Transcript: Brian Hamburger

 

 

The transcript from this week’s, MiB: Brian Hamburger, MarketCounsel, is below.

You can stream and download our full conversation, including any podcast extras, on iTunes, Spotify, Stitcher, Google, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.

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ANNOUNCER: This is “Masters in Business” with Barry Ritholtz on Bloomberg Radio.

BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, I have an extra special guest. Brian Hamburger has been one of the leading authorities in the world of registered investment advisories, broker-dealers, SEC regulatory compliance. He is the founder of MarketCounsel, which is one of the leading firms in that space, as well as the Hamburger Law Firm.

I know Brian for, I don’t know, a dozen years, maybe longer, but I’ve really gotten to know him over the past couple of years. Really there are a few people in the industry with a better perch on what’s going on, a better position to see the industry, which, depending on which survey you read, is anywhere between $38 trillion and $97 trillion.

He just knows everything about how to stand up an RIA, what’s happening in the worlds of mergers and acquisitions in this space, where the capital is flowing, how people change their employment in the industry, and how various groups get carved out or stood up or established on both the broker-dealer side and the registered investment advisory side.

He is highly sought after as a counsel in this space, and I’m glad we had the opportunity to finally sit down and talk about the industry. It’s a little inside baseball if you’re an RIA, if you’re an attorney working in the space, if you’re a broker-dealer, if you’re anybody within the financial services industry, or if you’re somebody just curious as to how all these things actually happen, I think you’re going to find this to be an absolutely fascinating conversation.

With no further ado, MarketCounsel’s Brian Hamburger.

BRIAN HAMBURGER, FOUNDER, PRESIDENT & CEO, MARKETCOUNSEL: Thanks, Barry. It’s so great to be here.

RITHOLTZ: It’s great to have you. Now, full disclosure, Ritholtz Wealth Management has been around a decade. A couple of years before we launched, we were exploring merging with somebody. We retained your firm. You guys did a nice job, and that was, I don’t know, 12 years ago?

I always feel more disclosures, better than less. As an attorney, I assume you wouldn’t disagree with that perspective.

HAMBURGER: I wouldn’t disagree. We also co-invested in an investment recently where we —

RITHOLTZ: That’s right.

HAMBURGER: — we participated in the same investment.

RITHOLTZ: I didn’t know if that closed yet. Has that closed?

HAMBURGER: That closed last week.

RITHOLTZ: So there you go. So now I have to disclose that also.

So, Brian is not a stranger to me, and we have some shared financial interests, but the reason I wanted to bring him in here is there are few people in the industry who have a better perch by which to look at the world of registered investment advisors, broker-dealers, all of the changes that are taking place in the space. And before we delve into that, let’s jump into your background.

You turned out to be the first dual economics financial management major at Quinnipiac. What led to the interest in finance?

HAMBURGER: Quite frankly, the interest in finance started when I was young. My father was an investment advisor, and he made his way to be an investment advisor from being a manager with a textile factory to selling insurance to find his way out of that business, went from insurance to financial planning, financial planning to the independent broker-dealer world, independent broker-dealer to hybrid IBD slash RIA.

RITHOLTZ: And so really, you’re saying he couldn’t keep a job, constantly looking for a new gig.

HAMBURGER: He made his way into this space, and I was captivated.

Keep in mind also that when I was going through school in the mid to late 90s, Wall Street was pretty appealing.

RITHOLTZ: It was banging. It was on fire.

HAMBURGER: Yes, pretty sexy. And so —

RITHOLTZ: So why law school? Why not go to University in Miami? Why not go for a business degree?

HAMBURGER: So, I did. I mean, at first, I got out of undergrad, and a degree in finance coming out of a small college at the time, Quinnipiac College, the gigs I was offered were essentially customer service jobs at mutual funds, call service, manning the phones, which I was no stranger to. I worked my way through high school and college on the phones, but was uninspired by that work. I didn’t see the real path ahead. I saw myself, if anything, maybe doing product wholesaling, getting involved in financial product structuring, but I didn’t really see a clear path. And my grandmother sat me down and she said, maximize the opportunity.

She said, you’re still in learning mode. You’re never going to go back to school. If you’re going to do it, go to law school.

RITHOLTZ: Really?

HAMBURGER: And actually, I’m going to tell you, she did something a little interesting. She was an investor. She loved stocks. She had her broker at Merrill Lynch, and she put in front of me a stack of annual reports. Remember these big glossy things —

RITHOLTZ: Sure.

HAMBURGER: — used to come out all the time?

RITHOLTZ: Right, right. With a little bit of information buried in the back, but the front was the narrative story —

HAMBURGER: Glorious.

RITHOLTZ: It was compelling.

HAMBURGER: Yes, and so —

RITHOLTZ: How could you not put money into this company?

HAMBURGER: Right, and so she puts these annual reports, and she said, I want you to look at the management and the board of directors, and I want you to tell me what they have in common.

So, we’re at dinner that night, and she said, did you look through them? I said, yes. I said, I’m good with my answer. I’m ready. She goes, what do they have in common? I said, they’re all white bald men. And she —

RITHOLTZ: And one day, I’ll be a white bald man.

HAMBURGER: And she said, that’s not what I wanted you to get out of it. But what she did —

RITHOLTZ: Grandma was tough. She wasn’t fooling around with you.

HAMBURGER: No, she wasn’t fooling around.

RITHOLTZ: She was looking for the answer “they all went to law school.”

HAMBURGER: They all went to law school, and they didn’t necessarily pursue a career purely in law. But her understanding of it is, they must know the rules of the game better than others.

RITHOLTZ: Right.

HAMBURGER: And so that really stuck with me. And I decided to go to law school.

RITHOLTZ: They know the rules of the road better than others. That’s really insightful.

HAMBURGER: Yes.

RITHOLTZ: What did grandma do that she had such market savvy back in the 90s?

HAMBURGER: So, my grandma, Nana Sophie, she lost her husband at a young age before I was born, and her husband ran an auto body shop. They were first generation immigrants. And when faced with the typical widow dilemma, she stepped in and said –

RITHOLTZ: I’m not going to sell (ph).

HAMBURGER: — I’m not going to sell. I’m going to run this business.

RITHOLTZ: OK.

HAMBURGER: And so, to this day, I continue to meet some old school mechanics who knew my grandmother when. And they said, man, she was a tough son of a —

RITHOLTZ: Really?

HAMBURGER: Yes, and it’s really —

RITHOLTZ: So, I’ve been having a hard time chasing down an old 911 Turbo, the charger. Can she — can grandma hook me up?

HAMBURGER: She’s unfortunately passed away for many years now. But I had some really good, strong women in my life. My other grandmother was another first-generation immigrant from Germany. And she took to selling beauty supplies on the side. And before you knew it, she was the number one salesperson for selling to professional salons in the whole country.

So, I learned a lot from these ladies.

RITHOLTZ: Really? That’s quite interesting. So, one of your grandmothers steers you towards law. When did you kind of realize, hey, I can make law and finance work well together, and one plus one is three?

HAMBURGER: Yes, so I don’t think there was that necessarily eureka moment. But I was definitely informed by my father’s study groups, you know, I knew his network of friends and colleagues. And I would constantly hear them frustrated by the compliance department.

RITHOLTZ: Right.

HAMBURGER: They were just blaming compliance for everything they couldn’t do.

RITHOLTZ: The Bureau of Business Prevention is how the retail brokers used to describe compliance.

HAMBURGER: I think many still do, right? They know that the answer is no, but they don’t know why, right? And they really don’t care to know why.

RITHOLTZ: Right.

HAMBURGER: And it just struck me that it can’t be all that complicated. And so, when I would look into why certain of their marketing materials would get declined or certain of their business requests or authorizations would get declined and I would share it with them, we would sit down and figure out a way around it, a way to deal with those issues. And they were really grateful. And I love solving things that other people think are unsolvable. I love —

RITHOLTZ: The puzzle.

HAMBURGER: Well, more than the puzzle, I love coming up with a solution when they can’t even formulate the question. Right?

So, it’s almost like pulling it out of them and asking what the problem is. And I’ve always been drawn to that. And so, to me, that really helped. And then early in law school, I had a professor, an adjunct professor, I think some of the best professors in college are adjunct professors.

RITHOLTZ: They’re working an actual career in the industry and teaching part-time.

HAMBURGER: Absolutely. And I was fortunate that this professor, Chuck Senatore, was, during the day, the head of enforcement in Miami’s SEC Enforcement Division. And so, I started to see, you know, what he’s done with his law school education. Chuck went on to be general counsel for a small firm like Fidelity Investments —

RITHOLTZ: Heard of them, heard of them.

HAMBURGER: — and him and I are still in touch to this day, but it’s people like that who take the education and really make it their own that really inspired me.

RITHOLTZ: So, let me throw a compliance question at you, because you’re making my —

HAMBURGER: You want free advice.

RITHOLTZ: No, no, no. I want to talk about the industry. So, I always assumed the reason compliance departments always said no was simple game theory. There’s zero upside for them saying yes. The best that can happen is nothing goes terribly wrong. The worst that can happen is there’s a big problem, and why did you approve this? So internally, there’s no incentive for them to do business until they stop so much business that some senior person has to come in and say, hey, you got to loosen the reins a little bit. You’re killing us.

HAMBURGER: You are very correct, and I’m not going to tell you that that often.

But the root of that is this big misnomer. It’s this word compliance that major firms have used because it’s a good catch-all. Right? Compliance at big firms is similar to saying, wait till your mother gets home, right, because they know that people are fearful of the regulators far more than their colleagues sitting at the cubicle right across the hall. And so, they call things compliance when really probably about 80 percent of the issues are risk mitigation issues, right? And so, as advisors look to leave these big enterprises and go independent, one of the biggest things we need to train them on is the distinction between compliance, legal, and risk.

RITHOLTZ: Compliance, legal, and risk. Those are three very, very distinct issues that sometimes get lumped together as a lazy way to say no.

HAMBURGER: Exactly.

RITHOLTZ: Really intriguing. So clearly you see the overlap between being an attorney, understanding the intricacies of securities law. I’m going to use a dirty word now. How did you come across the synergy of combining a law firm with a consultancy that specialized in compliance and regulatory supervision?

HAMBURGER: Has that become a dirty word now?

RITHOLTZ: In the M&A world, it’s the worst word you can use.

HAMBURGER: Really?

RITHOLTZ: Because it means we don’t really know why we’re slamming these two companies together other than the fees, the banking fees. So, let’s say there’s synergies here and we’ll all go out for beer. I mean that’s kind of how that word became a dirty word. It was a substitute for actually thinking about how do two disparate things, how do you get to that one plus one equals three?

HAMBURGER: So, we’ll just assume that that’s going to work out instead of doing the analysis. Got it.

So, yes —

RITHOLTZ: I mean, I don’t think that’s that far from the truth.

HAMBURGER: So, what I realized is that people were intimidated by law firms. My first job out of law school was at a mid-sized law firm out of Princeton, New Jersey, and I would have clients who wouldn’t call when an issue arose.

RITHOLTZ: They’re afraid of getting billed.

HAMBURGER: That was it. 100 percent that was it because I would ask them after the fact and they would say, you know, honestly, I didn’t want to run the clock. That would have cost you $50 and we would have been done with this.

RITHOLTZ: You know, I didn’t want to tell you what you guys hit me for every time I made a phone call. I thought it was, no, you guys were pretty fair so I can —

HAMBURGER: So —

RITHOLTZ: But that is a legitimate concern, especially for a small firm that has a modest budget for legal.

HAMBURGER: Absolutely. Yes.

So, in my mind, we had to do something to democratize regulatory compliance without diminishing the quality of work. Because when I started MarketCounsel and the Hamburger Law Firm back in 2000, the only firms that were doing regulatory compliance work were registration services and service bureaus. Right? It was a very much next available operator, former regulators were the best you would get. And a lot of the answers were, well, this is what we do, right? This is our practice. This is what other firms do.

And they couldn’t go back to the source. They couldn’t go back to the root. They couldn’t rationalize why things were being done that way. And so, I wanted to be able to bring a higher degree of quality to regulatory compliance. At the same time, I didn’t want to walk away from the things that we need to be lawyers to do, right? And so, there are certain things. There are drafting of contracts, negotiating deals, representing someone’s interests, right? Actually, working on their behalf.

RITHOLTZ: Right.

HAMBURGER: Dealing with some complex issues where we’re going beyond the rules and regulations. All of those have to be done by an attorney. And so, I didn’t want to skirt that or circumvent that. And so, we set up two distinct firms.

RITHOLTZ: So how many companies — and I’m actually literally researching as we speak — how many companies do what MarketCounsel does, or some partial approximation?

HAMBURGER: So, I don’t think there’s anyone that has the breadth of services that we do. Other firms have launched in the past as affiliates or related companies to law firms. But they’ve either sold off the compliance business, so they’re no longer affiliated, or they really do — they do completely different work. It’s really just a referral relationship.

With us, the law firm is basically a customer of MarketCounsel for a lot of our startup work.

RITHOLTZ: So, when you say startup, it’s a new firm that’s stepping out to launch a new company, and they need to go through the whole SEC registration process, unless they’re small enough, in which case it’s whatever states they’re operating in. They need to set up their policies and procedures. It’s just all those initial painful, tedious, difficult things. I mean we’re only not even a decade out from launching ours. And I remember it was a pretty painful set of circumstances to get up and running.

HAMBURGER: Well, yes and no. Right? I mean so MarketCounsel consulting will work with firms on really understanding their scope of services, taking inventory over their conflicts of interest, drafting out fee schedules, investment strategy. A lot of it is disclosure-based, right? So, we’ll work on creating all the disclosures, obviously handling all of the registrations, the regulatory reporting that needs to be done, drafting a compliance manual, and installing an initial compliance program. All of that work is handled by MarketCounsel.

For most of the clients that come to us for startup work, right? And that program, we call it the RA incubator, right? Which is a really, I think describes, you know, what it does. But for almost all the clients that come to us, they’re not coming from a very pure place where they can just engage in that activity, right?

You know, for —

RITHOLTZ: Meaning they’re coming from a broker-dealer or another RIA, and that raises a question as to some of the technical legal employment issues around their exits.

HAMBURGER: So yes, there’s definitely issues with their employment and employment transition, right? What can and they can’t do while they are currently gainfully employed elsewhere, right? That captive employment restricts them often far more than they know, but they can’t engage in an outside business activity, right? They can’t engage in selling away. And the big one that they get hung up on is they can’t engage in a private securities transaction without getting the prior written consent of the firm. Now you may say, Barry, well, how is this a private securities transaction?

RITHOLTZ: Because they’re launching a new firm that’s SEC regulated.

HAMBURGER: It doesn’t even matter if it’s SEC regulated. The fact that they are, let’s say, in preparation for launching this new firm, they are acquiring 100 percent of the membership interest of an LLC or 100 percent of the stock of a corporation.

RITHOLTZ: So, can’t you disclose that at the last minute?

HAMBURGER: No, prior written consent of the firm you’re working for.

RITHOLTZ: I got you.

HAMBURGER: So, you can.

RITHOLTZ: That’s technical, isn’t it?

HAMBURGER: And it’s enforced, right? And so, you can decide that you want to sever your employment and then begin the startup work, but that’s not tenable —

RITHOLTZ: Right.

HAMBURGER: — for most people in this industry.

RITHOLTZ: — take six months and so how do you — that seems kind of an absurd set of rules that prevents people from leaving a firm if — or I guess you could always use a straw up man, you could use a third person to set this up and then, hey, I didn’t decide to leave until the day I resigned. And my wife did all the work. It’s on her. Does that work?

HAMBURGER: Unfortunately, no.

RITHOLTZ: Okay.

HAMBURGER: But there are strategies that we do deploy in order to make that work. And it doesn’t work for a whole variety of situations depending upon how restrictive their current employment situation is. But when you say, you know, that seems awfully restrictive, keep in mind these are rules written by a self-regulatory organization comprised of broker-dealers —

RITHOLTZ: Right.

HAMBURGER: — who are looking to create a moat.

RITHOLTZ: So, you launch both Hamburger Law Firm and MarketCounsel in 2000. That’s some timing. Everything’s going to hell. The dot-com implosion is happening. The Nasdaq falls. I think it was 81 percent peak to trough. What was it like launching two firms into that mess?

HAMBURGER: I was dumb and young. Right? I mean —

RITHOLTZ: Well, that’s the time to be dumb when you have, you know, a recovery period.

HAMBURGER: Absolutely. You know, I had —

RITHOLTZ: And let’s talk exactly how dumb. You sold your house to fund this. Is that true?

HAMBURGER: I did. I did. And to this day, I’m grateful to my former wife for supporting that decision and actually coming up with the idea.

RITHOLTZ: It was her idea. You were both all in. Let’s sell the house and see what sticks against the wall.

HAMBURGER: So, I came up with this consulting concept and I pitched it to the firm’s partnership. And I said, I really think that we would be able to do a great job for our RIA clients, for our wealth management clients, by having this consulting firm, and they rejected the idea.

And I would come home from work and crack open a beer, sit on the back porch. And I don’t do that every day, but I did it coming out of work there. And I would punch the pillow in the morning. I was just —

RITHOLTZ: Why did they reject the idea? What was the explanation?

HAMBURGER: Law firms don’t do that, –no.

RITHOLTZ: Okay.

HAMBURGER: 22 years later —

RITHOLTZ: That’s true. They don’t.

HAMBURGER: 22 years later, we see that law firms now do that. They just didn’t do that in big numbers back then. And so, she said to me, she said, well, are you just going to keep doing this? And I said, well —

RITHOLTZ: Meaning punching the pillow?

HAMBURGER: Yes. Meaning punching the pillow. And I said, it’s probably my best option right now. And we looked at our situation. She was pregnant with our first child and we were expecting —

RITHOLTZ: That’s the time to quit your job and sell your house. That’s the perfect time for that.

HAMBURGER: So, she said, well, leave. And I said, how are we going to do that? We just bought this house. And she said, if not now, when?

RITHOLTZ: So not even like a second mortgage. Sell the house and use that to fund the new company.

HAMBURGER: We had to sell the house. We had to do a for sale by owner because if we sold it using a broker, we would have been way underwater. So, we literally printed up flyers, put them outside, put them all over town. We sold our house. We have — when I went to launch this firm, my daughter was six months old and my wife was pregnant with our second.

RITHOLTZ: Second. Right.

HAMBURGER: We had two large dogs. Lo and behold, no one wanted to rent to us. So, we ended up renting a log cabin on a vineyard in central New Jersey. I thought it was charming. My wife, not so much.

RITHOLTZ: Wait. There are vineyards in New Jersey?

HAMBURGER: There are vineyards in New Jersey.

RITHOLTZ: That’s the news flash here.

HAMBURGER: Yes, there are vineyards in New Jersey.

RITHOLTZ: I had no idea, I can’t recall —

HAMBURGER: Not many.

RITHOLTZ: I can’t recall my last New Jersey Beaujolais. When is that harvest?

HAMBURGER: It was a lovely place to live for a short period. And yes, we were all in. We literally sold the house to finance the business.

RITHOLTZ: Wow. That’s a crazy story.

HAMBURGER: Yes.

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RITHOLTZ: Prior to 2022, when rates were cheap, when rates were zero, when capital was plentiful, it seemed like the entire industry went through this wild merger frenzy. I thought 2022 would cool it off. I mean it seems to have slowed a bit, but it’s not like anybody threw a bucket of ice water. What’s going on in that space today?

HAMBURGER: Listen, I think it has slowed down, I think interest rates are going to be probably the biggest driver there because, as you know, the capital becomes more expensive. But what shocked me more than the slowdown — the slowdown actually makes sense. What shocked me more than the slowdown was the intoxication of capital, right? And the fervor in which these firms, private capital, has been chasing investment advisors.

RITHOLTZ: So, I have a theory as to why. I’m curious as to why you think that fervor was there.

HAMBURGER: You know, I think that there is a strong investment thesis as to why to acquire these firms, right? We joked around about synergies before.

RITHOLTZ: Right.

HAMBURGER: They talk about synergies. They talk about economies of scale. There’s this foregone belief where people just like to jump to the fact that there is some type of scalable client experience out there that’s really special. People don’t necessarily describe how to get there, but they just say, with more resources, we can build a better client experience. You could probably build better digital tools. You could probably build a better communications strategy. Probably insert some AI. You could do some sophisticated things, but I’m not quite sure it’s just quantitatively or qualitatively better, right?

Because how do you compete with the advisor who’s got a couple hundred million dollars, who knows the names of all their clients and all their kids, knows all their needs, goals, and objectives, is sitting down at the kitchen table with them every quarter. This is the career that we started in, right? I mean this was what it looked like. And so, I always ask, better from what perspective? You know, is it going to be better from the client perspective or better in terms of just more profitable business? And I don’t quite know the answer to that.

RITHOLTZ: So, let’s take that apart. So, there’s really two issues there. The first is all the private money flowing in. I always looked at the private capital rushing into the RIA space, especially with — so there are a couple of different types of firms. There’s a small firm that has a very nice little lifestyle practice, then there’s the medium firm that’s been a decent chunk of capital, but for forever. They’ve been around for 20 years. They’re almost a billion dollars in assets.

HAMBURGER: Those are pioneers.

RITHOLTZ: Right? They’re not growing. They’re not losing clients. They’re kind of holding steady. To private equity, which is a big source of the money that was flowing in here, hey, this is a bond with a 7 percent or an 8 percent coupon and, theoretically, a capital, you know, an equity kicker if they’re acquired down the road, so we’re getting 2 percent in the bond market, or at least they were before 2022, let’s get 7 percent, 8 percent, and maybe things work out and someone takes them out. That was at least some of the interest when things were zero.

HAMBURGER: It’s better than that, actually.

RITHOLTZ: Oh, really?

HAMBURGER: It’s — I think the private capital likens it to an equity indexed annuity, right? Where there’s no downside, because they put in a pick. They put in a preferred income —

RITHOLTZ: Right.

HAMBURGER: Clause that gives them the ability to get paid first.

RITHOLTZ: Right.

HAMBURGER: So, there’s no market downturn risk, or I should say very low market downturn risk.

RITHOLTZ: Right.

HAMBURGER: When the minority investor or the capital partner —

RITHOLTZ: They get paid first.

HAMBURGER: — is getting paid first, there’s a long way to go —

RITHOLTZ: Right.

HAMBURGER: — before that investment is affected.

So, I think they look at it as having insured upside potential with that ongoing annuity stream.

RITHOLTZ: Now, let’s talk a little bit about the roll-ups and the mergers and acquisitions that are going on.

There’s no doubt in my mind, as having run a firm that was $90 million in assets, the one that is coming where $3 and eventually $4, when the last deal closes, a billion dollars is a lot of assets.

HAMBURGER: Congratulations.

RITHOLTZ: Well, a lot of work still to go, but there are clearly economies of scale, and I give full credit to my partners for seeing this before I did, and, hey, we need to hire a CFO or promote someone and say, you know, you don’t want Barry doing payroll and Josh doing the health care plan, but that’s literally what was going on.

HAMBURGER: Sure.

RITHOLTZ: So, we promoted a CFO. Hey, we need a head of compliance.

Like, really? We’re not that big. You know what? Think of it as insurance. Okay. My best bet is — my best trait is I let smarter people than me convince me of things that I’m hesitant about.

HAMBURGER: It’s a good call.

RITHOLTZ: Hey, we need a head of HR because, you know, we need to hire people. We’re not hiring them fast enough. We need to make sure that nobody is saying or doing anything that doesn’t comply with the rules. We’re in 27 states. There’s a different rule in every state. And I’m not even talking about the crazy this will get you canceled stuff. I mean, just staying on the right side of regulatory and on and on. And so, yes, there’s no doubt scale helps, but it doesn’t help you with the client experience. It doesn’t help you with client acquisition. It doesn’t help you with your investment performance. All those things have to be right before you start scaling up, or at least that’s how I see the world.

HAMBURGER: See, I agree that scale helps, but what does scale help with? Scale helps with reducing the complexity that’s largely come from growth, right? So, it’s a drug, right? If you want to grow quickly, you need to capture that scale in order to combat the complexity that comes with that growth.

But for the advisor with a few hundred million of assets under management, they don’t need the scale. They’re running a profitable business as it is, right? They’re delivering outstanding service to their clients. If this is a lifestyle business, and I know that’s kind of a dirty word because people want to say, oh, I’m not in a lifestyle business, right? It’s okay. Where we always encourage people to do is start with their why. I know that sounds kind of corny.

RITHOLTZ: No, but it’s a fair question. Why do you want to grow if you’re running a nice business, you’re happy, your clients are happy?

HAMBURGER: If you’re happy, if your partner in life is happy with you, and you’ve got time to spend with the people you love, if your clients love what’s going on, if your employees are well cared for and they love working there, is growth an imperative? And if you read the trades, you would think everyone has to grow, right? You’re going to grow or you’re going to die, right? And —

RITHOLTZ: Well, there are literally roll up shops that have, I’ve sat in the, I never sit in the audience. I’m usually in the green room, but if I’m sitting in the audience and someone comes out and says, grow or die, we’re a roll up and if you’re not going to be part of the roll up strategy, you’re going to get steamrolled. How much of that is just self-interest talking?

HAMBURGER: My opinion is this is all self-interest, right? If someone, listen, you always start, I always start at the bottom of the article. I always look at the italicized print, right?

RITHOLTZ: Right.

HAMBURGER: Just like you started with the disclosures at the top of the show, right? Start with the italicized print. If I’m here from a roll up or an aggregator and I tell you, now’s the time for you to sell to me because prices are at all-time record highs, right? I got to like, you know —

RITHOLTZ: Why are they at all time —

HAMBURGER: — raise my eyebrows, say, well, why do you then want to buy my practice —

RITHOLTZ: At all time high?

HAMBURGER: If you believe that this is an all-time high, right?

So, to me, you know, the truth is, is in the action, not the words.

RITHOLTZ: Right. I can’t hear what you’re saying because what you’re doing is speaking so loudly.

HAMBURGER: You are so much more eloquent than I am.

RITHOLTZ: That’s not me. I stole that. That’s Longfellow or Wadsworth or somebody. I know I, I know I’m stealing that. My dad used to say that to me all the time.

HAMBURGER: It’s a great one.

RITHOLTZ: But really, it’s true.

HAMBURGER: Yes.

RITHOLTZ: Which raises the question, how big is that M&A market for RIAs? Nobody has, here’s the crazy thing. So, you take the like five biggest RIAs you can think of. They’re all 200 billion, Creative Planning, Edelman, Ken Fisher, they’re all giants. And I’m sure there’s a couple of more there, $200 billion is nothing in a 30, 40 by some measures $97 trillion space.

Is anyone ever going to have market share here?

HAMBURGER: So, you have a few questions.

RITHOLTZ: Two questions, yes.

HAMBURGER: You have two questions there. The first one is we’re in the early innings, right? Because even the giants of independent wealth management are small in comparison to the entire securities industry.

RITHOLTZ: Right.

HAMBURGER: Right? It’s not, it wouldn’t take much for one of these financial behemoths to become an aggregator themselves. And they’ve got far more financial might than any of these private capital providers out there.

RITHOLTZ: None have gone public yet, right? They’re all still mostly private. Is that right?

HAMBURGER: Well, I mean, you had focused financial, right? Go, you know, go public.

RITHOLTZ: And they’re clearly a roll up there. How big are they? They’re like 300 billion, 400 billion, 500 billion.

HAMBURGER: Yes, I think, but, but they’re, they’re actually going, they’re leaving the public markets and you know, it looks like they’re, you know, they’re heading back to, uh, to private. So that’s an interesting transaction, right? One of the few firms to make their way into the public markets is actually, you know, some would say retreating, you know, others would say, you know, recapitalizing within the, you know, the private markets.

But you know, they’re the ones that have made their way over, arguably other firms like NFP have gone public, but there’s not really a peer wealth management —

RITHOLTZ: NFP is what?

HAMBURGER: National Financial Partners, right?

RITHOLTZ: Okay.

HAMBURGER: More an insurance, focus. But I think we’re in the early innings. I really do. I think that that there is a whole world that you and I can’t even sit here and fathom knowing where we’ve come from to imagine what this is going to become in the next 10 or 20 years.

I really, I really think we’re in the early innings.

RITHOLTZ: Really? So, so let, let’s, that’s surprising because when we launched our firm in 2013, I felt like we were a decade past the real launch of registered investment advisories. We were on the right side of passive, we were on the right side of fiduciary. It felt like, all right, this is the future. And that’s why I was surprised the big shops hadn’t bought on yet. But you’re saying, and here it is almost a decade later, you’re saying this is the this is still early days. The transition from transactional non fiduciary business is going to continue to ramp.

HAMBURGER: I believe that’s the case. Yes. And then you said, you know, are there going to be dominant, you know, players in the space? And I don’t believe there ever will be.

RITHOLTZ: Really?

HAMBURGER: And the reason for that is because there’s such a low barrier to entry, right? Anyone you know, who takes a nice hot long shower, you know, has an idea, right? And most of those people have the wherewithal to pull off.

RITHOLTZ: I told you that in confidence.

HAMBURGER: Most people have the wherewithal to pull it off within the independent wealth management space, right? There’s not a high barrier to entry. There’s not significant licensing, you know, that that takes place. And with the help of an objective advisor, I mean, this is not a very complex endeavor.

RITHOLTZ: So, you mentioned Focus Financial. Let’s talk about the platforms like Focus, like Dynasty. Shirl Penney was a guest of the show a couple of years ago, has a fascinating personal story. I think they’re down in St. Petersburg or Tampa. These platforms have developed, Hightower is another one, that essentially exists to pull out these billion-dollar teams from big firms and have been doing so very successfully. What is that sort of transaction like and how challenging is it for you as the attorney to deal with, I mean, nobody at a big firm is happy when a billion and a half dollars walks out the door?

HAMBURGER: Well, the billion and a half walking out is happy, just to be clear.

RITHOLTZ: Nobody who’s left behind is happy.

HAMBURGER: So, I think the three examples you gave are three really different examples that probably satisfy a similar utility, a similar need or demand in the marketplace. When you look at firms like, you know, like Dynasty, right, they’re a single vendor platform provider, right? So, for that entrepreneur who doesn’t want to make so many of the decisions that naturally go with entrepreneurship, but they want all the features and the independence and autonomy of running their own business, right? Those firms are a great option for them, right?

Suddenly within the independent space, you know, going out and being independent doesn’t mean that you have to go it alone, right? Whereas there are other firms or joint opportunities where you’re not going to have the autonomy of running your own firm, you’re going to go and you’re going to join these firms, you’re going to be a “partner in the firm” or you’re going to, you know, run one of these satellite affiliates within the firm, but make no mistake about it, right? This is all about this concept of control, right?

And I think entrepreneurs really want to hone in on this. I think that’s going to be a theme over the next few years is control because we have so many minority investments happening within this space, but even with a minority investment, these minority investors are demanding control provisions, right?

Control is like the big tug of war that’s happening nowadays. And when you look at a firm like Charles’ firm at Dynasty, you see a firm that helps enable folks to run their own independent autonomous practice without having to give up that degree of control.

RITHOLTZ: I want to ask you about some of the deals you look at and review sometimes after the fact. One of the, you know, risks of being an attorney is people will always come up to you and ask you about a problem, and then two-thirds of the way through the conversation you find they already signed that document, oh, I’m sorry, but I can’t help you, you have a contract. How often do people come to you and say, hey, what can you tell me about this deal? And your answer is, oh, that’s a terrible deal. Don’t sign that. And they say, well, I already did a letter of intent, what do I do now? Is this a legitimate issue that happens time and again?

HAMBURGER: So, you asked me before about the different practice areas we have, and that happens all the time within our business transactions group.

RITHOLTZ: Really?

HAMBURGER: Where I spend my time is really in two primary areas in my practice. One is having that ongoing relationship with CEOs within this wealth management space and talking to them about their objectives and helping them navigate a path.

So, it doesn’t happen in those circumstances. The other part of where I spend my time is fixing problems, right?

RITHOLTZ: This is a problem. Someone says, hey, I signed this, what do I do?

HAMBURGER: This becomes a problem, right? And it’s actually, typically it’s like an LOI, right? So, it’s not a legally binding document, but it’s a goodwill problem, right? Because we work with so many other of these firms within the space, by the advisor signing that LOI, it’s really the equivalent of a handshake.

RITHOLTZ: Right.

HAMBURGER: Right? And if you’re going to be in business with this firm for the next few decades, at least, you don’t want to start off by your attorney calling saying, hey, I know they signed this, but what they really meant was that, right?

So, I can tell you, it limits the ability for us to meaningfully affect the deal. We of course can continue to negotiate around the fringes and help mitigate risk and optimize the transaction to fit a more ideal tax structure.

RITHOLTZ: Hey, the deal could always fall apart in legal. That happens, right?

HAMBURGER: It can. Yes, no, it can. And I mean, that’s the typical, right? Blame the attorneys.

RITHOLTZ: Right, right. Throw them right under the bus.

HAMBURGER: Yes, we get that all the time, and that’s fine.

RITHOLTZ: God damn Hamburger, it’s his fault. We had a handshake until Brian came along and saved me from myself.

HAMBURGER: Perfectly, perfectly fine. But usually, my job is to call up the CEO with the contra firm and to say, hey, I know you guys slipped one by the goalie on this one.

RITHOLTZ: Snuck it by.

HAMBURGER: Yes. I said, you know, and it’s almost always met, Barry, with —

RITHOLTZ: They laugh, they know.

HAMBURGER: It’s almost always met with, oh, we had no idea that you were working with them. Of course, it’s not a problem. So —

RITHOLTZ: That’s hilarious. Yes. Because I can’t tell you how often somebody will mention something and it’s like, oh, I’m a car guy. Hey, what do you think of this? Oh, you don’t want, I’ve learned not to say, you don’t want to buy that.

HAMBURGER: You don’t want to touch that.

RITHOLTZ: That’s a POS. It’ll cost you —

HAMBURGER: I bought it last week, right?

RITHOLTZ: And that’s always the answer. Oh, it was just delivered. Well, you know, send your mechanic a Christmas card because you’re going to be spending a lot of time with him. You know, I’ve learned not to stick my foot in my mouth after having done it a dozen times.

So, you can work with people to erase a bad LOI. What happens if someone comes to you and said, hey, I got a phone call. These people offered me a ton of money. All I had to do is sign this, assigning all my AUM to them. And they gave me 10 percent of the value of the firm and I’ll work out the rest. What do you do with that?

HAMBURGER: Listen, that doesn’t often happen. You know, what often happens is they come to us with this deal and my first call to them was, I didn’t even know you were in the market to sell.

RITHOLTZ: Right.

HAMBURGER: We — and by the way, the one firm that you’re talking to seems to have none of the qualities that were important to you when you left your firm five years ago.

RITHOLTZ: Right.

HAMBURGER: So, I’m a big fan of really understanding what the objectives are before we set out to do anything.

RITHOLTZ: It’s more than just dollars. There’s a lot of other factors that make a big difference. Because most advisors don’t think of the fact that they’re going to have to be employed by this firm afterwards.

RITHOLTZ: Right.

HAMBURGER: This is not a one-time transaction. I think the other big misnomer that’s out there is people are fueled by these headline numbers, right? They’re looking at these headlines. This firm just sold for 18x. This firm just sold for 20x.

And they don’t understand that deals are far more complicated than that. There’s a cash component. There are contingencies. There are retention components to any deal. And so, when we look at those headline numbers, we’re often looking at the total cost of ownership. Going back to your car model. What did the firm pay to successfully acquire and integrate this firm?

It’s not how much did the original owner or founder put in their pocket.

RITHOLTZ: Right.

HAMBURGER: And then they don’t look at the tax structure, right? And for many of these transactions, the tax structure is the one thing that can dictate the success or failure of these deals.

RITHOLTZ: Right.

HAMBURGER: Right? Because it can make a thin deal work really well if structured in the right way.

RITHOLTZ: Right, the LLC pass-through, especially if you’re New York or California-based, is a big advantage versus traditional C-corps or however else people are doing it in other states, I love hearing people say, we are absolutely not for sale. 20x? Really? Let me get back to you on that. It’s funny how money isn’t an issue until suddenly it becomes an issue.

HAMBURGER: It’s the old Robert Redford quote, right? Everything’s for sale.

RITHOLTZ: “Indecent Proposal.”

HAMBURGER: Very good.

RITHOLTZ: Demi Moore. I don’t remember who her husband was.

HAMBURGER: Woody Harrelson.

RITHOLTZ: That’s right. That’s right, Woody.

Let’s talk a little bit about some of the fun terminology here. Teams, new launches, carve-outs. What’s going on in those spaces?

HAMBURGER: So, you know, the interesting thing with teams, these are people who are typically employed by a brokerage firm. They have worked together for many, many years. They are under this false belief that they’re partners.

RITHOLTZ: Right. They’re co-employees. They’re co-workers.

HAMBURGER: Yes, they’re colleagues that are often seated next to one another. Often, they have some type of fee-sharing arrangement among them.

RITHOLTZ: Right.

HAMBURGER: But there’s this misnomer among them. They think they’re partners. And I’m not here to burst anyone’s bubble, but I force it out when we have some of our initial consults on the business startup. Because I’ll ask them, I’ll say, “Hey, Barry, do you know John’s time horizon until he wants to retire?”

RITHOLTZ: No clue.

HAMBURGER: No, no idea.

RITHOLTZ: In other words, until there’s a partnership agreement, nobody’s a partner.

HAMBURGER: No one’s really a partner.

RITHOLTZ: Right.

HAMBURGER: Right. And so, what we try to force them to do is really get to know one another.

Because within this team are a whole bunch of different dynamics, right?

Someone needs to come clean that they’re on the precipice of getting a divorce. Someone needs to come clean that their financial affairs are just in complete disarray, which when your colleagues in an office doesn’t really matter.

RITHOLTZ: Right.

HAMBURGER: But if that’s your business partner —

RITHOLTZ: Makes it a bit —

HAMBURGER: You damn well better know that they’re going to be declaring bankruptcy within the next few months.

RITHOLTZ: Right.

HAMBURGER: And so, these are the surprises we have to foresee —

RITHOLTZ: Does that legitimately happen?

HAMBURGER: It’s legitimately happening.

RITHOLTZ: People launch a business and there’s a, oh, I got this bankruptcy pending. But don’t worry, it won’t affect what we do.

HAMBURGER: What makes the hair go up on the back of my neck is when we get off, we’re about to close a call like that. And one of the people that are on the call will say, “Hey Brian, can you hang on the line for a minute?”

RITHOLTZ: Uh-oh.

HAMBURGER: I know what’s coming every single time. It’s a prior felony conviction that they haven’t disclosed.

RITHOLTZ: Oh, really?

HAMBURGER: Or some type of legal —

RITHOLTZ: Does it matter if it’s out of the United States? Like a felony in South America.

HAMBURGER: Asking for a friend?

RITHOLTZ: Right. Yes, yes. Just asking for a friend.

HAMBURGER: They want to talk about marital issues, and is there any way —

RITHOLTZ: That’s a big one, by the way.

HAMBURGER: Yes, yes. Is there any way to own this while protecting it? They want to talk about estate issues. So, any time that there’s that type of divide between would-be partners, big red flag. We have a whole service protocol to try and make sure that we can diffuse that. And that’s not our information to share, but it needs to be shared.

RITHOLTZ: How often does someone come to you with a proposal and you look at it and say, I just can’t let you sign this. This is not a good deal.

HAMBURGER: You know I’m from Jersey, right?

RITHOLTZ: Right.

HAMBURGER: We can’t not share our opinion.

RITHOLTZ: Okay.

HAMBURGER: It’s part of who we are. It’s how we’re brought up. But I won’t say that. What I’m going to say is, in a polite way, I’ll say, what are you thinking? Because I’ll say, what were your objectives? What do you think that this agreement —

RITHOLTZ: So, you’re going to finesse your way around getting to, this is a bad deal.

HAMBURGER: I mean, come on. You know our colleagues in this industry, right? They’re a very prideful group, right?

RITHOLTZ: Right.

HAMBURGER: Some may say that there’s a big ego about them. And they’re used to being the smartest folks in the room. And what shocks me, more than anything else that we’ve talked about today, what shocks me is how great investment advisors lose their shit when it comes to securities analysis of their own security.

RITHOLTZ: Right. Because there’s no objectivity. They can’t separate themselves.

HAMBURGER: Right. So, you know, this, I mean, really at the end of the day, what do you own? You have a concentrated securities position, right? You better than me, as the investment advisor, can analyze the value of that security, right? You have all sorts of methods for doing that. And so, my job is to redirect your skills to be able to do that. And most of the time they see that.

RITHOLTZ: So, let me ask you this question, because I’m genuinely aghast. We talked earlier about people not making the phone call because they don’t want to run up the legal bill.

Every now and then I’m horrified to see people not have attorneys, not have accountants, sign documents. Like, how much are you saving? You’re talking about millions of dollars in revenue, tens of millions of dollars in revenue, millions of dollars in salary. How can you sign a document without having a lawyer review it? Oh, you save $10,000? It’s going to cost you $3 million over the next decade. I’m apoplectic here. I see this all the time. I’m genuinely aghast.

HAMBURGER: I, too, share your sentiments. I mean, you know, of course I’m biased. I think that you should never go into a novel financial transaction, particularly one that capitalizes the decades of goodwill and trust that you have developed throughout the course of your career without, number one, an objective party, right? Even if that’s a knowledgeable friend of yours to say, what the heck are you thinking?

RITHOLTZ: Right.

HAMBURGER: And an experienced party, right? Someone who’s been there before and knows what’s important, what needs to be handled urgently, and what’s everything else, right? What’s the noise that we can kind of set to the side?

But it amazes me the transactions that people enter into without the benefit of objective, experienced counsel. It really does. And you know —

RITHOLTZ: And this isn’t just self-interest speaking —

HAMBURGER: It’s not.

RITHOLTZ: — because the odds are they’re going to go to a different attorney than you.

HAMBURGER: Sure.

RITHOLTZ: Just statistically. But if you’re signing a contract that’s worth millions and millions of dollars, isn’t it just common sense to have an attorney look it over? I mean, I’m genuinely aghast when I see and hear about these things. And it happens more often than one would imagine. And it’s not like you’re a minor. It’s not like you’re going to be able to get that, you know, oh, no, they didn’t know what they were doing. Let’s just decay that.

HAMBURGER: So, here’s the distinction that I’ve been able to call together over the years is that people that think of this as an investment, people that think of this as a business are apt to spend that money.

RITHOLTZ: Sure.

HAMBURGER: Right? They say, hey, there’s a transaction cost and it’s making sure I have good counsel to help optimize the transaction, mitigate risk, et cetera, et cetera. Think about brokers, even the most successful among them, who have been sitting in a wire house throughout, you know, for decades, throughout their whole career, they’ve never written a check for any business endeavor, right?

RITHOLTZ: Right, right.

HAMBURGER: The only attorneys they’ve ever hired is, you know, is probably to buy a house and maybe get divorced.

RITHOLTZ: But you would hire an attorney to buy a house, right? You wouldn’t just go in and do the closings. Yes, I could figure it out.

HAMBURGER: But that’s only because your realtor sent you to someone who’s charging a thousand dollars to do the closing for you, right? It’s not really because you would have found them on your own. Here, right, when you’re saying this is what objective counsel is going to cost, that’s a tough check to stroke, unless you’re thinking about the brighter road ahead.

RITHOLTZ: I guess if you’re sitting in a place where you’re not paying for legal, you’re not paying for compliance, you’re not paying for marketing, you’re not paying for trading, you’re not trade execution, you’re not paying for any of that, it comes out of your gross revenue on a grid, so you don’t really recognize that these are actual costs? I mean, you’re giving up half of your comp or more to pay for that. I would think that’s intuitive, but I guess not.

So, the last question about M&A that I have to ask is, I keep seeing these headlines. Is this the end of the small RIA? Again, it seems a little self-interested, but what do we think about whether you want to call it a lifestyle practice or a small local practice? These are people everybody in the town knows, and when they have a financial question, go to, am I wrong in thinking those aren’t going away, they’re going to be here for a while?

HAMBURGER: Those small RIAs will be here throughout the duration of our lives. And the reason for that is probably not what you think. The reason for that is —

RITHOLTZ: Technology.

HAMBURGER: — is technology.

RITHOLTZ: Okay.

HAMBURGER: Yes.

RITHOLTZ: Because what you could do as a solo practitioner or two or three people working in an office today is just so much more expansive than what you could do 20 years ago.

HAMBURGER: That, but I think even more compelling is the scalability of that technology. Right.

RITHOLTZ: Meaning?

HAMBURGER: The fact that everything’s a cloud-based application.

RITHOLTZ: Right.

HAMBURGER: And you can scale it down to a single user license. Think of the CRMs. I mean, everyone knows the CRM.

RITHOLTZ: Salesforce is a big, giant company. There’s a dozen of them, four RIAs.

HAMBURGER: But to stand up a CRM, 20 years ago, to stand up a CRM like a Salesforce —

RITHOLTZ: Huge costs, huge.

HAMBURGER: You would have to buy a dedicated server.

RITHOLTZ: Right.

HAMBURGER: Host it in a cooled office, right? Have —

RITHOLTZ: A full time tech manage it, right?

HAMBURGER: Replicate the data, have backups all over the place, backup tapes and all this crazy stuff. Now you buy a license.

RITHOLTZ: And that’s it.

HAMBURGER: You buy a single license and you log in and you start to configure it. And so, the scalability of technology, the scalability of telecommunications is the game changer. Right? And I don’t think too many people plot out the acceleration of the independent, fragmented wealth management business with the prominence of scalable technology solutions in the space. But I would say that they’ve developed in lockstep with one another.

RITHOLTZ: Really quite fascinating.

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RITHOLTZ: Tell us about your practice. What is the thing that keeps you most busy? What are the other areas of practice? That’s someone who says, hey, I want to set up a registered investment advisory. I have half a billion dollars in assets. What is the thing that keeps you most active?

HAMBURGER: So, we talked earlier about the work we do within MarketCounsel Consulting, our consulting firm, but most of the time I’m spending personally is within our law firm. We have three distinct practice areas. One is regulatory, where not only do we work a lot with advisors on various legal matters, but also regulatory interactions, right? Working with state and federal regulators on anything that rises beyond a simple examination.

The second is business transactions. And our business transactions practice spans from startup all the way to interesting permutations of the business, whether it’s business compliance, it’s succession planning or implementation, it’s selling off equity, M&A, and everything in between.

And then the third area, and probably the area that people know us most for, is employment transition work, where we help folks go from wherever they are to wherever they want to be and everywhere and help them navigate everything in between.

RITHOLTZ: So, if I’m in a right-to-work state, how challenging is it for me in the finance industry, either as a broker or a trader or a fund manager or an RIA, to say, hey, I want to switch and go somewhere else?

HAMBURGER: You know, it’s funny when I describe the employment arrangements or restrictions to people outside of this industry.

RITHOLTZ: Shocked.

HAMBURGER: They think I’m making it up. They think it’s a story, and I don’t know, I think there’s more interesting stories to tell than that, but it is beyond comprehension for those that don’t spend time in this space. Everything from restrictive covenants, such as the inability to solicit former customers to no-hire provisions, the inability to hire former colleagues, to non-competes, which everyone knows about, to garden-leave provisions, which require people to maybe provide some type of extended notice or to sit out for a period of time.

RITHOLTZ: Right.

HAMBURGER: These restrictions are real. Right?

RITHOLTZ: And they’ve been found to be legal.

HAMBURGER: And they’re found — in varying degrees found to be enforceable, right? Depending upon the reasonableness of the restrictions, the states that we’re going to be dealing with these restrictions in, and that’s how enforceable they are, but we also have to look at the firms that they’re leaving. You know, what’s the reputation of the firm for actually enforcing the terms of those contracts?

RITHOLTZ: So, we hired somebody once from a major wire house and I got this like seething email from GeneralCounsel. I picked the phone and go, “Dude, what’s up? We’re a member of protocol.”

He’s like, “Oh, sorry, don’t worry about it. Just delete it.” I go, “Can you send me an email confirming it?” “Yes, yes, no problem.” I mean, it was savage to, “Oh, no worries, man.” It was just like a crazy transition.

Explain to people who are not in the industry, what protocol is and how that works and why people are just so, you know, Jekyll and Hyde, if you’re not a member.

HAMBURGER: So, the broker protocol, we should first probably say that before the broker protocol, the industry was a bit of a Wild West.

RITHOLTZ: Right. Free for all.

HAMBURGER: It was a bit of the free for all, right? People were leaving to go to firms. In fact, I was in court in the Southern District of New York Federal Court, right, because all these are handled in federal court and I watched a firm go in front of a judge and say this broker should not be able to leave and solicit its clients and here’s our trade secrets and all of these things. And the next case that was called, this attorney was on the other side explaining why they had a right to recruit this broker.

So, the hypocrisy was not lost on federal judges who quite frankly have better things to do.

RITHOLTZ: Right. My partner Josh calls this a prisoner exchange. Like guys from UBS go to Morgan, from Morgan to Merrill, from Merrill to JPM Chase and then back to UBS. It’s literally everybody is chasing a signing bonus, which if you have a decent amount of assets under management can be millions of dollars.

HAMBURGER: Right. And so, from a distance, right, this looks like indentured servitude, right? Or this looks like that we’re trading human chattel, right? Both things that are, you know, completely illegal and way outdated, you know, in not only in this country but in the world. But in the securities industry, there were still shades of that up until the broker protocol and maybe still in some pockets of the industry today.

RITHOLTZ: When did the protocol first come out?

HAMBURGER: So, protocol has been in existence since the mid-2000s, right, and it’s a limited forbearance agreement that effectively says if a firm is a member of the protocol, they agree not to enforce certain terms, restrictive covenants that might be contained in an employment agreement if the broker that’s leaving goes to another protocol firm and agrees to abide by the “protocol” right? Taking of limited information, furnishing certain notice and, you know, there’s a few other provisions.

RITHOLTZ: And somehow this escapes antitrust provisions.

Somehow. I mean, shouldn’t it be like, hey, you guys are creating a little oligopoly here.

HAMBURGER: Somehow this deal that was concocted, you know, on the back of a cocktail napkin, you know, seemingly amongst four global titans, you know, of financial services.

RITHOLTZ: There’s no price fixing, so I guess it escapes that way.

HAMBURGER: So, it was actually our first argument. So, we were the first firm to add an RIA to the broker protocol.

RITHOLTZ: Oh, really? That’s fascinating.

HAMBURGER: And the administrator at the time said, called me up, said, “Brian, you can’t do this. This is not, this is not for RIA.”

RITHOLTZ: Which administrator?

HAMBURGER: It was.

RITHOLTZ: Of which, which government agency?

HAMBURGER: No, no, no government agency. They just appointed a voluntary administrator within the —

RITHOLTZ: A protocol, broker protocol.

HAMBURGER: Yes, there’s no FINRA, there’s no SEC oversight. This is a private industry.

RITHOLTZ: Brian, you can’t do this. Well, let’s see what the judge has to say. So, speaking of antitrust.

HAMBURGER: So, these four founders, right, that, you know, that concocted this, you know, this, this three-page agreement, they say, this is not, this was not meant for RIA.

RITHOLTZ: That’s hilarious.

HAMBURGER: And I say, well, you know, then it seems like we have a legal problem because it seems like you guys are creating a moat. And this seems to be an agreement to —

RITHOLTZ: Restrict competition in the space of providing financial advice.

HAMBURGER: Absolutely. And so, I said, so I guess we’re going to have to, you know, we’re going to have to then deal with that. They thought again about it. And they said, you know, on second thought, we’re okay with the RIA joining.

RITHOLTZ: As opposed to a judge throwing the whole thing out, right?

HAMBURGER: Because they never, they never defined the term.

RITHOLTZ: Right.

HAMBURGER: Broker right. Like, I mean, we know what a broker is, but they never defined the term. I mean, arguably a carwash can join the broker protocol, right? Because it is like a prisoner exchange, right? It is a, you know, it’s, it’s very much a protocol. And so, coming off of that, you know, thousands of RIAs have joined the broker protocol and, um, they are beneficiaries, since they’re often, the RIAs often have a less restrictive environment. They’re beneficiaries of this broker protocol. They’re able to freely extrapolate talent from these otherwise restrictive scenarios and bring them to their firm.

RITHOLTZ: And I suspect capitalism supports that, that you want competition, the marketplace for talent. You want the ability to become more efficient, more productive, move around, go where there’s a best deal. It’s almost, you know, any other industry, it wouldn’t even be a question.

HAMBUIRGER: It wouldn’t be a question. And it, I’m smirking here, you can’t see that on radio, but, because there’s a running joke within the space, there’s a gathering each year that is assembled by a leading labor employment firm in the space. And they bring together probably about a hundred practitioners who focus on employment law within the securities industry.

And for many years I was the only independent representative that was coming, that worked with RIAs that would come to, to these meetings. And it’s a big Q&A session, right? We work on case studies and there wasn’t a case study that passed where I wasn’t the butt of one of the jokes, you know, and like, “Unless Brian decides to unravel this” you know, and so, you know, for many years we, we were the troublemakers and, you know, with the broker protocol.

When the broker protocol experienced what we alleged was a — was some gamesmanship, when Morgan Stanley bowed out of the protocol, we actually forced a change in the administrator because lo and behold the law firm that was representing Morgan Stanley forgot to send a timely notification of Morgan Stanley’s withdrawal.

RITHOLTZ: So, they were still members by accident?

HAMBURGER: Well, they announced, oh, you know, our omission, but they’re suddenly, you know, withdrawing from the protocol without the requisite notice.

And so, yes, you know, we’ve been, we’ve been advocates of not only having the protocol but making sure that the terms of the protocol are enforced, that there’s no gamesmanship within the protocol. And —

RITHOLTZ: What’s the — what’s the game theory for one big firm withdrawing from protocol? Are they that confident that, cause I know one of the provisions is no rating. You could take a couple of people, but you can’t decimate an office.

HAMBURGER: Sure.

RITHOLTZ: Now that they’re no longer involved. Hey, you’re back to the wild west, let, let’s go, you know, pillage Morgan Stanley.

HAMBURGER: Well, there’s still no rating, right? So, the limitation on rating doesn’t emanate from the protocol. The protocol just doesn’t protect you from rating.

RITHOLTZ: Okay.

HAMBURGER: So, I honestly think that some of the larger firms that are in the protocol are there as a matter of pride. I think that if they were to withdraw, I think that their advisors would see that as a sign of defeat.

RITHOLTZ: Really?

HAMBURGER: I do believe that. I think that’s one of, you know, that’s one of the theories. And I’ve spoken to executives at some of these large firms and they said that the optics around withdrawing would be, would be terrible.

They also believe that there’s a brighter future for them. They believe that they can innovate their way out of this and have brokers stay at these firms for all the right reasons. History indicates otherwise because by all measures they’re losing the game to independent wealth management. But, there’s still a lot of really smart, talented people there as we talked about before.

RITHOLTZ: So let’s stay with this. I’ll, I’ll circle back to M&A later.

So first, full disclosure, I’ve been wrong about the brokerage industry for 30 years. I’ve been saying, I don’t see how they don’t collapse under the weight of their own fees churning underperformance and the lack of a fiduciary standard. To me, it just makes more sense that your financial planner should be more like your attorney than a used car salesman. But that’s starting to change. So, I’ve been wrong for 25 years and it’s, and it’s beginning to change.

HAMBURGER: What’s changing?

RITHOLTZ: So, what is changing is the big broker-dealers kind of figured out that the compliance nightmare and the legal nightmare of transactional business is so much harder than, wait, we could just charge a fee for managing their money, not sell them BS syndicate or not sell them IPOs that maybe they work, maybe they don’t. The good ones all get sucked up by the institution, so the junk that’s left will stick in my mouth. Those are all ticking time bombs. Let’s just kind of go semi-passive, keep it low key and eliminate 99 percent of our compliance headaches. Like some of the bigger firms have gotten that message and either they’re hybrid, you know, half RIA, half BDs, or really have aggressively moved into the RIA space.

So whereas I thought they would collapse under their own weight, they kind of said, oh, we want to eat from both sides of the table.

HAMBURGER: So now that you’re dealing with reverse churn, right, you’re dealing with clients who are paying a fee.

RITHOLTZ: Went from churn and burn to net and forget.

HAMBURGER: That’s a good way to —

RITHOLTZ: To keep it running. Although that really, to be fair, that really isn’t fair because I know plenty of guys that are — men and women that are RIAs that big — so I’ve been slagging everybody, so let me, you know, throw a compliment. Plenty of people at big firms do really nice work on behalf of their clients, mostly operating as RIAs. Every now and then, they take off their RIA hat, they put on their broker-dealer hat, here’s a secondary, here’s some insurance product, here’s this. So, it’s not really 100 percent true fiduciary, but it looks so much more like it than it did in the 1990s when it really was the Wild West.

HAMBURGER: So a couple things on that. First of all, the way these sophisticated organizations do is they win on multiple fronts. Because along with what you’re saying here, as they’ve evolved their product, they’ve mitigated risk, they’ve also engaged in some sleight of hand, right?

So where advisors are subject to a fiduciary obligation, which you know, that means they have to act in the best interests of their clients.

RITHOLTZ: Which seems pretty instinctually how you want your financial advisor —

HAMBURGER: You would think, right? But then they get blessed — and they get blessed by the SEC on this notion of a best interest standard, which is —

RITHOLTZ: Not a fiduciary standard.

HAMBURGER: Not a fiduciary standard.

RITHOLTZ: You can call it what you want, it’s black or white, either you’re a fiduciary or you’re something else entirely.

HAMBURGER: But it just coincidentally has the two core words that define the fiduciary standard, right?

RITHOLTZ: See, this is where I go on a tirade as to, hey, liars are going to lie and there ain’t nothing you’re going to do to change it. Like I want to give them the benefit of the doubt.

HAMBURGER: I know you do.

RITHOLTZ: But they just keep disappointing.

HAMBURGER: But here’s the distinction that I think will, and it’ll help you with your segue over to M&A as well, is that I think financial advisors, whether they’re brokers or advisors, are largely an amazing crop of people.

I think almost all of them are in it for the best of reasons. I think we have a high degree of success in the industry. People make a really fine living and they’re doing good work.

RITHOLTZ: You can sleep at night. It’s nice.

HAMBURGER: They’re very well-intentioned people.

RITHOLTZ: Right.

HAMBURGER: I think where you face this dichotomy is with the firms, right? Because the firms, even if they push out a fee-based program —

RITHOLTZ: They will have it both ways.

HAMBURGER: The question is the legal standard of care. The question is, are the products in there pure? Is there a cash threshold in there where they’re scraping money off the top? Because at the end of the day, this firm’s management and their board have a fiduciary obligation to who?

RITHOLTZ: The shareholder.

HAMBURGER: That’s right. And that’s the biggest distinction that we have between a traditional brokerage industry and the wealth management industry.

RITHOLTZ: Right.

HAMBURGER: And that’s changing.

RITHOLTZ: How is that changing?

HAMBURGER: Well, I mean M&A has come upon the wealth management space. There’s hysteria when it comes to M&A. There’s a real lack of logic that’s out there.

RITHOLTZ: In terms of who’s getting put together or the price is paid or what’s the hysteria?

HAMBURGER: Yes.

RITHOLTZ: All of it?

HAMBURGER: Yes.

I think there’s been an influx in capital into the space. Investors see this as a safe investment, right? But one with significant upside, right? Like any other self-regulatory organization would.

RITHOLTZ: So when you say these are FINRA rules, my attitude has always been they could go leap in a lake. They have no regulatory authority over me who gave up my seven. And every now and then I get a request from FINRA and I pick up the phone and my compliance people aren’t happy, but I let them know what I really think. I’ve written what I really think. Hold aside that they were probably the single most corrupt organization in finance when it came to their arbitrations. It was just theft out now. And I will defend that in court if I have to.

So, I am — but this is a 90s era perspective. I’m biased. And back then they weren’t called FINRA, back then they were called NESDR, which had such a horrible reputation they had to change their name. Tell me, am I overstating a 90s era distaste for that self-regulatory organization or is that how a lot of people felt?

HAMBURGER: You are not overstating it. It is how a lot of people felt. The organization has evolved.

RITHOLTZ: They’ve gotten a little better, haven’t they?

HAMBURGER: But it hasn’t gotten better on the whole. I mean there are areas where they have improved. The arbitration process has gotten better.

RITHOLTZ: By judicial decree, because it was found to be third world corrupt. And again, am I exaggerating?

HAMBURGER: You’re not exaggerating.

RITHOLTZ: Just like, oh, this is legalized theft and we’re not going to allow this nonsense to go on, you can’t do this anymore. You can’t own the arbitration companies and mandate an arbitration go there.

HAMBURGER: So you’re absolutely correct with regards to the arbitration. But keep in mind, you said, well, if I leave FINRA, if I no longer am a broker and I decide to go fee only, they can go pound sand. But —

RITHOLTZ: they’re trying desperately to get in there.

HAMBURGER: Well, hold on. But when you sign that U4, you gave them jurisdiction over you for two years after.

RITHOLTZ: I never sign the U4. I just walk out.

HAMBURGER: No, no. Not a U5. When you sign your registration —

RITHOLTZ: The original U4?

HAMBURGER: They have jurisdiction over you.

RITHOLTZ: That’s probably right.

HAMBURGER: So there’s a two year period of time after you resign where they continue to retain jurisdiction.

RITHOLTZ: No, I dropped the seven two years before I resigned because I wasn’t doing any brokerage work.

HAMBURGER: And so a lot of these restrictions are tied to the fact that these folks are leaving broker dealers.

RITHOLTZ: Right.

HAMBURGER: And so, yes, these are FINRA rules.

RITHOLTZ: That seems like that is a class action lawsuit waiting to happen because that whole setup is borderline employment restriction. You would think like a state like California would slam that stuff from going on.

HAMBURGER: Except that states like California like the fact that broker dealers have that level of supervision and control, right, when it comes to protecting investors.

RITHOLTZ: Of course, again, the NASDR did such a great job protecting people from the worst brokers. Sarcasm alert, they, you know, the voiceover is narrator. “They didn’t.” Right? I mean, they did a horrible job. What they did was protect. And I don’t want to make this, I have a lot of respect for shops like Morgan Stanley and Merrill Lynch that have been around for forever and helped democratize investing. So, I don’t want to paint with too broad a brush. However, it seemed like the bigger member firms had a like Michael Jordan, a very different set of rules than what applied to the smaller firms. And meanwhile, the tiniest bucket shops got away with murder for years and years and years.

It seemed like a no-win situation.

HAMBURGER: Well, but that that’s why, right. That’s why they were able to justify a lot of these restrictive rules over the years. Right? Because there were people out there doing bad things. And so —

RITHOLTZ: That they failed to regulate.

HAMBURGER: Right.

And so, when larger firms would push, would advocate for these rules, right. No one thought about the law of unintended consequences.

RITHOLTZ: Right.

HAMBURGER: The big firms did. Right. There’s really smart people at Morgan Stanley and Merrill Lynch and Goldman Sachs. Right? I mean, these people are really smart and they have time to think about this stuff.

RITHOLTZ: Right.

HAMBURGER: Whereas small firms as you know, are just reacting to these rules on the most part, right? They’re — they don’t have as many resources to participate in these meetings and the rulemaking and writing comment letters. And so as a result, large firms have an outsized influence over the rulemaking process. It’s just the way it is.

RITHOLTZ: Really interesting.

So let’s talk about this space that I think has really gained traction in the past couple of years. The idea of the outsourced Chief Compliance Officer, tell us a little bit about that.

HAMBURGER: You know, back in 2000, we had two services at MarketCounsel. One was the RIA Incubator, which we still have to this day. The other was called Your Compliance Officer. And it was kind of a cheeky name. But keep in mind, this was like Windows 2000 era, right, where like everything was like My Files and all that kind of stuff.

The SEC promulgated a compliance program rule in the 2000s that, among other things, really clarified the role of a Chief Compliance Officer, including what qualities a Chief Compliance Officer needed to have, their autonomy, the level of control, and authority that they had to have.

And it made it clear to us that you cannot outsource the role of a C-suite executive, specifically a Chief Compliance Officer, within an RIA. So, for all the firms that we work with, their Chief Compliance Officer is an employee of the firm, because that employee needs to have authority to manage and control other employees and monitor them. It’s tough to argue that that’s possible when you have an outsourced vendor that you could just sever their contract at any time.

RITHOLTZ: Right.

HAMBURGER: And so, we built our services to help lead and direct the activities of the CCO, to give them kind of an editorial calendar and an agenda, to give them information for which to do their job effectively, and then to layer underneath them and help administer their work and carry out, help carry out their responsibilities.

So, the Chief Compliance Officer always has their finger on the trigger.

RITHOLTZ: So how many firms can an outsourced Chief Compliance Officer be an employee of and still stay true to that mandate?

HAMBURGER: I don’t know.

RITHOLTZ: You can’t do 10,000, but you could probably do 20 or 40.

HAMBURGER: I don’t know. I mean, the SEC hasn’t been clear on it. We don’t think it’s possible at all.

RITHOLTZ: Right.

HAMBURGER: I mean, our reading of the rule indicates that someone who is an outsourced service provider cannot serve in the role as Chief Compliance Officer. But I know other firms do it, right? They’ve made a business out of it. But —

RITHOLTZ: Before we hired a Chief Compliance Officer, we were working with a regulatory compliance firm out in LA. They were very helpful. It wasn’t that they were a Chief Compliance Officer, but let’s be honest, effectively when you’re hiring a third party, and I got to think this is true for MarketCounsel also, when you’re saying to somebody, hey, we don’t know what the policies and procedures should be. We don’t know what do we need to do to make sure we pass our next audit?

What do we do to make sure, like you want to be on the right side of the compliance rules. Tell us what we can and can’t do. Give us a black line and we’ll stay on the right side of it whether that person is a full-time employee or an outside attorney that’s giving you advice, how big a difference is there?

HAMBURGER: To me, the distinction here is that we’re helping run an outsourced compliance department, right?

We should be all of the resources that a fully functional compliance department should be on the other end of an email, on the other end of a phone call, any type of communication. But to me, it’s critical that that chief executive, that chief compliance officer, the C-suite individual sits as an employee of the firm so that they have the proper authority, they’re granted the proper authority within the corporate documents, that they have the authority to carry out their responsibilities, including the ability to hire and fire personnel.

The SEC says that person needs that authority. And I’ve never seen, in all my years of practicing law, I’ve never seen a vendor relationship where you give the vendor the authority to hire or fire an employee. It just doesn’t happen.

RITHOLTZ: Right.

HAMBURGER: So our reading of it doesn’t allow a third party, a vendor, to actually serve as a CCO. We think we can, as an outside provider, we can layer on the top and underneath the CCO and we can provide them with all of the support and guidance that they need. But it’s really critical to me that someone within that management, with a management role, takes on the role of CCO.

RITHOLTZ: And it doesn’t necessarily have to be a single dedicated person, it could be someone wearing multiple hats and when they say, okay, now I’m chief compliance officer, you’re working directly with them.

HAMBURGER: Yes, a lot of people have noted recently, you know, what I think has been a long-time trend, which is that the chief operating officer often –

RITHOLTZ: Right.

HAMBURGER: — also serves as chief compliance officer. I don’t think that’s the wrong call, right, when someone needs to wear multiple hats because to me, regulatory compliance is simply an operational baseline standard, right? That’s your non-negotiable line.

RITHOLTZ: Right.

HAMBURGER: It’s like, we never dip below that standard.

RITHOLTZ: Right, right.

HAMBURGER: Maybe we’re striving for excellence, you know, we’re trying to get, you know, nine out of ten on these, but regulatory compliance is that non-negotiable line, right? And so, it makes sense that if someone’s going to serve dual role that the chief operating officer steps in.

RITHOLTZ: Assuming you have a chief operating officer.

HAMBURGER: Assuming, of course.

RITHOLTZ: You know, a smaller firm, five, ten people, they may not have an operating officer.

HAMBURGER: Then it’s, you know, who signed the operating agreement last, right?

RITHOLTZ: Right. Or whoever’s overseeing the advisors –

HAMBURGER: Sure.

RITHOLTZ: — the CFPs. And it’s not, you know, on a brokered side, that person is trying to encourage transactions which generate revenue on the fiduciary side, on the RA side, hey, the revenue takes care of itself, there’s a fee agreement, you just want to make sure the advisor’s doing what they’re supposed to be doing and staying compliant, it shouldn’t be an interference in the actual business, but I’m really down a rabbit hole and I’m projecting my own experience.

HAMBURGER: But within that experience, don’t you think that it’s as much a quality-of-service issue as anything else, right? We talked earlier about the distinction between compliance, legal, and risk. But much of what, you know, regulatory compliance is something that we can handle, right? We know it’s a finite, you know, set of rules.

RITHOLTZ: Right.

HAMBURGER: Right?

But what you’re getting into is monitoring —

RITHOLTZ: Operation —

HAMBURGER: Oversight.

RITHOLTZ: Right.

HAMBURGER: Right, making sure that people are doing the right thing. And quite often, when you find a dispute with a client, it comes down to poor communications.

RITHOLTZ: Almost always. So, you mentioned earlier the SEC, and I think I brought up audits, pre-pandemic, the rule of thumb was, hey, expect an audit every three years, and then the pandemic happened, and for three years, you know, everybody was sort of frozen. What do you think is going to happen going forward in terms of what the audit procedure’s going to look like, what the frequency is, because I have to imagine the SEC is getting to the point where, hey, let’s go back to, if not the old regime, well, something that looks like it and the world is normalizing again.

HAMBURGER: I just don’t think it matters.

RITHOLTZ: Really?

HAMBURGER: Yes, you know —

RITHOLTZ: I remember prepping for –

HAMBURGER: I know.

RITHOLTZ: — our first audit, and it was like, you know, it was like the bar exam, going to the prom, and the SATs all rolled into one.

HAMBURGER: I think your perception is shaped by when you entered into this industry, right? People used to market all the time death, taxes, regulatory exams.

RITHOLTZ: Right, right.

HAMBURGER: The thing I can share is that there’s a zero-mortality rate, you know, attached to regulatory examinations.

RITHOLTZ: But there are fines, there are like, hey, you guys suck, you better get your act together. Just as a matter of pride, you never want to have something like that happen.

HAMBURGER: There’s no question that the SEC’s regulatory exams have gotten better, and they’ve gotten better primarily because the SEC has more data, and they’re using that data, right? So, before the SEC even walks into an advisor’s office, they often have a short list of deficiencies. And I could find those deficiencies —

RITHOLTZ: That they’re looking for or they’re aware of?

HAMBURGER: No, that they already know about.

RITHOLTZ: Really?

HAMBURGER: Absolutely.

RITHOLTZ: Wow.

HAMBURGER: Because it’s as simple as this. They’re pulling your form ADV disclosure statement.

RITHOLTZ: Right.

HAMBURGER: They’re pulling your marketing collateral. They’re pulling your client agreements, right? And sometimes they’re asking you for this in advance of the visit just for this.

RITHOLTZ: Sure.

HAMBURGER: Most of the time, for existing advisors that are on board with us, there are conflicts just within those agreements.

RITHOLTZ: Meaning that they’re in opposite each other and you can’t actually fulfill all those obligations.

HAMBURGER: Either that or one is so vague that it could be argued that it’s misleading, right? I mean, when advisors talk about their fees, right? This is a really big area because —

RITHOLTZ: Isn’t that on a form ADV disclosure? Isn’t that all, “Man, we’re really Inside Baseball today.” I mean, isn’t that all out there? How do you mess that up?

HAMBURGER: It’s so easy to mess that up.

RITHOLTZ: Really?

HAMBURGER: Absolutely. I’d say more advisors mess up their fees and their conflicts of interest than anything else, right? Because with their fees, advisors want to be aspirational in their disclosure. They want to say, our fee is 1 percent, right? They don’t want to get into all of the qualities they look at when they discount that fee.

They don’t want to disclose conflicts of interest that come along with the way in which they structured that fee. And we are definitely getting into Inside Baseball. But conflicts of interest are by and large the biggest area that the SEC can find without even stepping into the office or talking to an individual. And it’s because they can see your business practices and they can see what you’ve disclosed. And most of the time when you talk to advisors, they say, well, that’s not a conflict because we would never do that, right?

And that’s just a real significant misunderstanding about what a conflict is. And you need an objective party to step in and say, “Hey, I know you guys are good people. But this is a conflict of interest.” What we do to mitigate that conflict or eliminate that conflict is another issue. But we have to call out the conflict and disclose it.

RITHOLTZ: So, I started out with a disclosure. Let’s wrap up the last segment with a disclosure, which is my rule of thumb is always, even if there is a conflict and we really work hard on the fiduciary side of the street, I don’t mean just RWM, but the whole RIA industry tries to not have a conflict. Isn’t all of this stuff satisfied by just disclose, disclose, disclose?

If you let the clients know, hey, we set up a fintech venture fund because we feel we can push those companies out there and do really a benefit for them. And we want to participate in the upside. By the way, if you’re interested in it, we have upside. And here’s the disclosure.

If I disclose everything, how do you get into trouble? Does that resolve? Does disclosure resolve all of — and I’m not looking for free legal advice here, it’s a legit question. Does disclosure resolve the conflict issue?

HAMBURGER: Mostly.

RITHOLTZ: Mostly.

HAMBURGER: So, going back to — mostly, but I don’t want to just have mostly hanging out there. Mostly but it doesn’t resolve at all, right? And some conflicts are simply improper. You simply can’t disclose them away.

RITHOLTZ: Like what sort of conflicts?

HAMBURGER: So, use that example, right? Where you disclose that you have this venture fund is your own fund.

RITHOLTZ: And by the way, one of the things we will not put into the venture fund is an ETF or anything investing that then we’re going to buy for the client because clearly, you’re on both sides of the trade there. That’s a no-no.

HAMBURGER: So, there you go, right? There’s one of them.

How about the other one being if these are funds that you are recommending, an allocation, you’re not going to recommend your own fund, get paid for the investment advice and they get paid out of fund expenses.

RITHOLTZ: That’s right, that’s right.

HAMBURGER: Right? So, there are some conflicts that are just too far, right? The SEC is going to say, you can disclose what you want. But in my second week working at the SEC in the enforcement division, after I took Chuck Senatore’s class that we talked about earlier, he assigned me to work for this powerhouse of a litigator, Sue Curtin (ph). I don’t know how I just remembered her name. I couldn’t tell you what I had for breakfast.

RITHOLTZ: Right.

HAMBURGER: But I said to Sue, my sense.

RITHOLTZ: She made an impression, clearly.

HAMBURGER: My sense of this RIA thing is crazy. Like my sense is that so long as you disclose that you are stealing $10,000 a day from the client, that so much of the recourse is precluded.

RITHOLTZ: Right.

HAMBURGER: She just laughed at me and she said, you’re a quick study, right? And so clearly there are anti-fraud provisions.

RITHOLTZ: Right.

HAMBURGER: But disclosure is a key component to the Advisors Act and one that so many advisors have trouble with. They have a trouble —

RITHOLTZ: Really?

HAMBURGER: Yes. Because I mean, think of it, right? The last time you went to your doctor, what do you say? How are you feeling? Right? I feel great. Really? Because I’m looking at your blood sugars, I’m looking at your weight and the numbers are telling me a different story, right?

And so that’s what happens with advisors. They are so blinded by their own good intentions and their purpose that they don’t see the harm that they could do if they set out to do it.

RITHOLTZ: I got you.

HAMBURGER: And so, as an objective advisor, your job is to shine a mirror and say, just imagine for a moment there was a bad actor, right? Could we do this? Which is, listen, I don’t want to get off on another tangent on you here, but that’s why cybersecurity and fraud — cyber fraud, is such a problem for advisors because they’re running a business that has a foundation in familiarity, right?

RITHOLTZ: Sure.

HAMBURGER: They can’t have a client call and just say, what’s your social security number, right? What’s your mother’s maiden name?

RITHOLTZ: We’ve heard people, we’ve heard horrible stories about AI, especially somebody like you who’s in the public or me in the public domain. You could use AI, pull a bunch of language out and create a phone call that sounds like a person. You were telling a story about that. How dangerous is cybersecurity and this sort of AI generated impersonation to fraud protection?

HAMBURGER: Yes, I mean, let’s just touch on cybersecurity. Cybersecurity is a people problem, right?

RITHOLTZ: Right.

HAMBURGER: It’s just that the root of where they’re getting the data is technology and the tools in which they’re enacting it —

RITHOLTZ: Social engineering is —

HAMBURGER: — yes, is the data. But it’s almost all coming from people, right? It’s you’re on route to a conference or I’m on route to a conference and someone is specifically targeting your colleagues, right? I got an email from one of my colleagues years ago and he received an email before that that said, “Hey, as you know, I’m flying out to this conference is a well-known conference in our space. I’m not going to be available, but I need you to send me the following financial reports.”

To which he replied to me and he said, I don’t have access to those financial reports. I replied to him.

RITHOLTZ: What are you talking about?

HAMBURGER: Well, that’s exactly why you don’t have access to these financial reports.

RITHOLTZ: Right.

HAMBURGER: They’re — you know, these cyber criminals are getting, and I hate to call them that because people think it’s like fantasy.

RITHOLTZ: They’re getting clever.

HAMBURGER: They’re getting clever, they’re getting adept. They’re getting more nimble. Small advisors are not the primary subjects of a denial-of-service attack, right? That’s what big financial institutions are after. They’re going to get duped because of the feigned familiarity that they have to have with their clients. It’s Sally calling or emailing saying, as you know, I’m going on a cruise. How did the criminal know this? Because they went through Sally’s emails and they see she’s booked on a cruise.

RITHOLTZ: Right.

HAMBURGER: As you know, I’m on a cruise, can you access these funds —

RITHOLTZ: Or she’s dumb enough to put it on Instagram.

HAMBURGER: Or it’s on social media, right? And so, these criminals are scaling down. It’s a scalability issue. They’re scaling down to the point that they can go after these individual crimes and they’re succeeding.

RITHOLTZ: Unbelievable. Unbelievable.

All right, so I have two curveball questions I got to ask you before we get to our favorite questions in our last five minutes. The first is, you were a chef in the U.S. Coast Guard Auxiliary. How the hell did that happen?

HAMBURGER: You know, I’m an incredibly curious person. Some would say I’m just jumping from thing to thing.

RITHOLTZ: It’s your best trait.

HAMBURGER: And anytime I’m interested in something, I want to know how people do it. I want to know how things work. And so, I joined the Coast Guard Auxiliary when I bought a boat back in 2005.

RITHOLTZ: So, we’re not talking about JAG. We’re talking about literally the Coast Guard Auxiliary.

HAMBURGER: Yes, the Coast Guard Auxiliary. It’s a group of largely retired service men and women who get together to help support the U.S. Coast Guard. They call the U.S. Coast Guard the Gold Side and we’re the Silver Side. And so, I joined to get free boating education. I joined to learn navigation. I joined to learn weather and radio controls.

RITHOLTZ: And they give a lot as a fellow boater. They give courses. You can sign up. You can learn to sail. You can learn to navigate by the stars. You can do all of it with them.

HAMBURGER: Yes, and so — and I love the camaraderie of the group. And one of the programs they had, they used to call the Aux Chef Program, the Auxiliary Chef Program. Now they call it Auxiliary Food Service. But the program is about augmenting the capabilities of the Gold Side so that someone can take a few days leave or when they run low or when they’re having a special event and taught me about food safety, taught me about food quantity. And I’ve always loved the gratitude of pulling off what people don’t know –

RITHOLTZ: Right.

HAMBURGER: — how you did it. And it’s kind of an extension of what I do.

RITHOLTZ: That sounds fun. And then you almost had a career in radio. Tell us how you sidestepped that and went into legal practice.

HAMBURGER: I think what you meant to say is I have a face for radio. I definitely do.

RITHOLTZ: Same. Same. So, you were in your college radio station. Tell us a little bit about that.

HAMBURGER: So, I was convinced to do college radio early on our freshman year. We got a show. It was the worst time. It was during Monday Night Football. Who listens to radio during Monday Night Football at college? Nobody. But that was freeing because we can kind of do whatever we wanted on the air and make mistakes and no one really noticed. And so over the years, we got bumped up to the point that we got our slot Thursday night 8 to 11, which was like prime time.

RITHOLTZ: That’s a big—

HAMBURGER: Everyone listened to the radio.

RITHOLTZ: Sure. You’re getting ready to go out for Thursday night in college, big night.

HAMBURGER: Everyone’s pre-gaming, right? And so, we were doing our thing. Unbeknownst to us, there were ratings. I didn’t know anything about ratings. I knew you had to get an FCC license, but I didn’t know anything about ratings. And unbeknownst to us, we hit the top program in that time slot in New Haven and got all sorts of crazy recognition.

But we were just two roommates getting on and doing an old school rap show.

RITHOLTZ: That’s — wait. Old school rap show?

HAMBURGER: Old school rap.

RITHOLTZ: Wait. So, the two of you would drop in beats and lyrics on the radio? That sounds really embarrassing.

HAMBURGER: I wasn’t rapping.

RITHOLTZ: Okay.

HAMBURGER: And I call it old school. It’s only old school sitting here today.

RITHOLTZ: Right.

HAMBURGER: It wasn’t old school back then.

RITHOLTZ: We’ve talked about this before to me. Old school is Paul’s Boutique and Beastie Boys. That’s about as far as my hip hop progressed.

HAMBURGER: That’s pretty good.

RITHOLTZ: Yes, not too bad. So, in the last few minutes I have you, let’s jump to our favorite questions that we ask all our guests, starting with, what have you been watching? What have you been streaming and what’s kept you entertained in the pandemic and post-pandemic era?

HAMBURGER: So, I will tell you that I am not a good streamer.

RITHOLTZ: Okay. It’s not hard.

HAMBURGER: I know it’s not hard, but I’m one of these people that almost prefers there to be crap on TV so that I can do other stuff and have that on in the background.

RITHOLTZ: Okay.

HAMBURGER: So, I love putting on sports in the background that I’m marginally interested in. If I were on a Yankee game, I could hear the announcer, the inflection in the voice. If I were on a soccer game, I love watching soccer. Actually, I love having soccer on.

RITHOLTZ: Right.

HAMBURGER: And —

RITHOLTZ: There is a certain energy to World Cup, the back and forth.

HAMBURGER: It’s awesome.

RITHOLTZ: It’s like waves and you can kind of half pay attention to it.

HAMBURGER: It’s awesome and undeniably anytime you get into March Madness, it’s one of the best times of the year. So, I don’t really obsess over much on TV. I will put on anything on Nat Geo or History Channel and kind of geek out over that stuff. But my deal is I use one of these services where anything I find interesting, I just tag it as a “to watch.”

RITHOLTZ: Watch it later.

HAMBURGER: Yes, something like that. And then I have that on my TV. So, if I’m watching with any of my kids or my girlfriend, they can go into that treasure trove and be ensured that it’s something I wanted to watch at some point in time. And so that’s usually our deal.

RITHOLTZ: Let’s talk about mentors who helped shape your career.

HAMBURGER: You know, I think everyone that I came across did in some way, shape or form. I used to hate this question about who’s your idol because I never thought that that was a fair assessment of anyone. But in terms of mentors, I had so many and continue to have so many that came before me that I learned from. Some I strangely learned what I didn’t want to be and the road I didn’t want to take. It was a lot of other people’s mistakes that I would learn from. But I mean, the list is just so plentiful of people that literally would just give me a hand up.

I had a very unique and special type of relationship with the gentleman who was my boss as I interned at Merrill Lynch, one of my first jobs in the securities industry, an undergrad. Many, many years later, we continued to stay in touch and I had the privilege of helping him and his team leave Merrill Lynch. Yes, and it was fascinating. Then many years after that, when he went to exit his firm, I had the privilege of helping him again. And so, like that’s — to me, those are the relationships that just make this all worthwhile, continuing to not be involved in the individual transaction, but rather being a part of someone’s life.

RITHOLTZ: And that’s interesting that that’s a full arc from employer to team leaving to retirement. That’s not usual. You don’t usually get to see something like that.

HAMBURGER: It’s not usual, but I’m really grateful for those types of experiences.

RITHOLTZ: Let’s talk about books. What are some of your favorites? What are you reading currently?

HAMBURGER: So, you and I went to a conference and we saw —

RITHOLTZ: The Barron’s Individual Advisor Conference in Dallas. And we got to live through a tornado that turned the sky black. And people were standing in front of these giant plates of glass. Hey, I’m not from Texas, but maybe those big windows are not where you want to be as this funnel comes ripping towards the hotel.

HAMBURGER: Probably not, but that’s where I pulled my latest book from. The speaker they had that night was Jeremy Siegel, the professor.

RITHOLTZ: Always great.

HAMBURGER: He is always great. And so, I jumped into his book, “Stocks for the Long Run.”

RITHOLTZ: Now in the eighth edition or some crazy number?

HAMBURGER: Yes, I think he’s in sixth right now.

RITHOLTZ: Sixth edition. That sold a couple of million copies. It’s one of the best sellers in the space.

HAMBURGER: I found it — so here’s my disclosure about books. There are certain books I read when I was young that had such an impression on me, and nowadays anytime someone tells me about an interesting book, I buy it first and I start reading it. I’ve begun reading, knowing that you were going to ask me this question, I have 144 books that I’ve started reading and I’m in progress at some point in my life.

RITHOLTZ: Are you going to read them?

HAMBURGER: I will.

RITHOLTZ: Because, by the way, some people seem to feel that books are like homework and once you start you have to finish. There’s nothing wrong with picking up a book and saying, “Oh, I’m not enjoying this” and moving to a book that you’ll actually like.

HAMBURGER: I totally agree with you. I mean, there’s too many books that I read the first chapter like nine times because I keep picking up and I’m like, all right, if I’m not into this, it’s okay. Like just, you know, toss it to the side.

I also started reading a book, “The Hard Thing About Hard Things.” It’s a fascinating book —

RITHOLTZ: Who authored that?

HAMBURGER: By Ben Horowitz.

RITHOLTZ: Of Andreessen Horowitz. He’s also a prior guest. He’s a fascinating guy.

HAMBURGER: Yes, and I love his take on, we’re not talking about the hard issues, right? Like I think through things that people call luck or things that people call happenstance and I love to think through all of the permutations that led to that point in time, right? All the decision points and even lack thereof.

And you know, he kind of starts to get to some of that thing.

RITHOLTZ: Just because somebody’s lucky doesn’t mean they weren’t good or putting themselves in a position where a little luck can shine on them.

HAMBURGER: But where’s that right balance, right? Do you want to be, you know, you don’t want to be so pompous to say that there is no luck.

RITHOLTZ: Right.

HAMBURGER: Right? But you also don’t want to be, you know, so soft as to say like, oh, it’s all luck, right? It’s not. It’s, you know, it’s some —

RITHOLTZ: It’s a combination.

HAMBURGER: It’s some logical confluence there, right, in setting yourself for luck.

You know, I’m getting to that point that, you know, people recommend books about how much time we have left. So, someone recommended this book, “4,000 Weeks.”

RITHOLTZ: I love that title, by the way.

HAMBURGER: It’s awesome, right?

RITHOLTZ: It’s just genius. Yes.

HAMBURGER: Yes.

RITHOLTZ: I started that.

HAMBURGER: Yes.

RITHOLTZ: But I need better time management skills in order to finish it. You know, it’s one of those things you could just pick up a chapter at a time.

HAMBURGER: So, you can, and I’d say it’s a light read. It’s probably not a light read, but it is more of a time management book –

RITHOLTZ: Right.

HAMBURGER: — than a book about our own mortality.

RITHOLTZ: Explain what 4,000 Weeks are.

HAMBURGER: Yes, it’s how much time you have in your lifetime, right?

RITHOLTZ: If you’re lucky, you know, you and I have 1,000 weeks left.

HAMBURGER: Yes, and so it puts some degree of impetus to get to the things that you’re just saying we’ll do it later.

RITHOLTZ: Your bucket list, which most people don’t tag.

HAMBURGER: So, I always love having a variety of books that I’m reading that kind of check the box, whether it’s hard finance books or it’s strategy books or it’s empathy and, you know, emotional books.

But the stuff that I read when I was younger, kind of in my, I guess, late teens, early 20s.

RITHOLTZ: Give us an example.

HAMBURGER: Like I read “The Millionaire Next Door”, right, when I was young, right? And like I just, it just stuck with me.

RITHOLTZ: Really?

HAMBURGER: Yes. There’s just, there’s certain books that just stick with me.

RITHOLTZ: There’s aspects of that that are very valid. I shouldn’t just have like an automatic negative response.

HAMBURGER: And I can’t tell you anything about the book itself, but what I can tell you it left me with is that you always have control over what you spend, right, and less over what you, what you make.

RITHOLTZ: By the way, I’m going to withdraw my, I’m going to, I’m going to say that and respond to that again because I’m thinking of a different book and it’s not this one. So, Raspberry Withdrawn, I’m thinking of —

HAMBURGER: “Rich Dad, Poor Dad.”

RITHOLTZ: Well, I didn’t say that, but yes, that’s what I was thinking.

HAMBURGER: I know you were thinking —

RITHOLTZ: What makes “Millionaire Next Door” so fascinating is that we tend to think, well, you, you read it more recently than I probably did.

HAMBURGER: Nope.

RITHOLTZ: No.

HAMBURGER: I haven’t read it in decades.

RITHOLTZ: So, what I remember that is, hey, the fancy car, the big house, that’s not the average millionaire. The typical person who’s accumulated a net worth north of a million dollars is living a fairly sedate life. They have a modest home, not a big fancy home. They have a 5-year-old car. They’re not driving a Ferrari or a Porsche. They basically are living lives of quiet success without the feeling the need to show off. You see the indicia of wealth, you don’t see the liabilities on the other side of it.

HAMBURGER: There’s no doubt that if I could sum the book up in one word, it was moderation, right? Is it enjoy, just don’t enjoy the success, right? And it was such an offset to popular culture at that time, which was celebrating excess, right? The athletes and entertainers just like, that was the look of millionaires until I read that book.

Also, a little later on read, “Where Are All The Customers’ Yachts?”

RITHOLTZ: Not been a good speed. What’s his name? I read that book a long time ago and it’s hilarious.

HAMBURGER: It’s hilarious, right? I mean, it’s about this guy walking through Wall Street basically saying, Hey, wait, I see, I see all the yachts from the people who work here, but where, where are all the customers’ yachts? And I thought that was just a really good take.

RITHOLTZ: Fred Schwed.

HAMBURGER: Yes.

RITHOLTZ: I had to search for that because I couldn’t access his name.

HAMBURGER: It’s just, you know, it just, it’s very poignant. And to this day, I think about that when we think about the inequity that exists between financial institutions and retail customers, right? And the good work that since that book was written, that advisors have really done to democratize investing.

RITHOLTZ: And that book was written 75 years, maybe even longer ago.

HAMBURGER: I want to say it was in the forties, if I recall correctly.

RITHOLTZ: Okay, like post-war period.

HAMBURGER: Yes. Yes. Yes. 40s, 50s.

RITHOLTZ: I’m thinking 50s. 1940. Very good.

HAMBURGER: There you go.

RITHOLTZ: I thought it was a little, I thought it was a little later.

So any other books before we get to our last two questions?

HAMBURGER: You know, I, there’s other books that, that stuck with me. “Freakonomics” is one, you know, how to make economics interesting to the masses. I just love the approach that those guys took. And I’m just a — I’m just a nerd when it comes to economics, to technology and all that sort of thing. And building a business in 2000, it was tough to avoid books like “The E-Myth”, right? This concept that business process drives consistent results, which did, wasn’t necessarily a foregone conclusion back in 2000. And so, I thought it was really compelling.

RITHOLTZ: All right. And our final two questions, what sort of advice would you give to a recent college grad interested in a career similar to yours? Regulatory compliance, legal, finance, how would you advise them?

HAMBURGER: So, my oldest daughter just graduated from Pitt last year. My middle, that was Ella, my middle one, Jake, is graduating from Georgetown next month. And my youngest, Sydney, is a freshman at University of Miami. Both Jacob and Sydney are in, are finance majors. And so, I’ve had some, I’ve had, these have been real talks. These aren’t just theoretical. What I would tell them is that the, the finance industry can be a lot of things to a lot of people. That there’s not a single career within the finance industry. There’s an entire world. It’s great to work for a sector that’s on top, but remember that our entire economy is cyclical, right? If you’re picking a job today, I understand the hot jobs are in finance and pharmaceuticals but, you know, you have to think through the duration of your career, right?

RITHOLTZ: What was the hot job five years ago, 10 years ago?

HAMBURGER: Exactly. So, do you only want a job that exists in the finance sector or do you want to find a job that’s transportable elsewhere? And so, so speaking to Jake about that, right, he had experience working, working for us. He had experience working within, on the investment banking side, working for David Deveaux. He had experience working within, with a venture capital firm.

And when it came time to find a full-time job, you know, my advice to him was you want a flight to quality that’s not in the finance space but hones your skills in finance.

So, he’s going to do a CFO rotation at one of the large pharmaceutical companies. Like that to me is a good, you know, first step out of college, right? Find stability. I know all the hype is around startup and is around fundraising and private and public investors.

RITHOLTZ: Sure.

HAMBURGER: I just don’t think that that’s where, I don’t think that’s where you really make your foundation of knowledge at those places.

RITHOLTZ: None of the kids want to go work for the old man and his business, take it over?

HAMBURGER: It’s never, it’s, we’ve never discussed it as an option. They’ve all worked with me. But I think —

RITHOLTZ: And that was plenty.

HAMBURGER: Well, no, it wasn’t plenty. Actually, I still, I still love, my daughter and I still work together all the time. She’s a Salesforce consultant and she is one of the easiest people in the world that I can talk to because she knows where I’m going with things before.

RITHOLTZ: There’s a shorthand there.

HAMBURGER: It’s amazing. And so I would never preclude that, but you know, part of what we do stems from a degree of confidence in your skills and capabilities. And in order for, I think in order for any child to get that, they have to prove themselves in the open market. They have to go out there and do it for themselves so that when they come back, you know, their soul is fulfilled.

RITHOLTZ: Right.

HAMBURGER: They don’t feel like they’ve worked for dad their whole life.

RITHOLTZ: Right. No, that makes a whole lot of sense.

And our final question, what do you know about the world of finance, investing, regulation, compliance today you wish you knew 25 or so years ago when you were first getting started?

HAMBURGER: That’s so easy. I wish I knew not to listen to financial media when they would say, markets are up today because of blank or markets are down on fears of blank. I used to think, Barry, that I was missing something. I used to think that I was just, you know, like, how do they know that all of the millions, billions of, of, of inputs and outputs in the market all came down to that.

And the fact is they don’t, right? They’re oversimplifying a very complex problem. And I wish I knew that back then. I also wish —

RITHOLTZ: That’s fascinating.

HAMBURGER: Yes. I also wish I knew that, um, that I know more than I thought I knew. I wish I had a little more confidence and you know, now I’m confident not because I know a lot, I’m confident in my ability to recover from failures quickly and to change course. And I think most business owners, we find ourselves like fish in a tank, right? You hit the glass, you just change direction. Whereas when you’re earlier, you don’t want to touch the glass. You know, you don’t want to, you don’t want to hit that glass.

And so — and probably the last thing I would, I would wish I knew back then was just to start with the objectives in mind, because even with investing —

RITHOLTZ: And work backwards.

HAMBURGER: Start with the why, what’s my thesis, what am I trying to go after? I just want to tell you there, my best investing skills came out of a really bad habit, which is I would get the newspaper, typically the Sunday paper, but you know, on Wednesdays or a certain section Thursday, and I would grab them and I would pile them up in my office, right? And they used to have piles of newspapers everywhere. And I would read certain people’s columns pretty religiously, but, but late, right? So, I would only typically read them after they’d been out for a month, two months, sometimes six or 12 months, right? And the knowledge that I gained by how wrong people are in with 20/20 hindsight was absolutely amazing.

So, what’s, what, what, what started out as a really bad habit was so helpful to me in putting things in context because now naturally when I read something, every day I say, well, they don’t know that, right? Like they’re asserting that, but they don’t know that. And it’s really helped me out a lot.

RITHOLTZ: So, one of my all-time favorite publications, Laszlo Birinyi out an annual media roundup and it’s presented without commentary. And it’s just the most important media stories from the Wall Street Journal, the New York Times, the Washington Post, the LA Times, and it’s just Xeroxed and bound.

And it’s by the time you get it, everything’s a year old and exactly what you’re describing, as you go through it. The things that are the big scary headlines, they just look horrific a year later. Like that’s wrong. Oh my God. How did anybody think this guy knew what he’s talking about? You just go through page after page after page and you realize nobody knows anything and they’re just faking it till they make it. When you have a little time and distance, it’s just clear that, hey, people have, there are hours of TV that need to be filled. There are pages of newspaper that need to be filled. There are just pixels and pixels online that need to be filled, most of which doesn’t stand the test of time.

HAMBURGER: So, when the day after Silicon Valley Bank —

RITHOLTZ: Blew up, right.

HAMBURGER: I got a call from a reporter and they used the words “in these unprecedented times.” And I had to stop for a moment and I said, how old are you? Because these are precedent times. We know exactly what we’re dealing with and hopefully we don’t go back to that again.

But I think it just gives you a sense of place. And at the end of the day, isn’t that what we all yearn for? Even as a young person starting out their career, you want to find your tribe, you want a sense of place and you want a purpose.

RITHOLTZ: I like that. You could do a lot worse than that.

We have been speaking with Brian Hamburger. He is the founder of the Hamburger Law Farm, as well as the leading regulatory compliance and consulting firm, MarketCounsel.

If you enjoyed this conversation, well, feel free to check out any of our previous nearly 500 discussions we’ve had.

You can find those at YouTube, iTunes, Spotify, or wherever you find your favorite podcasts.

Feel free to sign up to my daily reading list at Ritholtz.com. Follow me on Twitter @Ritholtz. Follow all of the Bloomberg family of podcasts at Podcast. I would be remiss if I did not thank the crack team that helps put these conversations together each week. Paris Wald is my producer. Sean Russo is my head of research. Samantha Danziger is my audio engineer. Atika Valbrun is our project manager.

I’m Barry Ritholtz. You’ve been listening to “Masters in Business: on Bloomberg Radio.

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