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2017-06-22 14:16:03
A Kansas Investment Firm Spurring Change on Wall Street

LEAWOOD, Kan. — Tucked away in a sleepy office park in this Kansas City suburb, a $26 billion investment advisory firm is helping drive Wall Street’s latest wealth boom.

Inside, there are no televisions tuned to CNBC and there is hardly a Bloomberg terminal to be seen. There is a dentist on the top floor. The boss drives a Honda.

Yet the company, Creative Planning, is at the vanguard of a profound shift in finance: the move away from brokers and mutual fund companies peddling products for a fee, and toward firms offering truly independent, low-cost investment advice.

These firms, known as registered investment advisers, number about 30,000 and can manage as little as $1 million and as much as $70 billion. They now oversee about $4.5 trillion in assets.

That is about $1 trillion more than what hedge funds administer, and with no sign that this growth will diminish anytime soon, independent advisers — with their vast exposure to “sticky” retirement money throughout the country — have become crucial distribution channels for the biggest names in the industry, including BlackRock, Vanguard, Pimco and Goldman Sachs.

As the independent advice industry has grown, Creative Planning has grown faster, with assets exploding to $26.2 billion today from just $34 million in 2004. Peter Mallouk, an estate planning attorney who started the business with an eye toward servicing medical professionals in suburban Kansas City, now oversees a national fleet of wealth advisers in more than 30 states.

Although most Creative clients have their funds in broader stock and bond markets accessed largely via passive investment vehicles, the firm’s growth has attracted a who’s who of Wall Street firms, eager to pitch more complex, less liquid investment options.

Once a month, Creative’s Honda-driving founder, Mr. Mallouk, and 10 of his top executives gather in a conference room to hear pitches — in person and over the phone — from these investment shops.

Plain-spoken and dressed casually in polo shirts and chinos, they seem more like high school teachers than seasoned investment professionals.

“How would you explain the benefit of your fund to a 15-year-old?” one team member asked at a recent meeting, after a windy presentation from a big-name investment firm pushing a private-equity-style credit fund.

But don’t mistake anyone here for a rube. That investment house would slash its fees and its multimillion-dollar investment minimum to get on Creative’s approved list. That means, higher-net-worth Creative clients would have the opportunity to invest directly in the vehicle, alongside traditional private equity investors like pensions and sovereign wealth funds.

Mr. Mallouk, who led the meeting, was fresh off a plane, having just landed a $75 million account.

And he was urging his colleagues to be more flexible in allowing sophisticated clients to get maximum exposure to these types of elite, alternative investments.

“We have to be able to do what we do for all clients, which is give them our best advice but give them the power to adjust as they wish,” Mr. Mallouk said. “Otherwise they are going to kick my butt out the door.”

At a time in finance when a firm’s ability to gather assets in large amounts has become the ultimate emblem of sway and success (see fund leaders like Vanguard and BlackRock or the private equity giant Blackstone Group), Creative’s asset growth numbers border on the unfathomable.

That is doubly true because the growth has been largely organic. Unlike many other large registered investor advisers, Creative Planning has not expanded via acquisitions, or by luring away teams of brokers from the likes of Merrill Lynch or Morgan Stanley.

Instead, Mr. Mallouk has bet the ranch on a single principle: that as clients become ever more aware that the first priority of large brokerage firms is to direct investors to in-house investments, they will instead choose independent advisers like Creative Planning.

“I honestly think that if you are a financial consumer and you are dealing with a brokerage house, you are just out of your mind,” Mr. Mallouk said, his voice rising as it often does when he talks about investors’ right to receive conflict-free advice. “The problem in American finance is that if you go to a large broker, you are assuming he will act in your best interest — but by law he does not have to. ”

While it is true that much of Wall Street is moving toward the independent model of charging a flat fee tied to assets, Mr. Mallouk notes that many brokers at the big houses are still paid by commission, which is tied to their ability to sell proprietary investments to clients.

“It’s horrible — people don’t even know that they are paying someone to sell them something,” Mr. Mallouk said. “Here is the bottom line: Compensation drives behavior.”

At Creative, which has no in-house funds, there is no such temptation and the firm’s advisers are compensated not on what they sell, but on how their client assets grow and are retained.

Industry experts say that the fee independent advisers charge clients is, on average, about 1 percent of assets under management. That would include the central function of creating a financial plan for clients and other services as well, including tax, legal and estate planning advice.

Since 2005, the market share for independent financial advisers has increased to 23 percent from 13 percent, according to a recent report by Cerulli Associates, a financial research firm. The gains for registered investment advisers have been strongest in recent years, as a combination of steep fees and heightened investor scrutiny since the financial crisis has prompted a small exodus of funds from traditional brokerage houses.

Fueling Creative Planning’s own success are two critical developments that have been instrumental in driving the growth of independent advice.

One is the increasing popularity of low-cost, passive investing styles, exemplified by the emergence of exchange-traded funds, or E.T.F.s, which give independent advisers cheap and easy exposure to every imaginable investment preference.

At Creative, for example, planners rarely if ever buy individual securities or traditional mutual funds. Nor do they pay much attention to the daily ups and downs of the market: Mr. Mallouk’s ban on CNBC-spouting televisions is supposed to favor long-term sang-froid over shorter-term panic.

Accordingly, a basket of E.T.F.s, Mr. Mallouk believes, keeps his employees — and clients — from succumbing to the temptation to try to outsmart the market by taking big risks.

Creative Planning is now among the larger individual holders of Vanguard funds. And at BlackRock, Mr. Mallouk and his $26 billion pool of client assets loom large as a crucial distribution channel for the firm’s fleet of iShares E.T.F.s.

The second important development is the adoption of the so-called fiduciary rule, which obliges financial advisers of every stripe to put clients’ interests above their own. Despite speculation that the Trump administration might revoke this Obama-era proposal, the main elements of the law went into effect this month.

All of which is heady stuff for Mr. Mallouk, who is 47.

With 426 workers workers, Creative is hiring, on average, a new employee every day — each of whom Mr. Mallouk interviews. The company recently broke ground on new headquarters to house its expanding work force.

And about $400 million in new investor funds has been flowing into the firm each month.

Still, Mr. Mallouk likes to keep things simple. He has no secretary and he leaves the office most days at 5 p.m. to catch a son’s baseball or basketball game.

“We are building a rocket ship even though the rocket has already taken off,” said Mr. Mallouk, who believes it will not be long before an independent adviser reaches $100 billion in client assets.

The son of Egyptian immigrants, Mr. Mallouk grew up not far from where he works today, and he celebrates what he calls Creative’s “solid, not flashy” Kansan sensibility.

He runs the firm but still considers himself a customer man, even though he does not play golf and eschews client dinners, industry conferences and other schmooze-driven outings.

“You don’t call up your doctor and say, ‘Let’s go to dinner,’” Mr. Mallouk said. “I like where I sit — on the side of the client.”