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After settling with the SEC for $250,000 over two compliance issues, Peter Mallouk explains what he quietly and painfully experienced as his RIA grew from $15 billion to $36 billion

The CEO of Creative Planning ran into trouble after a local radio host became a client and part of his advertising. The host/client then enthused about his wealth manager well past the SEC's testimonial tolerance

Monday, September 17, 2018 – 4:09 AM by Guest Columnist Peter Mallouk
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Peter Mallouk: When I reflect back on this journey, there will be one episode I will certainly not recall fondly.

Brooke's Note: During the past few years, we have written about the growth of Peter Mallouk's RIA, Creative Planning of Leawood, Kan., which has been off the charts. In 2016, it was at $15 billion. Today, $36 billion. See: Peter Mallouk has diamond as big as The Ritz, a flashy new Kansas City headquarters, complete with Silicon Valley perks; Now his new goal--top $40 billion in assets Unlike other growth stories, it did not depend on acquisitions but rather it grew through marketing, advertising and referrals. But the SEC objected to one particular advertising effort involving a local radio host and it resulted in a $200,000 fine. Another $50,000 was levied for a compliance issue involving family funds held under his RIA. Peter asked that he be the one to break the news of his settlement with the SEC to our readers, and we agreed after he assured us he'd put the hard details in his account in addition to sharing his experience as a cautionary tale for other RIAs.

From 2004 to present, I’ve had the privilege of running one of the largest RIAs in the country.  It’s been an incredible, amazing, and wholly gratifying journey. In many ways, it’s been a lot of fun, so much so, that I feel like I blink and another year has gone by.  This is an easy business to get the feeling you are making a difference, and I am confident the RIA model is the way to deliver the right kind of advice to clients.

I am also confident I am in the best of company when I show up at the office, and I find every day with my colleagues inspiring. I’ve got a long road ahead of me, and my firm, Creative Planning, has ambitious plans.  

One thing I am sure of though, is that when I reflect back on this journey, there will be one episode I will certainly not recall fondly.

Over the life of Creative Planning, we have been through multiple SEC audits, probably more than most given our rapid growth. Of course, this is completely normal. All RIAs are audited and nearly all have a variety of issues that come up. After our 2016 audit, we had a few issues that garnered more attention from the SEC.  We’ve learned a lot from this experience and want to share it with other RIAs so they may benefit from our lessons learned.

Our story begins after considerable time had passed from a routine audit. Months after we received and addressed our deficiency letter, one issue was escalated and a new one appeared.

The bigger issue, and one we are now much more sensitive to, related to advertising. See: Advertising practices that can raise the hackles of regulators Our firm and its affiliates have advertised on the radio in our home market for many years.  Our spots are largely pre-recorded. They have been reviewed by compliance consultants and compliance attorneys and even during regular SEC audits.  

'Live reads'

There have never been any issues. We also used “live reads.” A live read is an advertisement where the radio host discusses the subject live on the air. We had given the radio station explicit instructions to follow the content from our compliance approved pre-recorded spots.  In other words, if the recorded spot mentioned some of our services, then the live read could discuss the same services. See: Examiners may ask “Says who?” about your advertisements

In January 2016, one of the radio hosts called Creative, met one of our advisors and became a client.  So far, so good. But then shortly after that, during the live radio ads, the radio host added his own color commentary, outside of our talking points or pre-recorded ad references, having no idea he was violating any rules or guidelines.  The host said that he and his wife were really pleased with their wealth manager and expressed satisfaction with how much they got out of the process. Here are some examples of what the radio host said:

“Andrew, he’s our guy and he shepherds us through the whole thing.  He’s incredible.  I bet you will have the same experience, too.”

“They handle all of that for (wife’s name) and me…Andrew is our guy…He runs everything.  And he is doing all for us and it is really spectacular.  It is really worth a call to see what they can do for you.”

Along the way, the radio station asked us if we ever wanted to change the bullet points we had provided to them for the live reads, or if we wanted to change the content.  We always said no.

'We said, no'

The radio station never sent us recordings of the live reads, nor did we ever ask for them, and when they asked months later if we wanted to review them, we said no, assuming they were sticking with our pre-approved talking points. Big mistake.

In March 2017, the radio station, using copy points from us, created a new ad.  All of our copy points were compliant, and none asked that the station include a testimonial.  The radio host added his pleasure with his experience at Creative, and this advertisement aired for seven months before it was brought to our attention by the SEC. Some of the 250 or so ads airing over this period included the radio host’s personal opinion about his advisor.

Our own internal policies state that “[marketing] materials cannot refer, directly or indirectly, to a testimonial of any kind concerning [CPI], or any advice, analysis, report or other service it provides.  Testimonials are generally defined as any form of endorsement relating to the adviser’s services or performance.” This is in our policies, as testimonials, as most of us know, are prohibited in our industry.

Thankfully, the radio host apparently never mentioned performance or even brought up investments.  Regardless, the SEC cited this as a “nonscienter” violation (meaning the conduct was not intentional or reckless), calling it a testimonial that we should have been aware of and stopped.  

$200,000

This settlement amount for this was $200,000. For us, we are taking a straightforward solution to address this - no more live reads. It’s simply impossible to know what a radio host may say at any given time; it’s unreasonable to expect them to remember extensive guidelines and given they occur ongoing, it’s nearly impossible to oversee, with much of the monitoring needing to happen after the fact.  If you utilize any live reads as part of your marketing, it may be time to reconsider.

The other violation was a code of ethics and “books and records” issue. Our in-house policies state that our employees are to report their investment accounts to the chief compliance officer.  100% of my family’s accounts are invested in the same exact positions as our clients. Some of tmy accounts were not reported, resulting in this code of ethics and reporting issue which resulted in a $50,000 fine.

A big takeaway from all this is to not only follow rules and regulations, but to also follow your own written policies.  Having gone through this experience, we had our compliance team, in conjunction with our compliance consultants and compliance attorneys, carefully review our policies and procedures to ensure we have policies in place to comply with rules and regulations, and to avoid policies that don’t help serve that purpose.

It's hard to be perfect. The SEC audits every firm, eventually, and after every audit, they report violations back to the firm in a deficiency letter. According to the SEC’s own reports for 2017, 99% of annual examinations resulted in deficiency letters, or some other action.  Only 1% of audits resulted in no action. Issues that don’t harm any investor may not always be handled by a deficiency letter alone, and, as we learned, can amount to more.

In her May 11th address at the 50th Annual Rocky Mountain Securities Conference, Hester Peirce, the most recently appointed SEC Commissioner, stated: “We cannot bring an enforcement action every time we discover a violation, nor should we… Often, given the time and costs of enforcement investigations, it is easier for a private party just to settle than to litigate a matter.”  We did just that, settling the matter so that we could move on and focus 100% of our attention on our clients.  

As RIAs get larger, they can expect to have similar experiences, and let me tell you, the experience is horrible. It’s time consuming, expensive and distracting.  Through it all, I didn’t allow it to let me miss a kid’s event or hinder Creative’s dedication to its clients. It certainly didn’t hinder our growth either, as we hired more people and brought on more clients during this period than any other.  

Space in the mind

But, it definitely takes space in the mind. One major positive takeaway? After a vetting of epic proportions, we feel better about our approach to compliance than ever before. Clearly, we’ve learned what needs to be better. We also now know the parts of what we are doing that are in great shape as well.

As a regulated entity, we value good relations with our regulators and always strive to do the right thing. We are constantly looking for ways to improve.  We take every issue, no matter how small, very seriously. We want to be perfect, and we certainly weren’t here. We made it 35 years without any action, and would like to go the rest of time without dealing with another one.

We’ve invested more than ever in our policies and oversight, and changed the way we approach advertising.  Given our experience, we strongly encourage others to take a close look at their advertising, particularly in venues where there is not total control of what is said.

This version of the article corrects the version of the article that appeared yesterday. Mentions of "code of ethics" were added and the mention of a consultant whose involvement led to family assets not falling under the RIA compliance oversight was deleted.


Related Moves

The new 'Tony Robbins' book debut coincides with Ajay Gupta revealing plan to retire, which leaves Creative Planning to keep the referral spoils with Robbins down to a 'with' credit on the cover

Peter Mallouk's and Robbins' book, 'The Path: Accelerating Your Journey to Financial Freedom,' was released this week through a new publisher and word got out that 50 year-old Gupta was departing with little explanation

October 16, 2020 – 7:49 PM


Mentioned in this article:

Creative Planning
RIA Serving Other RIAs
Top Executive: Peter Mallouk, JD, MBA, CFP®




Jeff Spears

Jeff Spears

September 17, 2018 — 4:50 PM
Two items that all RIAs should takeaway from this article. 1.) According to the SEC’s own reports for 2017, 99% of annual examinations resulted in deficiency letters, or some other action. Only 1% of audits resulted in no action. 2.) As painful as the experience is, the SEC professionals are just doing their job and following their playbook. It's hard to not take it personally but it isn't personal.
Bubblicious

Bubblicious

September 17, 2018 — 5:23 PM
I have never understood these testimonial rules. Ameriprise can hire Tommy Lee Jones to do commercials but I can't hire a local athlete? Lawyers can hire Barry Sanders to pitch them but I can't? Testimonials allow consumers to learn a lot quickly about a business. Why exactly do we deny them this? You can't even use your friends' opinion of an advisor on social media to gauge the competency of an advisor. Why don't we change this?
Paul J

Paul J

September 18, 2018 — 11:34 AM
Only about 12% of audits go to enforcement, and essentially there are rules about unlicensed celebrities acting as defacto advisors.

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