Creative Planning CEO Peter Mallouk knows his music. In fact, the chief of the $245 billion-dollar RIA was once the proud owner of not one, but eight music stores, after his college years at the University of Kansas. That all changed when the digital music revolution — led by the likes of Napster — threw the music industry into dire financial straits and changed the course of his career forever.

“It just happens so fast,” Mallouk said about digital disruption. Similar scenarios have played out in the mutual fund and brokerage industries in recent decades. “Once Schwab got down to zero [fees], you saw how quickly TD Ameritrade folded,” he told The Daily Upside. “It’s going to happen in the RIA industry.”

The wealth management industry is projected to top $2.92 trillion by the end of 2029, opening up massive opportunities for growth. It has also attracted the gaze of private-equity investors from all over the globe. The eventual winners will rely on the strategies put in place today, he said. “It’s just how capitalism works.”

Mallouk sat down for an interview with The Daily Upside on the sidelines of the Future Proof festival in Huntington Beach, California.

TDU: What’s the biggest challenge for advisors today?

PM: You see a lot of RIAs that think they’re doing well, but they’re not. The market has been on a 15-year bull run and just gone straight up. So you can have very few positive inflows — and actually, you aren’t doing very well in the marketplace in terms of winning over consumers — but your practice has gone up. You feel like you’re doing great. At the same time, those that have emerged as leaders in the space have become highly specialized and found a way to deliver more value to clients. What will happen is, when the markets normalize, there will be a mass slaughter. I mean, it’s going to be really bad, and it’s going to happen in a very short, multiyear period.

TDU: How is technology transforming our industry?

PM: The great thing about technology is it allows for scale. We can disseminate information quickly and that levels the playing field. People from all over the world have access to the same data and information that someone in a penthouse in Manhattan does. Those are wonderful things. But people that want to cause harm can also do it at scale, and we’re going to have to think about cyber crime and fake AI calls. There will be a lot of good, but there will be a lot of challenges, too.

TDU: What’s one thing no one is talking about?

PM: It’s really hard to get your brain around just how much money is sloshing around the system, and what deficit spending does to the economy. Inflation shows up in equity prices not linearly, but over time. Deficit spending is worse than it has ever been before the US, which means equity prices will be inflationary, too, over the long run. There’s no end in sight.

We will have a real bear market in here somewhere. We love to talk about COVID like it’s some miraculous thing. “Oh, we survived it; we were so amazing.” It lasted a couple of months. Sure, independent advisors have been around since the ‘70s, but for practical purposes, it’s been 20 years. And no one’s experienced a prolonged bear market. We just have not experienced that in the modern RIA era.

Nobody likes the government knocking on their firm’s door, peeking inside filing cabinets, and scanning computer servers. Sometimes the company’s stock price doesn’t care for it either.

By tracking smartphone geolocation data, researchers at multiple universities were able to link unannounced visits at corporate offices from the Securities and Exchange Commission to drops in share prices — even when no enforcement was handed down. The location data was linked to de-identified phones between 2019 and the first quarter of 2020. The researchers looked at devices that pinged regularly in SEC offices and then tracked the ones that would also ping in public company headquarters. Sneaky. Across the board, significant reductions in stock prices were seen after a visit, with three-month abnormal dips of between 1.4% and 1.94%, the report found.

There are a few possible reasons as to why SEC visits can lead to share price drops, such as firms using questionable accounting practices they correct only after an SEC visit, according to Marcus Painter, a professor at Saint Louis University and one of the report’s authors.

“There could also be news leaks of the visit, as sophisticated investors are skilled at uncovering information,” Painter told The Daily Upside. “Finally, employees of the firm may be distracted or burdened by the regulator visit, leading to operating underperformance that translates to market underperformance.”

Every Step You Take

Similar to getting randomly selected by airport security for additional screening, many SEC visits aren’t related to something bigger. The report found that 84% of visits occur at firms that were never under formal investigation. However, the visits can still put company executives and investors on edge. When regulators come to town, insiders tend to stop trading to avoid raising any red flags. 

• Insiders are 16% less likely to sell in the two weeks surrounding an SEC visit relative to periods with no visits, the report said. That percentage is even higher when the SEC enforces an action.
• But because the visits aren’t public, insiders may want to offload shares and avoid losses. When insiders do sell around visits, they avoid three-month abnormal losses of 4.9%, on average, the report said.

The business of wealthtech is booming. From robo-advisors and market analytics apps to tools used to speed up grunt work like summarizing financial documents, the industry is expected to reach a global market size of $9.43 billion by 2028 — nearly double from where it stood last year — according to a Research and Markets report.

Funding is pouring into the sector both in the US and abroad. One of the latest rounds came from wealth.com, which raised $30 million led by Google Ventures. The digital estate-planning service works with some 550 advisory firms, and said it will double its current headcount, which now stands at roughly 50 employees. “Advisory firms are all asking, ‘What else can we do?’” CEO Rafael Loureiro told The Daily Upside. “They’re all trying to create the family office experience.”

Wealthtech Around the World

The enthusiasm for wealthtech extends beyond those wanting to beef up their estate planning game. Nearly 9 in 10 investment firms are developing AI and cloud computing capabilities, according to a report from ThoughtLab, and it’s paying off. Forty-five percent of firms report lower costs, 41% higher shareholder value, and 40% increased revenue thanks to their advances in wealthtech and digital innovation, the report said. 

AI is top of mind. Last year, wealth.com launched Ester, an AI legal assistant that automates tedious and laborious tasks traditionally handled by financial analysts and in-house paralegals. “With AI you can read a document that used to take 30 hours being done by a paralegal in minutes,” Loureiro said. 

Where’s My Wealthtech? Money is pouring into wealthtech businesses across the globe:

• In July, the California-based Powder — a company that uses AI technology to quickly read, interpret, and organize brokerage documents — closed a $5 million round of seed funding, backed by 40 Silicon Valley investors. Also that month, New York’s Earned Wealth, a startup that provides financial and career advice for doctors, raised $200 million in funding, led by Summit Partners and Silversmith Capital Partners.

• Last week, India’s Centricity, a digital private wealth management platform, raised $20 million in seed funding, led by private equity firm Lightspeed. The investments brought Centricity’s valuation to $125 million, a sixfold increase from its $20 million pre-seed valuation in September 2022.

Though more in the retail investment sphere, Istanbul’s Midas raised an impressive $45 million in April, Turkey’s largest-ever Series A funding round for a fintech company. Midas, which hit profitability last year, said the new capital will help double the company’s headcount to more than 400 and roll out a host of new product lines including crypto trading, mutual funds, and savings accounts.