Peter Mallouk: The Financial Advice Industry Is ‘Still Very Messy’

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Our guest on the podcast today is Peter Mallouk. Peter is the President and CEO of Creative Planning, an independent registered investment advisor with roughly $300 billion in combined assets under management and advisement. Peter has also written or co-written several books, including The 5 Mistakes Every Investor Makes and How to Avoid Them, The Path: Accelerating Your Journey to Financial Freedom with Tony Robbins, and his latest, Money, Simplified. Peter graduated from the University of Kansas with four majors, including degrees in business administration and economics. He went on to earn a law degree and a Master of Business Administration degree, also at the University of Kansas.

Background

Bio

Creative Planning

Pathway Financial Education

Books

Money, Simplified, by Peter Mallouk

The 5 Mistakes Every Investor Makes and How to Avoid Them: Getting Investing Right, by Peter Mallouk

The Path: Accelerating Your Journey to Financial Freedom, by Peter Mallouk, with Tony Robbins

Podcasts

Down the Middle, with Peter Mallouk and Jonathan Clements

Signal or Noise? with Charlie Bilello and Peter Mallouk

Creative Planning

“What to Expect in the Year Ahead,” by Peter Mallouk and Jonathan Clements, creativeplanning.com, Dec. 29, 2023.

“Creative Planning Closes on Acquisition of Goldman Sachs Personal Financial Management,” by Diana Britton, wealthmanagement.com, Nov. 3, 2023.

“Peter Mallouk: The No. 1 Thing to Look for in Investments Now,” by Dinah Wisenberg Brin, thinkadvisor.com, Feb. 27, 2023.

“Tax-Loss Harvesting: What It Is and Why It Matters,” by Taylor Harroun, creativeplanning.com, Oct. 4, 2023.

“The Media Has a Fiduciary Responsibility, But It’s Not to You,” by Peter Mallouk, creativeplanning.com, March 15, 2024.

Other

“How Financial Planners Actually Do Financial Planning (2023),” by Dan Inveen, Michael Kitces, and Meghaan Lurtz, kitces.com, 2023.

Transcript

(Please stay tuned for important disclosure information at the conclusion of this episode.)

Christine Benz: Hi, and welcome to The Long View. I’m Christine Benz, director of personal finance and retirement planning at Morningstar.

Amy Arnott: And I’m Amy Arnott, portfolio strategist for Morningstar Research Services.

Benz: Our guest on the podcast today is Peter Mallouk. Peter is the President and CEO of Creative Planning, an independent Registered Investment Advisor with roughly $300 billion in combined assets under management and advisement. Peter has also written or co-written several books, including The 5 Mistakes Every Investor Makes and How to Avoid Them, The Path: Accelerating Your Journey to Financial Freedom with Tony Robbins, and his latest, Money, Simplified. Peter graduated from the University of Kansas with four majors, including degrees in business administration and economics. He went on to earn a law degree and a Master of Business Administration degree, also at the University of Kansas.

Before we get started, we’d like to disclose that Morningstar has business relationships with Creative Planning and receives fees for the services it provides.

Peter, welcome to The Long View.

Peter Mallouk: Thanks for having me.

Benz: Well, thanks for being here. We’ve been looking forward to this. We wanted to spend a little bit of time on your biography because it’s interesting. And you’ve talked about your family’s story about how a stroke of luck brought your parents to the US in the late 1960s. Can you share that?

Mallouk: It does speak to the power of luck, at least in my story. My parents’ backgrounds—our families are Lebanese, Egyptian. They were in Egypt. My dad had graduated from medical school. All of his siblings had moved to Canada, France, and England. And my mom’s family was still in Egypt, and they had just gotten married. They were going to the Canadian Embassy because they were going to join my dad’s, a couple of his siblings in Canada. It closed before they got to the front of the line. They were walking home. And they passed the US Embassy, no line. My mom said, “Hey, we should go take a look at that.” And they went in, and they said, well, we’re really only bringing in teachers, engineers, and doctors. And my mom was a teacher. My dad was a doctor. Less than 30 days later, they were in the basement of somebody’s house in Kansas City that they did not know that was a friend of a friend of a friend of a friend. And the rest is history. Just the luck around that is insane to me.

Arnott: That’s an amazing story. You’ve also written about how you worked as a DJ in college, as one of your part-time jobs, and eventually opened up a chain of record stores. And I think you said the advent of Napster in 1999 was a rude awakening. And the way that file-sharing service upended the music business gave you some insight and hard wisdom about how business conditions can change so quickly. Can you talk a little bit more about that experience?

Mallouk: I stretched out college as long as I could. I had a great time while I was there and had a variety of jobs. But eventually, some friends and I opened a music store where you bought and sold CDs. Some of your listeners will still know what those were. And it actually did really well. And we just kept putting the money back in. We’d buy more and more CDs from customers and sell them. When we opened, we had like 50 and we got to like thousands of these. We were doing good volume. And instead of taking profits, we opened another location and another location, and another location. I bought out all my partners over the following three years; I had eight locations, took my first monthly check. I remember the check was $8,400. And I was like, wow, I’m never going to get a job. This is amazing.

Somebody comes into this store maybe a few days after I wrote that first check in one of the Kansas City locations in an area called Waldo. And so, I’m working behind the counter and the guy goes, have you heard of Napster? And I said, no. Well, it was 30 to 90 days later, sales were down 50%, 70%. In less than a year, seven of the eight stores had closed, wound up donating all the remaining inventory to a charity. It was the most incredible learning experience. Because you think you’re competing against other music stores, but you’re not. You’re competing against a technology that didn’t exist at the time, just kind of like Walmart and Kmart were competing with each other. And then Amazon shows up. Or all these various movie theater chains are competing with each other, then Netflix shows up. It just really was more valuable than any degree or any business class I took while I was at school. Definitely the best education. I’ve had a lot of businesses that I started and that went under while I was in high school and college, but that one was the epic lesson of all of them.

Benz: So just to follow up on the role of luck as you think about your career, the evolution of Creative Planning, can you talk about how you think about luck and how it’s influenced how things have worked out for you in the firm?

Mallouk: Well, I would just think about the way that we started. There was no business plan. There was no sitting around a room and thinking of things. I had just had the idea of, hey, people want to have things in one place. My dad and mom did not want to go to a lawyer and then an accountant and then a financial planner. My dad was a doctor. He just wanted to see patients and then preferably go see one person. And having observed the industry through my early years, I wanted to have a practice that did that. And so, I did that. But I didn’t think it was going to go anywhere. I just thought there’s some people want this, and I can give tax advice and legal advice and planning advice, so as a lawyer, and a CFP with tax background. And so, I said, let’s do this for people. And, it immediately took off. And on the investment side, we were using passive investments. But had I had that idea 10 years earlier, would it have gone anywhere? Maybe not. Does it help that from that time of when I really got going, the late ‘90s, early 2000s, to now the stock market is up 10 times? Does it help that I happen to be independent, and that the marketplace moved overwhelmingly favoring independents over that time period? There are just all of these things—that you could do all the right things. You can have great ideas. But there are a lot of things beyond your control that have to cooperate. And being alive at this time and in America is one of those things. But there’s about 10 other things that really had to break your way to not have it just be successful, but to be very successful.

Arnott: So that’s actually a good segue into our next series of questions, which focuses on Creative Planning’s growth and success over the years. I think I saw a number from an article a couple of weeks ago that said there’s about $245 billion in AUM. I don’t know if that’s still the right number?

Mallouk: I know this only because we were very excited about it internally. It’s a little over $300 billion today.

Arnott: Wow, OK. So as part of that growth, you’ve acquired about 30 firms over the past five years, which according to Citywire is the fifth highest number of acquisitions for any RIA over that period. So, what are some of the key things that you look for when you’re deciding whether to acquire another financial advisory firm?

Mallouk: For us, we were really looking for alignment. So, there’s a lot of motivations for firms to do acquisitions. And we want to be the best firm in the United States. That’s the objective of everyone that comes to work at Creative Planning is how do we make this the best place for a client of any firm? And we think to do that we have to have a broad, deep offering of services. We have to be able to offer best-in-class investments at best pricing, and we have to have an experienced credentialed team. And we have an approach that we follow. We’re planning-led, we customize portfolios, all of those things.

So, when we’re looking at acquisitions, we get a lot of looks. Sometimes in a year, 50 to 150 firms, we’ll get to see. And we really only want to do about one a quarter. And the reason is we really want to maintain the culture and the approach. And so, for us to acquire a firm, it has to check just so many boxes. So, I was doing a call this morning with a firm that we acquired in Texas that’s unannounced, and what made that such a great firm for us is they share a similar investment philosophy. They’re planning-led. They have a tax background. They’re credentialed. So, they’re checking all of these boxes. We really only want firms that are already doing generally what we’re doing, and they look at Creative Planning as an opportunity to say, hey, we’re planning-led, and we’ve got investment flexibility, but now we’re even bigger investment on planning implementation and even a greater investment offering. And so, we’re looking for places that want to go next level, not change who they are or what they’re doing. We don’t want to take an active manager and convince them to manage the way that we do, or a firm that’s interested in hedge funds to come to Creative where we don’t use hedge funds, or a firm that has proprietary products and wants to carry them over into Creative. We really want very, very aligned fits, and I think that’s why we have such a high success rate with our acquisitions.

Benz: You mentioned that it was a stroke of luck to be part of this very favorable trend toward independent Registered Investment Advisors, which seems like it’s a more high-touch, truly personal client relationship. I’m wondering if you can talk about this evolution away from the old wirehouse model and how clients might feel comfortable with a very large firm that Creative Planning has become, if maybe their original goal was to be with some smaller boutique and it’s morphed into this very, very large business.

Mallouk: I haven’t found that to be the case. And I don’t think we’re a large business. When I look at the marketplace, you’ll get the custodians, Schwab and Fidelity, the investment banks, Goldman and JPMorgan, the brokerage houses like Morgan and Merrill, and the insurance companies like Northwestern, MetLife. These are firms with tens of thousands or hundreds of thousands of people. We’re 2,400 people. So, we’re the size of the high school that’s just a few blocks from my office. It is not this overwhelming enterprise.

So, I think a client comes in and they meet their advisor, and they know the planner that works with the advisor very well, and then they know that immediate team. But they know that that team is plugged into cybersecurity that might be higher level, technology that might be higher level, maybe a better investment platform, maybe more experienced people down the hall that if there’s a question that can’t get answered, someone can answer it for them. So, I very much view it like if I were looking for a doctor, there might be a wonderful doctor—I’m in Kansas City— there might be a wonderful doctor at Rural Missouri or Kansas. But if I’ve got some serious needs, I would like a doctor to be plugged into an operation that’s maybe a little bigger than that local hospital.

So, I think that that’s our typical client is saying, look, I’m going to have a personal relationship with my advisor, but I want that advisor, what’s behind that advisor to be turbocharged. This is my life’s work, and I want to make sure that that advisor has got some real expertise and force behind them. I think Creative Planning brings that. I think when they look at Creative and they’re comparing us to Morgan and Merrill and JPMorgan and so on, we’re less than 1% of the size of these places. So, there’s still a very, very big gap in terms of the scale and number of people.

Arnott: One of your biggest acquisitions recently was the United Capital Business from Goldman Sachs, which had about 30 advisors and $30 billion in assets. So, what drew you to that firm or made you think it would be a good fit for Creative Planning?

Mallouk: Well, I think that was probably the only deal ever that happened quickly, like that quickly at Creative Planning. So, with our other 40 or so acquisitions, I’m going to meet the team, my team is meeting their team, they’re coming to our headquarters, we’re really getting into this in a very deep way. Goldman Sachs, they had a private deal with some other firm and that deal blew up and we got a call. We were one of three firms that got a call and we had to make a decision. Do we want to do this? If we want to do it, we have to do it quickly and we have to just assume certain things will work on the other side. And the decision was made that, hey, we’re in a position where we have the capacity, we have the leadership team, we have the economics to be able to move quickly here and have this be something that makes a lot of sense for us. And we were able to pull that off. I think that’s something we would not have been able to do three or four years ago, but at our scale and with the leadership we have in place, we were able to take that risk.

Benz: RIAs that have been active acquirers tend to land on a spectrum between ones that really centralize everything and those that let the acquired companies operate as before. If you had to plot your approach to these acquisitions on that spectrum, where would you say you land?

Mallouk: Well, I would say we’re a total integration shop. We’re one end of the extreme on this thing. When a firm joins Creative Planning, everyone here is doing planning for clients. It’s not optional. The name on the door is changing and the software that is used is changing and the trading technology is changing. We operate very, very integrated as one firm and it’s an integration that happens quickly. It happens largely in the first six to 12 months. It’s almost always completed at that point. So, we’re really for advisors that say, look, I really philosophically align with Creative Planning’s investment and planning approach, and that is why I’m calling Creative Planning, because that’s what’s going to happen in our model. There are plenty of great acquirers that don’t do any of that. Some you keep your brand, some you keep everything that you’re doing the way it was yesterday, some you only adopt the HR and compliance. So maybe you take another step. But I think we’re probably the most integrated major shop in the United States in terms of just really requiring everyone to utilize the same approach in terms of technology and CRM and the way we look at investments and planning.

Arnott: How do you balance that focus on total integration with allowing advisors from the acquired firm some degree of freedom to continue doing things that they liked that were maybe a little more creative or entrepreneurial or focusing on a certain type of client, things like that?

Mallouk: My main concern is making sure the client gets the absolute best advice possible. And then obviously you want the advisor to have the autonomy, you want to trust the advisor to give the client that advice. But I’m a very big believer that the process is what creates the certainty that you’re giving the best advice possible.

For example, I’ve got some clients that go to the Mayo Clinic to go through this physical protocol, and they do it every year. And they go through the same 12 things every year. It doesn’t matter what doctor they see; they’re going through the same 12 tests every year. Why? Because the Mayo Clinic and all of people that got together have determined if we have somebody go through all of these things exactly this way, then the doctor is going to be armed with the right information to articulate what the outcomes are, the path forward are. I believe that wholeheartedly.

So, we want to have a process that no matter where that client comes in the country, the client is going to experience that process. I don’t want a firm where hundreds of advisors are each using whatever software they want, or some are doing the plan if they want to, and some aren’t doing it if they don’t want to, and some want to use hedge funds and some don’t. I don’t think that creates the best outcome for the client.

Once the clients have gone through the process, then the advisor has the information they need to say, well, you should use taxable bonds, or you should use municipal bonds, or maybe you should use a bond fund, maybe you should use individual bonds. They have a lot of discretion around that—or maybe you should have no bonds at all. So, they’ve got the freedom to do those things. We’re not saying a client has to go on one of five things. There are tens of thousands of unique portfolios here because the advisors have so much discretion around all of that. But what we don’t want to do is have discretion around process. And I think that that’s where you really have failures for a client. You don’t get the best advice if everybody is following their own protocol.

Benz: You mentioned, Peter, that one of your motivations for starting the firm was that you wanted to be able to give clients a lot of different types of financial services under one umbrella, so tax planning, estate planning, and so forth. Can you talk about how that would work for a Creative Planning client? If I’m paying my advisor a percentage of my assets under management, how much, say, tax planning and estate planning advice would get bundled with that fee that I’m already paying and how much would be à la carte?

Mallouk: Well, the financial plan and financial-planning advice, tax advice, legal advice, trust funding, all of those things are going to be included for the clients. The client is going to pay a separate fee if they need us to create a buy-sell agreement or an irrevocable trust or if they want us to prepare their tax return or prepare a valuation for their business. So, if they’re doing those things, then there’s going to be a separate fee for those things. They know what that would be upfront.

Arnott: How about on the investment side? I think that your firm was very early to use index funds and ETFs, and I think that you’re also a fairly big owner of DFA funds. Can you talk about how you vet the investments that make it into your client portfolios? Do you have select lists that all of the advisors draw from?

Mallouk: It’s funny because I remember in 2008, we’d only been at it a few years, four years at that point, and our Vanguard rep reached out and said we were the largest holder of Vanguard ETFs in the country, I believe, and we were not that big. We were a very small firm. But I remember initial presentations or prospects explained what an ETF was. So we are, I would assume, still the largest holder of ETFs. I know we’re the largest holder of several of the small-cap DFA funds, too. On the equity side, we definitely more heavily lean passive than active. And so, the criteria for us is about liquidity and fees and so on. And we try to outperform on the private investment side where you might see private equity, private lending, things like that.

Benz: Can you talk about direct indexing, this idea of creating bespoke portfolios for clients and maybe benefiting from tax-loss harvesting especially?

Mallouk: Well, I think direct indexing is a great innovation. At first, I was not a fan because the fee gap between direct indexing and ETFs was so significant that the tax-loss harvesting couldn’t offset it. That’s very much changed now. So, as you were seeing the fees between ETFs and direct indexing get much more similar, you can’t ignore the tax alpha. And then you take it another step, a lot of clients can customize not just where in the world they want to be but the types of industries they want to be in. I found it to be an excellent development in the investment space.

Arnott: One interesting thing I read as I was preparing for this is that you believe in setting clients’ asset allocations based on their need rather than their age or risk tolerance. Can you talk a little bit more about why you use that approach and how it works?

Mallouk: Well, I remember one of my idols, Bogel, I remember reading his books and just agreeing with everything and then reading that he was even a believer using your age to figure allocation. I thought, wow, I just so disagree with that one thing. And I really think that the way you’re allocated should be based on what money do I need and when do I need it? And so, you could have two people with the exact same age, exact same risk tolerance, have very different allocations to bonds and stocks and everything else. To me, bonds are to cover what you need over the next certain however many years, depending on how aggressive or conservative you want to be—three years, five years, seven years, 10 years, whatever—that should be your bonds. But everything else should be invested in things that are probably going to do better over that time period. So, if you have money you don’t need for 15 years, no matter what your age or risk tolerance is, it probably shouldn’t be in bonds. It should be in something that’s probably going to do better over that period of time and keep you from other risks like inflation.

Benz: Drilling into bonds a little bit, can you talk about how you create bond portfolios for your clients? Are they typically getting bond funds or ETFs or portfolios of individual bonds?

Mallouk: This is an example where our advisors can do whatever they think is best for the clients. So, whether they’re taxable or not, will have to do with their situation, whether they’re a mutual fund and ETF or individual bonds, will have to do with what they’re bringing to the table and what the advisor thinks is best for them. And so, we’ve got different teams that do each of those.

Arnott: You’ve commented very favorably about trends in technology and how that can help people globally in terms of increased productivity and time savings, standard of living and so forth. But in terms of technology in financial services, would your firm ever offer a robo-advisor or use artificial intelligence?

Mallouk: Well, I suspect we’re going to be using artificial intelligence to do a lot of things here at Creative Planning. We’ve got an IT team that’s very enthusiastic and excited about it. I’m still waiting to see exactly how this is going to evolve. To me, this is like an inevitability and the question is just to what scope are we able to utilize it?

Benz: I wanted to ask about the evolution of the financial advice industry. On your website, you say, “The financial planning system was broken. Creative Planning set out to fix it by turning it completely on its side.” So maybe you can talk about what was broken in your view when you started the firm in the industry and whether you think that’s gotten better?

Mallouk: When I got going, a couple of things were unique. One was being passive instead of active at the time was maybe 1% of advisors. So that’s one direction we were in early. The other was including planning without a separate fee. Very few firms were doing planning and those that were doing it were charging a separate fee, day one, no fee for a plan. That’s become the norm. We were very early there. And then this idea of serving a couple of different needs of the clients in-house, this has become commonplace today. But again, all of these things were things we were doing more than 20 years ago. And so those were all things that were not done because we thought we were going to build this huge firm. They were done because we thought it was the right thing to do for the client. And it turns out people agreed. And that’s what really drove the success of Creative right from the beginning was being on the right side of all those issues.

Arnott: Are there things in the financial advice industry that still need to be fixed, in your opinion?

Mallouk: Well, I think that what’s the good news is that the independent world has gotten bigger. There are more firms that are capable of doing a lot of things without having their own products and all of those conflicts. I still think that if you have a firm that on your investments, you should not be getting commissions. We’re in a world now where that should be a thing of the past and yet still exists. I still think that an advisor and their product should be separated. Especially if you’re holding yourself out as a holistic advisor, where the client believes they’re getting independent advice. I get that there needs to be investment products. If you’re a firm and you’re in the investment product business, great, we have to have great investment products. But if you’re an advisor and then you’ve got these products that have different names, but you really own them, I just think that that’s still happening on a wide scale today. And I think that’s part of why the industry is still very messy.

Benz: We’ve seen steady reductions in investment expense ratios. We were just talking about the real huge trend toward exchange-traded funds. But we’ve seen less pressure on financial advisor fees according to research from Michael Kitces and other people. What do you think the explanation for that is?

Mallouk: It’s fascinating to me. In fact, I’m seeing the opposite. Two of our competitors so far this year have raised fees or minimums. And so, this space seems to be so far immune to all of that. I think what’s happened is the landscape has gotten so complex that there’s more and more people seeking out an advisor. And so, we’re still in a world where there are a lot of people that don’t have an advisor that are coming in and using advisors. You have a lot of advisors retiring. And so, I think that’s why you don’t see the compression here yet. I do think though there’s been some hidden compression. So, if you look at when we came in and we started to give all this other advice, some of our competitors who started to add other advice that might not have corresponding revenue. So, it’s eating at the margin. It’s just instead of lowering the fee, they’re having to add other services.

Arnott: In terms of that hidden compression, do you think that one of the issues is for an average investor, they may not be able to easily compare what they’re getting at a given financial advisor versus another advisor, and it’s very difficult for them to compare prices apples to apples?

Mallouk: Yeah, I think that’s very fair because it’s hard to figure out what are each of these investment costs and is there any revenue sharing within those investments, or are there hidden commissions or not hidden commissions within those investments? What’s the advisor’s fee? What am I getting for that fee? What’s included? What’s not? I do think it’s complex and I’m sure a fraction of the reason why you don’t see the compression.

Benz: In terms of regulatory reforms that have been proposed or things that haven’t been proposed, just in terms of making it easier for clients to select an advisor to feel comfort in the advisor that he or she has chosen, do you have any that you favor, any things that you’d like to see in terms of regulatory reforms for financial advice?

Mallouk: I think there’s a lot of stuff in the regulatory space that is not helpful to consumers that the regulators spend a lot of time on. And I think if the regulators want to clean up the space, you get around custody. Who’s holding the money? Let’s keep the Bernie Madoff things from happening, put a lot of energy into that and create separation from an investment product and the advisor and you’ll get rid of a huge majority of the conflicts. I think those are the biggest issues and that’s where most of the problems happen in this space.

Arnott: In terms of the process of meeting with clients, have you seen a big change in that since Covid? Are your advisors having a lot more virtual meetings now than they did a few years ago?

Mallouk: I prefer in-person, but a lot of our advisors do some of their meetings on Zoom and some in person. What’s happened is now every client knows how to use Zoom, right? Covid forced them to do that, to talk to their family and grandkids and so on. And so now we’re in a world where when they want to have that one review and they go, hey, look, I’m traveling and they tell the advisor, they just want to do Zoom. They’re capable of doing it. So, it’s definitely put a dent in the number of in-person meetings, but the majority of the meetings that happen are face-to-face.

Benz: We wanted to ask about your latest book. It’s called Money, Simplified and it covers a lot of important investment topics in a very, I think, clear and straightforward way. We wanted to start by talking about the current landscape and cash investments specifically. It seems at least anecdotally that it’s difficult to persuade people to step away from that 5% CD guaranteed rate of return and into, say, a bond fund or something like that. Can you talk about maybe what you’re hearing from the firm’s advisors about that problem, whether it’s hard getting clients to step into appropriately risky investments?

Mallouk: We are educating our clients all the time. And I think even when cash is at 4%, when you get done paying the income taxes and you look at that 2.5% rate of return relative to equities, which depending on who you want to believe can be 7% to 11% over various periods of time, and there’s no tax unless you sell, in which case it’s the lowest tax rate—this is a very, very big discrepancy. I think when it’s explained to clients, they understand it, especially when you explain inflation, which everybody understands, given what’s happened the last several years. So, to me, it’s just an education element. It doesn’t take a lot of education to really get somebody to a place where they see the benefits of not holding a lot of cash.

Arnott: You’ve written about some of the dangers of long-term bonds and not necessarily providing enough yield to compensate for the risk. But at the same time, I think you’ve been pretty bullish on bonds in general and the likelihood that the Fed will eventually end up cutting rates sometime this year. Can you talk a little bit more about your outlook there?

Mallouk: I think the Fed has to cut rates because of where the deficit is and a lot of other reasons. I think they’re going to struggle doing it as much as they originally indicated, which was three times this year they said they would do it. But I think given how hot the economy is, that might be difficult. So, I think that the outlook from here for bonds looks pretty good. We’re expecting rates to go down, but I’m not overall, over the long run, ever bullish on bonds. I’m bullish on stocks. I much prefer my clients to be owners than lenders. And I really view bonds, no matter where rates are, as a shorter-term investment. But I do think if you’re a bond investor, or for the part of the portfolio that’s in bonds, the next couple of years probably will have a better outcome than we’ve seen recently.

Benz: We wanted to ask about stocks. And in the book, this is a topic that you obviously delve into in great detail. The US large-cap equity market has performed really, really well, almost at the expense of everything else. But you have a graphic in the book that depicts the underperformance of US large caps from 2001 to 2010, the lost decade in US equities. Do you think we’ll see a similar pattern unfold in the years ahead? And I guess importantly, what would be the catalyst for it?

Mallouk: Well, I don’t know that. I certainly wouldn’t predict what’s going to happen in the United States at any given moment. But I do think we will see periods where various markets perform very, very poorly over a decade. I just don’t know where that’s going to be. So, we saw that period from 2000 to 2010 where large US stocks were in zero. There will be a period where emerging markets are in zero and bonds are in zero and large-cap international are in zero. This is the argument for diversification. So, to make that point in the book, my point isn’t like, hey, the US might not do well in the future. It’s no one knows which given market at any given time is going to outperform. Spread your eggs in a bunch of different baskets. You don’t get punished if you get Japan only. You don’t get punished if you’re in the US from 2000 to 2010. We’re trying to get you to your goals. And the way to get there, one of the ways, is to make sure we don’t blow up along the way. And earning zero for a long, long, long period of time is one way to not hit your goals. You can diversify your way out of most of that risk.

Arnott: We’re taping this toward the end of February when it seems like every other day the market is reaching a new all-time high. We’ve seen a lot of big market optimism about the earnings results from Nvidia, for example. Do you think that this enthusiasm on especially large-cap stocks in the US is overdone, or is it something that people shouldn’t worry about?

Mallouk: I don’t think it’s overdone because I think what we’re seeing here is—these companies have real earnings. Apple is by itself an economy that’s bigger than most nations. We could say the same about Microsoft. And Nvidia, whether it’s overbought or not, I don’t know. But it’s making a real product that’s really essential to this AI revolution we have now. So, I don’t look at this the way I look at bubbles. And if you look at the P/E ratio and a lot of different ways of looking at the markets, it’s on the higher end, but it’s not crazy. And so, while the US is overvalued relative to international stocks, emerging markets, and large US is overvalued relative to small, you can make a rational argument as to why. That outperformance won’t last forever, and it will eventually give way to these other asset classes. But I don’t see as having a fundamental problem with large US stocks.

Benz: We’ve been talking about how passive investments have enjoyed this tremendous surge in assets. And they recently overtook actively managed funds in terms of assets under management. But some critics have argued that the growth of passives is distorting the market. Do you have an opinion on that question?

Mallouk: Yeah, I do. I don’t think that’s correct at all. There’s enough money in active management to keep the markets relatively efficient. I think what we see with passive is in some down markets, the market appears to be more resilient than people think it should be. But I think we’ve had enough significant downturns to dispel that myth as well. I think as long as you’ve got a good portion of active managers, that’s enough to keep the market efficient.

Arnott: Another thing that you wrote about in the book is the importance of global diversification and the fact that markets can go through these long cycles where US stocks may be outperforming for a number of years, but then international stocks may do better for a number of years. But at the same time, we’ve seen correlations for international stocks, especially for developed markets, steadily increase. So, you’re not necessarily getting the kind of diversification benefit that you used to. Do you have an opinion about that? And do you still advocate that investors should have a significant portion of their portfolios in non-US stocks?

Mallouk: I still think we should have large stocks, small stocks, international stocks. But I do agree—well, it’s just a fact—that the correlation is more significant. I think a part of that is it’s become a global economy. If you’re Walmart, you’re getting a lot of your earnings overseas. If you’re Hershey’s, you’re getting a lot of your earnings overseas and you’re a US company. Nestlé is getting a lot of theirs outside of their country, and they’re an international company. And so, I think as we see these companies become global empires, where really the only tie they have to their country for the most part is the stock exchange. We’re going to see more and more correlation. And we’re seeing that as we see corrections in bear markets and bull markets. We’re seeing it become more and more a global economy. But it’s not exactly paralleled. And there can be pretty significant discrepancies for certain periods of time. And that’s to me why you’ll say diversified—no different than real estate and large stocks. They’re about 80% to 85% correlated. But you should still own a little bit of both to not have all your eggs in one basket, not have things to be perfectly correlated.

Benz: So, what do you think is a sane way to set someone’s non-US allocation, assuming that they’re based in the US? What’s a good benchmark for thinking about that?

Mallouk: To me, I don’t have a religion around this issue. If I’ve got a client that says I want to be all US, I’m good with that, because big US is still global. And if you want to be large-cap Euro Pacific, you’re largely global. And so, people feel high conviction around 20% international exposure to 50%, I don’t really feel very strongly about where that chip is laid. I think you’re going to get a very similar outcome across all of that. And the key to me is just to make sure that you’re diversified one way or another. I like to have more US than international, but that did not work out from 2000 to 2010, and it’s worked out from 2010 to now. But I don’t have conviction about how it works out going forward.

Arnott: I think you’ve been pretty optimistic about the prospects for emerging markets outside of China. Is that still your outlook?

Mallouk: Yeah, I still feel that way. I think you’ve got over a billion people coming out of poverty. I think you look at what’s happening in India and a lot of the emerging economies. I think there’s a lot of reasons to be optimistic. There’s a lot of instability. So, I think we would never get the same valuation level as the United States. But I think eventually will have its run. And when it does, I think it will be very, very rapid, much the way we saw it with small-cap US in the fourth quarter, where you just make up years and years and years of ground in a short period of time.

Benz: One thing that caught my eye in the book was this idea of what you call backyard bias. I think we all are aware of home-country bias, like overallocating to the US But can you talk about what backyard bias is and how people can try to avoid it?

Mallouk: Well, if you look at people who live in Sweden, they’re overallocated to Swedish stocks. People who live in Canada are overallocated to Canadian stocks and same with the US But it even gets more backyard than that. Like if you live in the South in the United States, they’re overweighted to energy stocks as a group. People who live on the West Coast are overweighted to tech. People who live in the Northeast are overweighted to financials. People who live in the North are overweighted to industrials. We tend to buy what’s in our backyard. And we wind up with a lot of excessive sector or industry risk because of it. People who live in Canada have way too much in energy and financial stocks because the biggest stocks are the bank stocks and the energy companies and commodity companies. So those become the big industry biases that show up in their portfolio. And we have the same thing here. We tend to buy what we see in our backyard. And that’s not the right way to make investment decisions.

Arnott: You have some graphics in the book depicting how private equity and private credit have outperformed. Your firm also acquired Lenox Wealth Management, which specializes in private equity. Is private equity and private debt something that you use with the majority of your clients over a certain asset level? And what kind of allocation do you think is appropriate?

Mallouk: I’m a big believer in private investments. And I think that it’s just no different than stocks and bonds, it’s just the private version of it. Private equity is the private version of the stock market, and private lending is the private version of the bond market. I think it again helps with a little bit more diversification. You’re entering a little bit of a different space. Things are structured differently. And for our clients that have $5 million and up, most of them tend to have some exposure to this space, but we have it available even to people that have a million and up of investable assets.

Benz: What would be the preferred avenue for those smaller clients, the ones who have $1 million and up in terms of the private markets? What would be the vehicle?

Mallouk: To me, the thing with $1 million and up is you really have to make sure they have the liquidity they need to meet their short-term needs. If we’ve got that covered—if we’re looking that there’s 8,700 private equity funds, or whatever the number is today, and however many private lending funds, we’re really trying to find what the premier players are and going and negotiating with them, those top 10 private equity firms, we believe to be the top 10, and negotiating and saying, we want access to certain funds, we want fee breaks for our clients and really trying to get our clients best in class across the board.

Arnott: How do you feel about liquid alternatives? Is that something that you use at your firm?

Mallouk: I want to say no, but we certainly don’t do it in a big way. There are probably some clients that have them, but for the most part, that’s not really our area. We tend to be more passive on the equity side and when it comes to private investments, we’re more focused on traditional private equity, private lending, private real estate, things like that.

Benz: You had a line in the book that caught my eye. You said that the media has a fiduciary responsibility and it’s not to you. I’m wondering if you can talk about what you mean by that and what are the implications for how investors should behave and also where they get information.

Mallouk: So, almost all major media are parts of a publicly traded conglomerate. And so, they have a fiduciary duty to maximize shareholder value. How do you maximize shareholder value if you’re in the media? Well, you have to have people buying your online subscription or your magazine or watching your TV show because you then, in turn, can sell ads. So, they make their money by selling ads and they get the ads by showing that there’s a certain number of eyeballs that are focused on them and they get that by creating attention and it’s just the way it is. So, if you turn on a financial broadcast, they’re not incentivized to calm you down or to make you focus on the long run. They really want to go minute by minute. They want to give you a reason to be paying attention all of the time so they can sell more ads and make more money for their shareholders who they have a fiduciary duty to.

So, I think it causes a misalignment. You have a very complicated space, as you were bringing up at the beginning, where how are investors supposed to even know how to compare? Then they go try to educate themselves, but we’re not incentivized—the media is not incentivized to educate. The media is incentivized to retain the eyeballs. So, you’re never going to read that article or watch that show or you’re rarely going to do it, where they say, hey, look, there’s nothing to worry about here. Just come back in a month or two or three and check in. But for the most part, if you’re focused on the long run, everything is going to be fine. That’s not the message you’re going to get. So, it’s very incongruent with trying to educate yourself.

Arnott: Another theme that comes out in the book is that there are so many trends that are headed in a positive direction. You’ve got global GDP growth, advances in technology and healthcare, a lot of people coming out of poverty globally, as you mentioned earlier. So, given those positive trends, why do you think that the prevailing mood, especially in the US, seems so pessimistic today?

Mallouk: Well, I think we’re getting news 24/7 via social media. We’re all attracted to reading things that are more negative than positive, negative things stick out in our heads 7 times more than positive things. When all of that’s so accessible, it’s very easy to get discouraged. Then our political system encourages this too. They really want to discourage you and that your party is the only one that can save you. So, I think, it’s misalignment combined with the 24/7 world that we live in today that’s just made it very difficult for people to see the forest for the trees and really go, well, look, I’m probably living in the best time that’s ever been to be alive and the innovation that’s happening and that will happen in healthcare and in my lifetime is probably beyond our imagination, and with artificial intelligence and everything else, probably beyond our imagination. Poverty, extreme poverty, as we know it, will probably be a thing no one will believe occurred at this point, probably in 30 or 40 years. I just think that there’s so many positive things that are happening if you take a step back, but we’re getting fed just nonstop. It doesn’t take a lot. We scroll through, we get that one thing that puts us in a bad mood, and it sticks with us for a bit.

Benz: You were referencing that you think consumers ought to be more savvy consumers of financial information, that they shouldn’t necessarily subsist on the junk food minute-by-minute news flow on the markets. So, I’m curious, what are your go-to sources in terms of staying current on what’s going on in the investment landscape, what’s going on in the financial advice space? What are your go-to things that you read or podcasts that you listen to or anything like that?

Mallouk: Most of what I do is I track 40 or 50 things on Twitter where I can scroll through, and I can see, I want to see what my clients are seeing and then I want to see the industry stuff. So, I’ll read what’s coming out of Goldman and JPMorgan and Schwab and Fidelity, but I’ll also go read all of the stuff that clients are seeing. I like the way it’s set up in Twitter for me where I can just in very quick time go through all 30 or 40 of these and in 15, 20 minutes, get a sense of everything that’s going on, and I really try to get the 360 view that way.

Arnott: So, I think you and your wife are involved in several different philanthropic initiatives. One of them is an organization called Pathway Financial Education. So, there’s obviously a lot of different organizations trying to improve financial knowledge and education, but I think the results of those efforts have been pretty mixed so far. What kind of approach is Pathway taking and what do you think really can work for financial education?

Mallouk: I don’t think Pathway is going to solve this problem. I think that the way the problem gets solved is really, really, really simple, which is that every high school in the United States dedicates one half of a credit hour to financial education. That would do more than anything that Pathway or any other financial education institute is going to be able to do.

But what we try to do here is put a small dent in the universe and basically say, hey, we’re going to do everything we can to make financial education accessible. And so, what Pathway does is it’s targeting three groups. One, it’s targeting teenagers that are trying to learn more about money, how to get off to a good start. It’s targeting people in socioeconomically challenged communities to teach them how to run their households better from a monetary perspective. And then third, to help business owners in those same communities think about all the things that you need to think about if you’re starting a business. And so, Creative Planning, we have lawyers, we have CPAs, we have planners, we have money managers. We said, hey, how can we make a difference? We said, well, these people are advising some of the most successful people in the United States. What if we take these same people and try to make a difference in this community? And that’s what that’s about. It’s having an impact here. But to really have a major, major impact, it’s going to have to be more built into our education system.

Benz: So, those attorneys and advisors and so forth, are they doing courses for people or are they meeting one on one with them or both?

Mallouk: So, we do in-person. We have a facility, and we go there, and we do it in-person. They also do it via Zoom and then some of it is mentoring. So, we’re really trying to meet them where they are and doing whatever we can to accomplish that.

Arnott: As your firm has grown, I’d imagine that you’re being pulled in a lot of different directions, and you have a lot of meetings and other tasks on your plate. Can you share any tips that you use to manage your time and maintain your focus?

Mallouk: I will say that my time has gotten a lot easier to manage things today than it was maybe five years ago as the firm has gotten bigger. There are so many amazing leaders here and the team is more experienced. So, there are so many things that get solved before they come to me that I just say it’s way easier than it used to be.

But when it comes to my schedule, I’m very focused on am I somehow working with or communicating to clients or my team? And if I am, then I consider it a good use of time. And so, it keeps me from doing a lot of things that aren’t really directed at that. I’m not against conferences, but a good example would be I’m not going to a bunch of conferences. So, I’m really trying to stay very, very intentional about my calendar. Does it involve my family and friends? Does it involve my clients or team? If it’s not in those categories, it’s got to really fight its way onto my calendar.

Benz: Well, Peter, we appreciate that we made it onto your calendar for this podcast. And we want to thank you for your time and sharing your insights today.

Mallouk: I have never had so many questions in such a short period of time. So, that was a lot of fun. Thanks for having me.

Arnott: Thanks again, Peter.

Benz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.

You can follow me on social media @Christine_Benz on X or at Christine Benz on LinkedIn.

Arnott: And at Amy Arnott on LinkedIn.

Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.

Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. While this guest may license or offer products and services of Morningstar and its affiliates, unless otherwise stated, he/she is not affiliated with Morningstar and its affiliates. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with the US Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis, or opinions, or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)