Yie-Hsin Hung: So, Peter, welcome. Thank you so much for joining us today.
Peter Mallouk: Thanks for having me, good to see you.
Yie-Hsin Hung: So let's dive right in. As a financial advisory firm, it'd be really interesting to hear when and where you use ETFs and why you'd recommend using ETFs as compared to other investment vehicles.
Peter Mallouk: I think we were one of the first in the industry to really embrace ETFs in the 2000s, and I remember sitting with prospective clients and having to explain what an ETF actually was, and really helping people learn about the comparison of performance of active management versus passive management and why ETFs made sense. So, to look at the impact on the portfolios, if you look at the history over that time period to today, ETFs have beaten their peers very handily in those sets, and oftentimes beating 90 plus per cent of their actively managed peers. And so it really was way ahead of the curve. ETFs really solved a very big problem when it came to investing. And for us, that's been a very big part of our history. I think we're the largest holder of ETFs, I think of any independent wealth management firm in the United States, and I think our clients have really benefited because of it.
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text: The attributes of ETFs
Yie-Hsin Hung: So you clearly see a lot of value in ETFs, and I wanted to know, among the various attributes, there is access, transparency, low cost, tax efficiency, flexibility. Are there aspects that you value more than others, or does it depend on the situation?
Peter Mallouk: What we're really looking for for any given space, can we get that client the exposure they need, where they have a high probability of outperforming their alternatives, and getting that with transparency, the lowest cost possible, and liquidity. So we're a pretty big firm, so when we buy even a few percentage of a position across a certain group of clients, that can be a very substantive part of that ETF, so we're also looking for scale.
Yie-Hsin Hung: And I would imagine in many cases you're putting together model portfolios and a lot of these ETFs are building blocks.
Peter Mallouk: Yeah if you take the typical client, we basically look at their positions, we figure out what their tax basis is, what their goals are. There might be some positions that they just love. We hold those positions that have significant tax consequences to diversify. In many instances, we hold the positions that they're really married to in many instances and we work around them. And so ETFs allow us to pick and choose the parts of the portfolio that we want to complement or replace or supplement and really build something unique for that client. Very rarely do we take a client say ‘we're selling everything and going into these things’ and so we're able to use those ETFs like pieces of a puzzle to really round out what the client needs.
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text: The influence of ETFs
Yie-Hsin Hung: When you step back and you think about how have ETFs influenced or shaped the financial advisory industry?
Peter Mallouk: I think ETFs have changed everything. If you go back a couple of decades, everything was active management, it was security selection, market timing, who was the hot mutual fund manager. And the marketplace has really moved towards ‘how do I get outperform’ and there's a lot of evidence that the ETF will outperform their peers a lot. We're valuing transparency more than ever for all sorts of reasons and the ETFs provide total transparency. We see the benefit of being fully invested in the active manager, that hedge fund manager, that mutual fund manager has to have cash on hand that creates cash drag that the ETF doesn't have. We're so much more focused on fees than ever and the ETFs have lower fees and a lot of people have figured out that there are ways to tax manage portfolios and mutual funds which have their returns diluted by having the tax consequences factored in. ETFs [are] quite the opposite. Often, once we account for the tax savings that can come from tax managing a portfolio, the listed performance usually underestimates the actual performance of the ETF. And so it's really changed the way a lot of firms manage money for clients and clients have benefited enormously because of it.
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text: The use of ETFs in Creative Planning
Yie-Hsin Hung: And even with the advent of ETFs now, where other financial advisory firms are really using them, is there a way that's really different that your firm is using and thinking about them relative to other firms in this space?
Peter Mallouk: I think everybody's utilising ETFs differently. In the beginning, it was really simple. There's a broad exposure to this asset class and you buy them because you believe that passive beats active. Then we started to see the tactical use of ETFs where a lot of ETFs have covered a lot of spaces and advisors try to time industries or big cap or small cap or US or overseas. And now you're seeing actively managed ETFs where managers are actually actively trading active managed ETFs. So in many ways, ETFs have become like weapons of mass destruction, feeding into the things they used to compete against in the beginning. At Creative Planning, we're very focused on controlling costs, having transparency, getting broad market exposure and being very aggressive with the tax management of the portfolio. And even though ETFs have started to move in a direction where they're sliced and diced more, and some of them have a little bit higher fees, and they've got active management, those things don't really interest us and are not in alignment with our philosophy. So despite the evolution of the ETF world, we're very firmly anchored in how they originally originated.
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text: The next big thing in ETFs
Yie-Hsin Hung: All right, so I have one final question for you, Peter, and what is the next big thing in ETFs?
Peter Mallouk: I think the next big thing in ETFs is we're going to eventually see a contraction in the space. So I think that we've started to see more and more ETFs come out. There are thousands of them. We're seeing actively managed ones. We're seeing mutual funds see releases of ETF versions. But I think what we're going to find is that people value the liquidity. So bigger firms like Creative Planning, we need to be able to buy and sell a lot of these at a time. You're going to see a lot of the smaller players I think get squeezed out of the space because of that. A lot of the niche products are going to get squeezed out of the space because of that. And we're going to wind up with a healthy selection of ETFs controlled by a few big players that allow for a competitive environment to keep fees low. So I think we've kind of swung too far, and I think we're going to see it contract a little bit.
Yie-Hsin Hung: I happen to agree with you. Thank you so much. It's really been a pleasure speaking with you today, Peter, and I want to thank you for your time and for sharing your insights.
Peter Mallouk: Happy to do it, good to see you.
