships with kind of the names everybody's heard of. We're committed to just working with them, reviewing there's, and I think we try not to get too spread out in terms of what we're looking for, although I do think that that viewer is onto something, that we're going to see more of a secondary market emerge and a lot more activity happening there. It's going to be interesting when this illiquid investment becomes more and more illiquid as that market emerges. I think that's an inevitability.
John Darsie: (31:22)
At SkyBridge, we've looked at a few opportunities. There's some funds out there that are sort of funds of closed end funds. You have a lot of closed end funds that are trading at significant discounts, given the turmoil in markets, and there's an opportunity to invest in that mismatch of underlying assets to market value. So why don't we talk about the fiduciary rule for a little while.
John Darsie: (31:44)
Again, you started Creative Planning and removed those conflicts of interest because you thought it was the right thing to do and you thought the business model was the best way to align the interests of the client and with the firm. There was a fiduciary rule under the Obama administration that ended up petering out and there's been no move to resurrected in the Trump administration.
John Darsie: (32:04)
In a Biden administration, if he wins the election in November, do you expect to see a revival of that conversation around standards of care and how do you think that would affect the industry and the acceleration of trends toward independence that we're already seeing?
Peter Mallouk: (32:19)
I do think it will come back if there's a Biden administration, but I also think, unless we just get a very clear global standard, it really won't do anything to change the industry. All these little changes do is confuse people. Everyone's got to be a fiduciary on an IRA, but not on another investment or on the certain products, but not other products. Sometimes you can be a fiduciary and sometimes you can't. The rules in this country are so unbelievably stupid that how is the consumer supposed to navigate it?
Peter Mallouk: (32:50)
I mean, our highest net worth clients don't understand it, because nobody can understand how stupid the rules are. So unless they change the rule and say every financial advisor is a fiduciary with investments all the time, it's not going to do anything to clear up the space.
John Darsie: (33:06)
Do you have an expectation of that might happen in the next five to 10 years or you're not holding your breath and you're just worried about what you're doing over there in-
Peter Mallouk: (33:16)
I'm not holding my breath. I think the financial services industry is an extremely powerful industry and you just imagine if these big private banks, these big brokerage houses, if everyone that went to work at their office had to act in the best interest of their client every day, 80% of the funds would be gone. They just wouldn't be able to sell them anymore. So no, I don't think it's going away anytime soon.
John Darsie: (33:39)
In terms of the makeup of the wealth management industry, you talked about the benefit of scale and the depth of expertise that exists at a large RIA like a Creative Planning. The industry was a little bit separated and there's been some consolidation among independent RIAs to create entities like Creative Planning where you have that at scale and expertise. Do you expect to see as you see a continued exodus from the wirehouse world, do you expect to see sort of new wirehouse type models emerge that just have fewer conflicts or how do you expect that evolution to take place in the wealth management world over the next five to 10 years?
Peter Mallouk: (34:18)
I think we're in the very early stages here. So you hear me talk about Creative Planning being large. At 50 billion, we're large in the independent space but compare it to custodians. Fidelity is 8 trillion and Schwab is 5 trillion, or compare it to the private banks. JP Morgan is five plus to 10 trillion in assets or the brokerage houses like Morgan and Merrill, trillions and trillions of dollars. When we say Creative is a rounding error, it actually is a rounding error.
Peter Mallouk: (34:45)
It's totally negligible in the wealth management space. The market share is probably one 1,000th of 1%. In the independent world we're big. To your point, the independent world. What you're seeing is you're seeing these firms, larger constructed by PE investors, where you have a firm that had 5 billion or maybe 2 billion, and then they bought 10 billion of other firms. So I call these firms Franken firms, where they might share a brand but it's not one culture.
Peter Mallouk: (35:15)
It's not one offering and it's just Morgan Stanley all over again. You go to the Chicago office and the guy's trading options, you go to the Dallas office, and maybe he's a passive guy and in New Jersey, they're the active guys. It's not one voice. It's not one philosophy. It's really just financial engineering, putting a bunch of firms together, buying them at a multiple of earnings, putting debt on it, putting it together and saying I've got a $30 billion firm and selling it to the next person.
Peter Mallouk: (35:42)
Private equity will play that game and keep selling it to the next one and the next, the next one till somebody gets caught with the whole thing falling apart. That's what's going to happen, I believe, in the independent wealth management space. There are very, very few independent firms that are actually a firm, where they've got a philosophy an approach of doing things. I think they're going to survive that washout, but I think that's where this side of the space is heading.
John Darsie: (36:09)
The last question I want to ask you before I turn it back over to Anthony, and I'm hogging the spotlight as usual. So Anthony, I'm sure will give me a mean phone call after the SALT talk but about your philanthropic work. I know you do a ton of philanthropic work. Like I mentioned, you went to University of Kansas or Kansas University, not just for undergrad. You got your MBA and other graduate degrees there. You and your wife, Veronica are very active in the community. Talk about some of your philanthropic work and why that's so important to you.
Peter Mallouk: (36:37)
I think that basically, obviously, you can't take it with you and I've gotten to see my client, kind of the book ends of seeing my parents come from a very poor country and then also seeing our clients. What happens is they save, save, save pile up, pile up, pile up, and then they die. So the clients that I've learned a lot from are the ones that they enjoy giving while they're alive. If they want their kids to have something, they give it to them so they can see them enjoy it. If they are passionate about a charitable cause, they do the giving themselves so that they can enjoy it.
Peter Mallouk: (37:11)
It's interesting, because you see people pile up their money, and then they might put it in a foundation for their kids to give away and their kids either don't want to deal with it, or they have causes that are the opposite of what the parents had. So essentially, the parents spent their whole life saving up all this money to see the money spent on things that aren't tied to them.
Peter Mallouk: (37:28)
So for me, Veronica and I look at it like 99% of whatever we wind up with is just going right out to causes that we believe in and from the beginning, I think at Creative Planning and both Veronica and I personally have been focused on those less fortunate. So I believe in the capitalist system, I'm a very proud American. Democracy is better than all the alternatives. I think Churchill said, it's a terrible option until you compare it to all other options. I'm sure I butchered that quote.
Peter Mallouk: (38:01)
Look, everything's not fair. We were born on third when we were born into the households we were born in and we're not oblivious to that. At Creative Planning, we work with a lot of people that are very successful, some of whom got there completely on their own, some with a little help, some with a lot of help. So at creative planning, we've spent our time giving to the part of the people that are never probably going to be our clients.
Peter Mallouk: (38:25)
So I'm proud of the fact that a very large percentage of our workforce is involved in mentoring kids that we provide full ride four year scholarships to, mentoring them sometimes from grade school all the way through college, covering them for all four years. All of the annual events we've had at Creative going all the way back to the inception have been focused on the inner city from 2004 to today, whether it's delivering 1,000 Thanksgiving meals every year or building a place to distribute basic goods and services to kids and people that need them that aren't covered by food stamps.
Peter Mallouk: (39:01)
Things like soap and shampoo that is unbelievably not covered by food stamps. We've just been involved in causes like that at Creative Planning from the beginning, and that's never going to change. Obviously, the events of this year, I think, have highlighted to a lot of people a lot of these things, but we're just going to keep doing what we're doing and trying to make a difference when we can.
John Darsie: (39:24)
Well, congratulations on all your great philanthropic work and your success, building Creative Planning, and that really cohesive culture that you've created. I'm going to let Anthony hop back in if he has any final words before we let you go.
Anthony Scaramucci: (39:36)
We're going to wrap up in a sec but Peter, I have one last question for you and it's really about the psychology of money. Because we have brilliant people that lose all their money and then we have janitors that are able to save and they die with $8 million in the bank that they give out to charities and their family. So if you were going to give somebody some advice about the psychology of money, what would you say?
Peter Mallouk: (40:02)
I think very, very few people have a healthy relationship with money and there's a lot of research that shows that how we all deal with money has to do with how we grew up in our households. So some people feel like they're not worth something and they spend the money on things that make them feel like they've got a sense of worth. Some people grew up in households where there was a sense of scarcity. So when they get money, they want to leave it in cash and they want to hoard it and they want to protect it and they live in fear of losing it.
Peter Mallouk: (40:35)
Some people, it becomes this narcissistic scorekeeping type of measure. So I really think that most of us have a problem with money. So having somebody who's capable of earning it and investing it without screwing it up, making a mistake like going to cash in March, which a lot of people that were invested, according to Fidelity study did in March, having people who can invest it well, who can then leave something to charities or their kids or are comfortable giving money away, and also able to enjoy it themselves.
Peter Mallouk: (41:09)
A lot of people just can't spend money on themselves. That person's very rare, and that person is a very happy person. So to the extent, we can help at all impact our clients, save better not make an investing mistake, enjoy their money for themselves and others, that's the most rewarding part of the job is helping people take the money to match the goal. That's what Creative Planning is all about.
Peter Mallouk: (41:32)
Most money managers, they're trying to get alpha all the time and obviously, we want to perform for our clients but for us, the primary goal of performance is, you want X to happen, and we're going to do these things to make it happen. So anytime you can help somebody realize that, is a beautiful thing but to me money it's like alcohol. Whatever you were before you took the five drinks, it just became amplified. So, to the extent that you can know thyself, and make better decisions, you'd be a happier investor and a happier human being.
Anthony Scaramucci: (42:06)
Amen. All right. Well, Peter, fantastic to have you on SALT talks. We got to get you to one of our live events and congratulations on what you build and what you're about to build. I think that for Creative Planning, frankly, the best days for you guys are ahead because you're right at the intersection of everything that clients want. So we wish you great success and I hope to see you at a live event.
Peter Mallouk: (42:31)
I look forward to that.
Anthony Scaramucci: (42:32)
I'm enjoying the picture of your kids way more than the fake George Washington poster behind John Darsie.
John Darsie: (42:39)
You had to get the dig in before-
Anthony Scaramucci: (42:41)
I had to get that in there before we left. Well, God bless you, Peter.
Peter Mallouk: (42:43)
All right. Thank you, Anthony.
Anthony Scaramucci: (42:44)
Give it back to John.
John Darsie: (42:45)
Don't let him convince you it's fake. Come on. Peter, thanks so much for joining us and thank you everybody who tuned in to today's SALT talk with Peter Mallouk of Creative Planning.