Clearing Week Recap & Insights w/ Brian Hamburger

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Ryan Morfin:

Welcome to non-Beta alpha, I’m Ryan Morfin. On today’s episode, I’m with Brian Hamburger from Market Council, as we recap clearing week to pull the insights out of the conversations. This is non-Beta Alpha.

Ryan Morfin:

Brian, welcome to the show. Thanks for joining us today.

Brian Hamburger:

Hey, Ryan. Thanks for having me, it’s been a great show so far.

Ryan Morfin:

Thank you. So, clearing week is finished, would love to talk to you today a little bit about some of the comments that were made by some of the executives from Schwab, Fidelity, TD, Pershing, Raymond James. The custody industry, it’s an industry that’s changing a lot. Some due to regulations, some due to pricing model changes. To take a big step back from all the content that we heard this week, what are your views in the clearing industry today and how has it changed and how do you see it changing going forward?

Brian Hamburger:

I think it’s been interesting and I think your series of interviews have been a proof point for this, which is from a utility perspective, all of these clearing firms do functionally the same thing. They serve advisors and clients the same exact way. However, there are some major distinguishing characteristics in terms of how they see the business, where they see the future of the independent RAA channel and where they see the business of just investment advice. And so, what they had in common didn’t surprise me, I thought the contrast between them was pretty interesting, and also showed me that if this Wentworth thing doesn’t work out, you’ve got a career in journalism. So, you’re in good shape.

Ryan Morfin:

I appreciate it. I didn’t realize how early you have to get up to do all these interviews, but nevertheless. So, I think one of the areas that they’ve all touched on is technology, and a lot of them are internalizing that role, but you’re the advisor’s advisor. When we’re bringing somebody over the wall from the wirehouse environment to freedom, how do you talk to an RAA about… There’s a lot of tech support in these custodian choices that you have or there’s a tech stack you can go out and build yourself, and how does that conversation go down?

Brian Hamburger:

So, this has been a consistent theme over the 20+ years that I have run Market Council, which is technology has been the driver behind the move to independence. And it’s not just the technology, because technology will always advance. Hardware and software advances are all around us. What’s changed is the manner in which these firms price the technology. So, starting around 15 years ago, the software as a service really started to become extraordinarily popular. And the fact that someone could leave a wirehouse and pick up a voiceover IP system that is better than the firm that they left behind, and they can run that for five users, the fact that they can plug into Salesforce without hitting any type of enterprise level minimums, the fact that they could now archive all of their emails. And it’s a utility, it’s just a small fee that you pay per user.

Brian Hamburger:

That has made the biggest single change in the move to independence because now it’s not a question of quality. You can actually improve the quality because you can use the ability to be more nimble than the enterprise and still get the same pricing considerations that the enterprise tends to get. So, we’ve definitely reached a tipping point, we’ve passed the tipping point where the price of supervision of thousands of reps has now exceeded the ability to negotiate better pricing terms with respect to the per user cost. And so, I know that’s not exactly the question you asked. So, technology is at the centerpiece of all of this and I think only recently have people started to realize that it’s going to have a lasting impact. The biggest part of that, however, is now the battle over screen real estate. And so, I think what firms have realized is that it’s not the employment contracts and the restrictive covenants that are going to hold people in place.

Brian Hamburger:

So, here’s a lawyer telling you it’s not the contracts that are going to keep people where they are, it’s going to be the pain of making the move to the next place. And so, if you can own that screen real estate, if you can own the data, if you can own people’s mind share by having them trained and specialized on your systems, you’re going to keep them, you’re going to retain them because they’re not going to want to move. And probably more specifically, their staff is not going to want to move. So, advisors have to keep that in mind, is that when we talk about screen real estate, this is a battle. There are forces at play here. The old adage is, “If it’s free, then you’re probably the product.” And so, if something’s low cost or it’s free, you have to be asking yourself the question, “Who’s eventually paying for this. Is this being paid with dollars to maintain retention? Is this being paid with advertising dollars? Is this being paid with product?”

Brian Hamburger:

So, if advisors really want to maintain independence, well, they also maintain complete independence and autonomy with respect to their tech stack. But advisors who are willing to compromise on that, and compromise is not a bad word by the way, as long as they go in there with eyes wide open, knowing what it is that they are giving up. Then, the custodians and other product providers are doing an amazing job at providing low cost technology, removing traditional barriers of entry.

Ryan Morfin:

Well, your point about if it’s free, then you’re probably the product I think should be put on a tee shirt, because I think that’s so true across social media today, all sorts of Gmail, Google. I think people don’t really appreciate that. I think Americans are starting to wake up to that, but financial advisors as well should be waking up to that. And I look at the pricing models in the a la carte model versus the fee for service model as it relates to clearing choices. And recently, Ben Harrison came out in Barons and said, “There’s tremendous fragility in a freemium model.” And I guess he was really talking about the race to zero in terms of ticket charges and such. What are your thoughts on that? Is it a sustainable model or do people just not understand how the sausage is being made in the background, that these are still profitable relationships?

Brian Hamburger:

Yeah. So, I don’t know if it’s a sustainable model. The folks that understand the numbers and have investor pressures on performance are going make that determination. But certainly, the race to zero, I think, did uncover some fundamental cracks in the foundation. I think it furthered this view that investing shouldn’t cost that much. And unfortunately, because of the confusion between broker dealers and investment advisors, I don’t think end investors really distinguish. When they hear that a trade is zero, I think that the investment advice should also be zero or somewhere close to that. So, I think it has created as much confusion that it’s cleared up. It’s definitely been a relationship boost for advisors, they don’t have to get on the phone, talking to clients about the $5 ticket charge and what that’s for and who they’re paying and why this custodian is different than the RAA that they’re paying fees to.

Brian Hamburger:

And it’s alleviated some work for advisors, because they’re no longer sponsoring [inaudible 00:08:36] fee programs. But I think Ben raises a good point, which is if the trades are free then yeah, the relationship has a certain degree of profitability and the custodians are going to build their model around that level of profitability. However, in any industry there needs to be premium offerings that come to the top, and advisors are used to being cared for, they’re used to a high degree of service. You and I have talked about our desire for our staffs to be able to really embrace the Ritz Carlton and the Four Seasons model of service. And we’re not alone, custodians are trying to emulate the same thing. You can’t have Walmart prices and deliver that level of service. Those two don’t exist and most advisors have taken more than one economics class, they should be able to understand that. So, I think what Ben’s suggesting is, “Hey, you know what? If you want the low cost car, you can come on our lot and we’ve got that to sell you, but there also needs to be a place in the market for a premium offering.” And I think a lot of the custodians are looking at that similarly.

Ryan Morfin:

Yeah. No, it’s interesting. I know it’s not a perfect correlation, but if you look at what’s happening to the retail sector. JC Penney, Neiman Marcus, and you’re looking at the survivors, it’s Amazon and it’s Walmart. And it’s really interesting to me, I do look at this business from a consumer retail lens because in summarizing, there is a B2C component. We’re B2B individuals, but looking at the end customer and the user experience, what Amazon and even Walmart’s doing is focusing on that digital online user experience. And you talk to and advise a lot of RAAs, how are they thinking, how are they shaping how they think about this user experience of the end investor and then how are the custodians helping drive that experience online?

Brian Hamburger:

Yeah. So, it’s a great question. I think a lot of advisors are misinformed about what does it all take to come to the table with a true digital experience? So, I’d put them in one bucket and it’s a pretty big bucket. The other ones are trying to determine how do you execute on a genuine digital experience that doesn’t feel canned, that doesn’t feel forced, but it feels the way it should for their clients? Advisors are in a tough spot. They’re trying to deliver something at a reasonable cost, but with a really high touch model. Amazon is not a high touch model, Walmart’s not a high touch model. And so, we look to those firms and say, “Hey, we want product, and so what we’re going to pay for is we’re going to pay for low prices, we’re going to pay for security.” When I say pay for low prices, I mean we want to go to a retailer who reliably is going to give us low pricing. Access to options, which both Walmart and Amazon have become great at. More than half the products that Amazon’s selling isn’t sold by Amazon, it’s sold by a third party seller, which is pretty amazing. Amazon figured, “Hey, we can reduce our inventory and still make the same profit margins, if not better profit margins, by essentially hosting this store for others that couldn’t do it.”

Brian Hamburger:

But the consumers have decided that this is the experience that they’re looking for. And so, for advisors to engineer a really complex experience that requires training and requires a high degree of engagement by the client, I think what they’re finding is that they’ve over engineered it, they’ve over-managed the entire process. And so, advisors have listened for a long time to what the clients say they want, but I would argue, and I’m arguing as the advisor to advisors, not having any retail clients myself. I would argue that the clients themselves don’t know what they want, or they don’t know how to articulate what they want, because what they really want is they want to be able to log in at any time, see how their portfolio’s doing, be able to compare it to various benchmarks, communicate on their own terms, not have to schedule time with their advisor but rather if it’s 2:00 in the morning and they’re at their desk, be able to shoot over a note, knowing that they’re going to get a response within within that next day. There are different demands that the clients want, that you can tell by the way in which they behave, than what they’re communicating to their advisors.

Ryan Morfin:

Yeah, and I think as it relates to the advisor-client experience, the clients are demanding more tech. Especially in a no touch economy, they do want new ways to interact with their performance, their assets, their advisors. And so, I think it’s going to be the practices and the businesses that embrace this digital moment are going to be the ones that accelerate and take market share. And we’re hearing it from a lot of our advisors, I’m sure you are too, there’s really A Tale of Two Cities right now. It’s the people who are adapting and thriving, and they’re going to have their best year ever in 2020, which sounds counter-

PART 1 OF 4 ENDS [00:14:04]

Ryan Morfin:

The best year ever in 2020, which sounds counterfactual, and then there’s a bunch of advisors who are losing market share or aren’t growing. And I think that what I see is the technology and the embrace of technology and the investment in technology and the willingness to try new things, I think is what’s driving a lot of the winners today and into the future.

Ryan Morfin:

But for the advisor that’s out there that says, “Look, I don’t know where to start. I’m not a tech guy. I’m an analog person. I’m not a digital person,” can that advisor still survive in this industry post-COVID? And are there resources in the industry to help people like that to say, “You know what? You don’t have to be the tech guru, let us be your outsource CTO,” or any thoughts on that for people who are watching this saying, “I’m not a digital native.”

Brian Hamburger:

Yeah. Well, first of all, I think you’re dead on with the tale of two cities, right? I mean, I never know what I’m going to get when I get on the phone with a client I haven’t spoken to in a while because they tend to be two extremes. From the moment this happened, our focus was deploying our business continuity plan, and I was thrilled that we were able to deploy it in the manner in which we did. That said, our offices were flooded last year, so it gave us an opportunity to do a dry run of our business continuity plan. And so we got pretty good at it, but I don’t suggest that for anybody.

Brian Hamburger:

But right after we implemented our business continuity plan, the next question was, how were we going to make sure that as for profit organization, we are in a position to maintain employment for everyone, we’re in a position to continue to deliver value for our clients?

Brian Hamburger:

And so we took, we really wrangled all of the open projects that we had scheduled over the next 12 months and we compressed them down to a six month period and said, “You know what? We’re going to figure out everything that needs to be done here so we are productive, we are moving forward,” and effectively, as a business owner, that’s reinvestment into the business, right? We’re just going to accelerate that reinvestment into the business so that we end up better off coming out of this than we came in.

Brian Hamburger:

There are other advisors who are just looking to stem the tide, right? And I talk to them and they just want to hang on until they can get back to that in-person meeting, right? And they just hope to stave off this digital experience. Listen, I agree with the sentiment that a few of your interviewees had this week, which is, when this is over, Americans tend to have short memories, right? And whether we’re talking about the flu in 1918 to the roaring ’20s, or we’re talking about 9/11, right? We know shortly after these devastating impacts occur, Americans tend to regress back to ordinary or traditional behavior.

Brian Hamburger:

But I don’t think that’s entirely going to the case here. I think digital has made a huge impact. I think professionals look at it as a way to create some real density within their calendar without compromising on genuine one-on-one individual experiences. I think consumers look at it as a way to interact with their advisor without having to really plan a half day to make a pilgrimage over to the office and have all the niceties that go along with it. Listen, as humans, I’m sure we’re craving that human interaction. I don’t take away from that at all, but functionally, I think there’s going to be a change that will be lasting long after this is said and done.

Brian Hamburger:

To answer your question directly, the answer is I don’t know. Because I’m a tinkerer, right? And as a business owner, I fall into the bucket of the one that wants to dive in, learn as much as I can about a particular thing, figure out what’s working, what’s not working, who has skills, who doesn’t have skills, really assess this myself, and then hand it off to someone within the organization. However, I’ve seen plenty of advisors hire folks on an outsource basis very successfully, whether it’s to build a tech stack and network infrastructure, to work with them on research tools, to help them with succession planning. I’ve seen that very successfully over the years. And as David Cantor said, it’s about getting the right advisors in the room. It’s about getting people who are really working with you on an objective manner.

Brian Hamburger:

It’s amazing to me how many advisors who understand the difference between sales and objective advice, it’s amazing how many of them don’t use that filter when looking out for their own services and look for someone who can simply help them objectively on pursuing their needs.

Ryan Morfin:

Yeah. And I’m looking at this quote, and we’ll play this little clip here from Ben Harrison.

Ben Harrison:

I believe we’re going to move towards more of a bundled approach as we go forward. And so that’s why we like the subscription model. You get what you pay for, it’s a flat fee, you get full access to all of the products and services on the platform, you get access to a higher yielding cash sweep vehicle once we hopefully return to a more normalized interest rate environment. So it’s going to be an evolution, but there’s no question it’s got to change and the prices are going to be compressed. And there’s going to be a lot of a bright light on what is actually free and what is provided for a value.

Ryan Morfin:

My question, Brian, is how can, in a low interest rate environment, how can these custody firms continue to make money? And do you see maybe a pullback from the freemium model in the months ahead if we have an elongated low rate environment?

Brian Hamburger:

I do. I do. And I think Ben’s concept is one that other firms are thinking about as well, right? But look around, right? The majority of Americans have Amazon Prime, and they only have Amazon Prime because, absent a pandemic, Amazon delivers upon that commitment of having something at your doorsteps somewhere between hours after you order it and two days, right? And so people have decided, “Hey, it’s worth the,” what does it cost, 129 bucks, “129 bucks to have Amazon Prime,” and it changes the mentality, right? It becomes now, “How much can I consume, so how good of a customer can I be to Amazon so I’m getting my money’s worth out of that 120 bucks?”

Brian Hamburger:

I think something similar will occur with the custodians as they start to look at their relationships and they start to bundle together products and services that perhaps advisers wouldn’t have the scale to go and get on their own, right? Perhaps advisers have become used to receiving them from wirehouses or trust companies. If custodians can bundle together those experiences and deliver upon their commitments of real priority service, right, live person picking up every single phone call, then I think advisors are willing to pay for that.

Brian Hamburger:

But that’s going to change the dynamic, right? And that’s what’s happening throughout all of American business, right? No one wants to be the one to have to charge the consumers money, right? And so, these custodians are looking at this, but they’re not looking at creating bundled services and charging the end consumer, they’re looking at creating bundled services and charging the advisor.

Brian Hamburger:

So it’ll be interesting, right? It’s the old airline, you know, the first one to blink. Well, actually, if you go before the airlines, right, it’s the Coke versus Pepsi, right? I mean, everyone’s waiting for the other one to move first, but we’ll see how that plays out.

Brian Hamburger:

The great thing about this space is the nature of independence really has just changed the entire dynamics of the way we’re talking about all of these topics, right? Because advisors are the buyers, advisors are the ones that have the ability to decide they want to buy or they don’t want to buy what a particular custodian is selling. So if a custodian offers something that’s really distinctive that’s attractive to the advisor and allows the advisor perhaps to reduce headcount or not to grow their headcount as quickly, maybe it allows them to not spend as much elsewhere, then advisors may flock to that, and they have the ability to flock to that.

Brian Hamburger:

So unlike the captive model, no one is beholden to a particular custodian, and what’s keeping these custodians so hungry. The reason you’re hearing about all the innovation from these custodians is because they have to go out and win this business every single day. Just because I’ve been a firm who’s been working with one firm, with one custodian for 10 years, it doesn’t mean I can’t wake up tomorrow and start opening an account at another firm. It’s very easy to do and it doesn’t have any of the strings that are typical of the traditional broker dealer model.

Ryan Morfin:

One of the things that Tim talked about, Tim Oden from Charles Schwab, that I thought was actually a fascinating synopsis, and we’ll play it right here.

Tim Oden:

There was a foundational limitation that was geography before. Well, when we’re in a work from home environment or primarily work remote environment, one of the benefactors of that is that the talent pool can increase. We can take away those geographic barriers and that provides us with access to talent that enables us to pull people in from around the country, around the world. We can bring in new perspectives, we can bring in new experiences. And I think that has this wonderful opportunity for all of us in wealth management to be able to diversify. And that only makes us stronger, that increases the access to talent, and it makes us able to create more of a national footprint without having to buy expensive real estate in every market we’re expanding to.

Ryan Morfin:

So that was Tim Oden talking about removing geographic barriers from the talent pool. And so now, as advisors, and especially these big mega teams are thinking about expansion opportunities into new growth markets, the way I look at it, there’s GDP corridors all over the country. Even in a downturn, there’s still going to be growth, and I-71 in Columbus, Ohio, and I-35 between Austin and Dallas. How should advisors be thinking about expansion in this environment, into these GDP growth corridors, now that we’ve kind of let the genie out of the bottle you can hire people and they don’t have to all be sitting in one location to execute your business?

Brian Hamburger:

Yeah. So that was one of the things I think that the pandemic revealed, much to the surprise of myself and a lot of the other CEOs that I speak to, is we’ve always, as a group, been probably very hesitant about this notion of remote work, right? It’s how do we know that people are working, right? And really, when you peel back that onion, really what it reveals is our own insecurities about people. It’s about our systems, right? Not about the people that work for us. It’s about insecurities about our systems. Are our systems good enough to really assess whether people are putting in an honest day’s work because we can’t pass by their office and see them in action and see how busy they are?

Brian Hamburger:

This has really, I think, pulled the covers off and allowed us to see things for what they are. We’ve already seen a lot of major hires happen within the industry that are outside of a company’s traditional geographic footprint. So I completely agree with Tim that it’s going to open up and I think democratize the talent pool, right? It’s going to take talent that’s sitting in traditional money centers on the coast and bring them and help them spread throughout the country to the extent that firms want to grow and retain this talent.

Brian Hamburger:

But it’s also doing the same thing with clients, right? Clients are realizing, and they probably should have realized this long ago, or advisors are realizing that they can bring in clients well outside of their traditional geographic footprint. And at a macro level, this is going to play out. I mean, as schools continue to move completely online, you’d have to have your head in the sand not to start to scratch your head and say, “Well, why is my school tied to property taxes when I could actually send my child to attend school anywhere? And based upon their interests and their skills and their intellectual capacity, why am I limiting myself? Why am I looking at things like education at a geographic level,” when, within this pandemic, we’ve realized that geography is not the biggest issue.

Brian Hamburger:

And then the final point I’ll raise here on geographic footprint is the byproduct of this is that it may really help us from a social perspective, right? I mean, social justice is the headline that we’re looking at every single day. And one of those issues is that people have become really comfortable in their traditional communities, right? They’ve grown up, they’ve lived in these communities, they’ve never left these communities, and so they haven’t gotten comfortable with diversity. They haven’t gotten comfortable with the notion of inclusion.

Brian Hamburger:

And I think a byproduct of breaking down those geographic barriers is that we get Americans comfortable with the fact that diversity, inclusion are mainstays of well-run American business.

PART 2 OF 4 ENDS [00:28:04]

Brian Hamburger:

… of a well run American business.

Ryan Morfin:

Yeah. I think we’ve all been guilty of living in the box that has been created for us, whether it’s in our industry or in our personal lives. And I think this pandemic’s really broken that box and a lot of people just kind of look at new ways of doing it. I think your comment about education is spot on. I mean, your clients can be in Maine to Seattle. You don’t have to… And you can be sitting in Florida. So you don’t really necessarily need to be in that area if your personality jives with, and you can still trust in a client across the country. And I think this is going to really change people’s mindsets about growth. Another area that when David Cantor was talking, that I thought is quite spot on, it was talking about succession planning. And here’s David Cantor from Fidelity.

Tim Oden:

Boy, that is a great question, but also a very complicated question. Maybe I’ll start with what hadn’t worked. So if you go back, boy, five, 10 years ago, when succession planning was just starting to be in vogue, most advisors did a lot of talk, but there wasn’t a lot of action. And what I’ve seen at least in the last five years is sort of divesting succession planning from, let’s call it ownership planning around the firm.

Tim Oden:

So there’s sort of two issues. Who’s going to run the firm and then who are the owners going to be? And with many big firms that have been growing it’s hard to groom successors that have the same skill sets, but also will have the capital to provide liquidity, to provide a ownership transition for the founders. So what I’ve seen is probably three things. One firms, rather than trying to hire talent that are going to be experienced talent, trying to groom their own. So hiring and grooming them all pursuant to their own sets of standards, their own sort of master apprentice model.

Ryan Morfin:

To David’s point about this, talent and talent wars in the space. You know, I think a lot of people just look at experience in the space as a plus, but the way we look at it, I’d like to take people in from other industries and bring their different perspectives into our industry. How are you looking at succession planning? How are some of the best advisors you talked to thinking about that next gen of advisor that next gen of senior management? What are they doing differently to really create foundational human capital in their business?

Brian Hamburger:

So let’s have an honest conversation about it, right? I mean, rather than just tell you what everyone else has told you I’m going to tell you what I’ve seen, not what advisors have told me. Advisors are doing a horrible job with succession planning. And that’s not to say that they are not trying to groom the next generation of talent. I think they are. And I think they’re doing a pretty good job of that. So you hit on two big issues there, right? One is the talent pool. And I agree with you. I think that if you’re an organization that already knows investment advice, you already know the securities industry, then it’d be easy to bring someone in who’s done that job at another organization, but it’d be far more rewarding to bring in someone from outside of the industry to bring a different perspective to these things. You want to be the firm that’s thinking differently about a lot of this stuff. And the more voices we can get in the room who have a richer degree of experiences I think the more likely we are to be thinking differently about these things.

Brian Hamburger:

But there’s a fundamental gap in succession planning and the gap is that no matter what we talk about at the end of this story, it has something to do with the founder’s own demise. And because advisors are advisors and they look at themselves as I can always give advice, like “I’m always going to be in a position to deliver advice. And I love my clients. I love what I do.” And so the first time that advisors come front and center with a real need for succession planning is when there’s an imminent event. And unfortunately it’s often a health scare that brings an advisor to reckon with this. Before then it’s rather altruistic, it’s let me train this next gen, let me make sure we’re recruiting properly and all that’s well and fine. Unfortunately, with a very short runway with something like a health scare, where they need to implement succession planning, imminently, there’s no time for a sound business decision, right?

Brian Hamburger:

You’re bringing in sources of capital that don’t align with the longterm interests of the staff that remains and the client’s interests. So yeah, we’ve seen an uptake in deals. And many of the firms that David mentioned are high quality firms, that we’re thrilled to work with and to have in the space. But there are also a lot of deals happening in the space that are done with a certain degree of desperation, deals that have been done with a lack of forethought and consideration. And deals that are being done based upon the founder’s own interests, without regard to the impact on the eventual business. I would argue that the delivery of independent investment advice is not one that we can create a corporate investor for. I think the further removed the investors are from the client experience the more this industry starts to look like the wirehouse space.

Brian Hamburger:

Now it’s not to say that you can’t have investors in your business, but you want investors who are aligned with the core ethos and the values of the organization that you’ve created. And far too often we’ve been involved in deals typically with private equity firms that don’t have a great deal of experience with the independent investment advisor space. And all they’re looking at is the numbers. They’re looking at the recurring numbers, the free cash flow. They’re looking at the growth rates. They’re not looking at what are we going to need to do to continue to invest in this business to deliver a high quality, personalized investment advice experience to the end client?

Ryan Morfin:

Yeah, I think your comment about not really taking or having the right mindset to envision their removal from the business in totality is really keeping a lot of advisers succession plans from being either unrealistic or not financeable. And I think that’s a great comment. One other area that we touched this week on was the M&A environment. And in this conversation, I spoke with Peter Dorsey from TD Ameritrade and he had this to say about the M and A environment.

Ben Harrison:

Valuations are not going down, they’re definitely going up. And it’s kind of, when you talked a little bit, Ryan, [inaudible 00:35:26] the temp space, you know, there’s a lot of buyers and there’s not a lot of sellers. And so it doesn’t really take an economics major to do the math on that one. You know, the prices are going high so the valuations are definitely… They’re frothy right now. And a lot of people are attracted to that for sure. And it’s super important.

Ben Harrison:

The other thing that I would just implore people to look at is, you know, valuation is obviously important. Deal structures are really important too. Are you getting 100% cash, probably not. Are you getting 25% cash and 75% equity maybe, but that’s really important to you. And I think it gets overlooked a lot because people get tied into this, my multiple is this, my top line is this. And if I just do this multiple, this is what my business is worth. And it’s absolutely not true. You know, I can look at two businesses of say $200 million in AUM, both doing similar top line and value them very differently, just depending upon the demographics of the end client, how many clients they have, there’s a lot of variables that go into that instance.

Ryan Morfin:

So Brian, do you subscribe to that? Do you think valuations are going to stay at 2019 levels? David DeVoe just came out and he said that Q3 is going to be a record quarter for RA M&A, but he also said in one of his earlier research notes that it’s the larger M&A that’s accelerating. Where the billion dollars and less AUM RAs has dropped dramatically by a third. What are you seeing out there? And what is your opinion of the M&A investors?

Brian Hamburger:

So I think Peter’s comment of frothy is pretty accurate, right? You and I earlier talked about the Tale of Two Cities. Buyers are looking at quality right now, the quality buyers are looking at quality firms right now. Where advisors are often misguided as they look at headlines of deals, right? They don’t know the intricacies of the deals. So they see a deal for $20 million. They just start to reverse engineer that they say, “Okay, well, this person had this much under management. I have this much. So if you follow the same ratio, my firm is worth X.” It’s just not the way it works. And advisors will push you for, well, what’s the rule of thumb and what’s the general rule and how much can I expect?

Brian Hamburger:

And eventually if you seek an answer, you’re going to give them an answer. It’s just not going to be an accurate one. It’s just going to be one that makes them feel better about themselves at the moment. Those headline deals are not coming to fruition. And that’s the problem that nobody is writing about. The deals that people stroked back in December of last year, that had all of these different variables and earn outs as what they’re properly referred to as. Folks aren’t going to hit those earn-out projections. Folks aren’t going to be able to maintain the growth rates. And so advisors need to know that when they’re working with a professional investor coming into their business, that they’re maintaining the risk post-transaction. That if the business dips or doesn’t grow at the rates that the investor used within the assumptions, that that money is typically coming out of their pocket first.

Brian Hamburger:

They are another layer of insulation and protection for the investor of the business. Most advisors don’t understand that. And so you have to go into a deal with the mindset, that quality is priority number one. The quality of this deal is the most important thing. And even if by a headline number, it sounds humiliating that I took such a low number based upon what I’ve seen other deals go for, advisors really want certainty coming out of these deals. They want to know that, okay, when I finally relinquish control of my firm, and I finally relinquish these shares that I’m getting at least X for that deal. Not that I just bought myself a job for the next five years to make sure that this investment pans out for this next investor, until they have an opportunity to flip it.

Brian Hamburger:

So we’re seeing an unbelievable amount of sellers remorse that’s coming online. Sellers remorse happens when the seller thought they had an ideal buyer, they thought that their interests were aligned. They thought that their interests matched and lo and behold for whatever reason, maybe it was lack of due diligence, maybe it’s that the seller changed direction. But the seller and the buyer aren’t working harmoniously any longer. And so we’re seeing a lot of inquiries about, “Hey, what rights do I still have? And is there the ability for me to effectively go back?” And the answer most likely is no.

Brian Hamburger:

So this is not a warning about M&A, I’m really bullish on M and I think it’s going to have a huge impact on independent RAs. And I love the investors that are coming into the space that are making it all sorts of interesting. This is really a warning of, hey, you know what? Don’t buy the headline number, dive into the documents, get experienced counsel early, get them involved early, really understand the deal. Because to do otherwise is really harming yourself, your employees and your clients.

Ryan Morfin:

And as we see the M&A consolidation with the Charles Schwab TD merger those are two of the larger players that have merged and got approval from the government to do so. It opens up perhaps a wider swath for people like First Clearing, RBC, Raymond James, to come in and bring differentiated models. And this week we were lucky enough to have Greg Bruce from Raymond James talk to us about a little bit about some different models, one of which is still independent, but a W2 model. And we have this clip here for you to listen to.

Raymond James:

… Model for their clients, as well as how they want to manage and run their business.

Ryan Morfin:

And so you guys have a W2 model, you have an independent model, a hybrid model, maybe talk a little bit about the trends in the W2 space. I actually have been seeing a lot of independent advisors want to go back to W2. Are you guys seeing that as well?

Raymond James:

Yeah. There’s a lot of momentum there, as well as the independent contractor division…

PART 3 OF 4 ENDS [00:42:04]

Raymond James:

-momentum there, as well as the independent contractor division. I think that, right now, the financial services industry is a tide that’s rising all ships as it relates tot the Raymond James experience. We’re certainly seeing a tremendous amount of growth on the W2 as well as the 1099 side of our business, and I think that the way that we are approaching that is that we feel that there are [inaudible 00:42:26] within all of those affiliations, and our ability to attract and educate and create awareness there is really where our focus is.

Speaker 1:

Thank you, Ron.

Ryan Morfin:

So Brian, this may sound counterintuitive, but for some of the new people that we’re reaching out to VR marketing of this clearing week, there’s this concept on the independent side of mega teams, and this is what I talked to a lot of our fastest growing firms about, is you want to become a mega team, ten active advisors that are growing, and there are W2 opportunities in the independent channel at some of these bigger firms. Maybe you could talk a little bit about that and talk about anything you’re seeing in terms of W2 opportunities for advisors who say, “You know what? I tried the entrepreneurial thing. I don’t love it. I want to go find a home where someone takes care of all that stuff and I can just service my clients again.”

Brian Hamburger:

Well, as we were talking about before with technology, that same thing has more recently started to happen with advisory firms themselves. I think that’s been even more fascinating, right? Because more and more advisors are leaving the captive wirehouses and banks and trust companies to jump into the independent space, but not always necessarily to create their own firm, but to join an existing firm that has an established infrastructure, has an established brand name, has professional investors on board and, really, all of the resources that they’ve come to expect from a securities firm.

Brian Hamburger:

It’s been fascinating. We just heard from Greg Bruce, but Raymond James and LPL and other traditional independent broker dealers, many have really taken the approach of, “Hey, we want to be the cruise ship buffet,” right? “Whatever you come to dinner feeling like, we want you to be able to go ahead and get it,” right? So you can have a family of six and every one of them can dine on something from a different continent, and everyone leaves happy.

Brian Hamburger:

So we’re seeing independent broker dealers, the most successful ones really reinventing themselves, right, and saying, “However you want to affiliate with us, we’re okay with. We’re going to figure out a way to survive and to make a business of that arrangement.” But beyond the independent broker dealers, you’ve got platforms in the space, and you’ve got enterprises that are independent REAs that have also built some amazing models.

Brian Hamburger:

The great thing is that now what unifies people moving over to independence is really only this desire to be held to a fiduciary standard, this desire to act in the best interest of clients, and the desire to leave behind so many of the conflicts that have plagued them and interfered with their relationships over the years.

Brian Hamburger:

Unfortunately, what we’ve created is like a seven-lane highway over to independence, and if you’ve ever been on the New Jersey turnpike, there’s no signs. People are going every direction. We like to change lanes a lot. But that’s kind of what’s happening on the way to independence, right? It’s become a bit of a confusing road to independence, because there are so many options.

Brian Hamburger:

So good news is there’s so many options. Bad news is so many options, right? So early on, we tell advisors who are serious about moving their teams over to independence get with an objective advisor right? Their recruiter may be great, and there are a lot of phenomenal recruiters out there, but get with someone who doesn’t have a financial interest in where you go and really share with them your needs, goals, and objectives.

Brian Hamburger:

It’s hard. It’s really hard for an advisor to turn client, right? It’s one of the most difficult dynamics that we encounter. So on my project kickoff calls, I’ll tell them, “Hey, listen, I need you to be the client for at least the next few months,” right? “I need you to actually ask open-ended questions. I need you to be inquisitive. I need you to tell me when you don’t know something or when you’re not picking up something.” But all of those typical you think you need to come to the room with all the answers, I need you to dispense with that for a little while, right? Getting them comfortable with that dynamic is a real challenge.

Brian Hamburger:

But I digress. I mean, it really is a showing of the maturity of the space and the maturation of the space that there are so many options out there.

Ryan Morfin:

Well, no doubt this industry has really been expanding aggressively and in a sophisticated manner to not only rival the wirehouses, but I think really outperform them in the years ahead. So what are some silver linings that you see on the horizon for the independent US wealth management industry and the US economy in general?

Brian Hamburger:

So I wouldn’t be the right one to ask about the US economy. I can’t quite make sense of how every company takes away their estimates and the market goes through the roof. If companies would have known they could have done that, they would have done that years ago, I’m sure. But so I’m unclear about the future of our economy. I think that David Canter mentioned that if you were to ask me at the beginning of the pandemic where the markets would be, I probably wouldn’t have said here, right?

Brian Hamburger:

So I think we have really had the markets buoy the success of the securities industry over the last several months, and I don’t think we can rely upon that, right? I think we have to anticipate volatility ahead, especially going into an election year. There’s going to be a lot of mudslinging. There’s going to be a lot of allegations. I don’t think anyone thinks that this is going to be a polite election. So I think we should expect some volatility ahead.

Brian Hamburger:

That said, the more that these markets are either unexplainable or volatile increases the demand for independent, objective advice, and so long as we can stay on that side and not necessarily worry about picking what horse is going to win, but rather make sure that all the horses are cared for and fed, I think we’re going to find ourselves in a really good spot, because we’re doing the good work, right? We’re supporting an industry that is supporting higher standards for the delivery of advice and supporting more objectivity.

Brian Hamburger:

As clients really start to understand this … and they understand. I’s not complicated. But as clients really start to be engaged in who my advisor is and how they’re compensated, all sorts of questions that they’ve often had about how all of this works, I think we’ll continue to see propelled growth within the independent wealth management.

Ryan Morfin:

What about books or podcasts or newsletters are you reading to kind of keep ahead of the trends in the industry today?

Brian Hamburger:

You know what? I don’t think I’ve ever done more reading in my life. I can’t believe how much content is being thrown at us on a regular basis. So for me, it’s been a flight to quality, right, is let me make sure that I’m digesting the right news, the most concise news that I can. I haven’t had a lot of time to read, but I just started reading Scott Galloway’s book, The Algebra of Happiness. I find him to be a really timely commentator on where we are, especially coming from higher education. I’ve got two kids in college and one on the way.

Brian Hamburger:

At the same time, I’m reading a book. It’s probably about a decade old, The Speed of Trust by Stephen Covey, because I think so much of what we’re dealing with now is really going to be based upon trust. I think that we talk about technology. We talk about growth. We talk about the financing. But at the end of the day, it’s still an advisor sitting across the dining room table with their client. As fancy as we want to make it and as much of an alternate reality as we want to create, it’s still someone who is confused about a really complicated topic going to someone for help and feeling better after that interaction. You just can’t stamp out genuine interactions in an infinite manner. You can scale it, but you can’t stamp it out in an infinite manner.

Brian Hamburger:

I think a lot of us are trying to figure out where that line is over the course of this pandemic, and there’s going to be a lot of really great things that come out on the other side.

Ryan Morfin:

Yeah, I do believe there was a Renaissance after the Dark Ages and the bubonic plague in Europe. But Brian, I wanted to thank you for helping us round out Clearing Week with your insights. You’re a trusted advisor to all the firms that were on Clearing Week, as you are to our firm. So we appreciate your insights, as always, and thank you so much for joining us today.

Brian Hamburger:

Thanks so much for having me. It’s good to see you for this [inaudible 00:09:50].

Ryan Morfin:

Absolutely. Can’t wait to do it in person soon. Thank you.

Ryan Morfin:

Thank you for watching Non-Beta Alpha. Before we go, please remember to like, subscribe, and follow us on Apple Podcast, our YouTube channel, or Spotify. This is Non-Beta Alpha, and now you know.

Speaker 2:

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PART 4 OF 4 ENDS [00:54:03]

 

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Ryan Morfin: Welcome to Non-Beta Alpha. I'm Ryan Morfin. On today's episode, we have Pini Althaus, CEO of USA Rare Earth, talking to us about the supply chain glut in rare earth minerals. This is Non-Beta Alpha.

Ryan MorfinPini, Welcome to the show. Thank you for coming on today.

Pini AlthausThank you for having me, Ryan. Good to be here.

Ryan Morfin: So you're an investor and a miner in rare earth minerals. Can you share with our listener base, what are rare earth minerals? Why are they important and why is there a geopolitical race going on globally?

Pini AlthausYeah, I mean, rare earths are an extremely ubiquitous part of all advanced manufacturing or technology manufacturing today's day and age. Several years ago, I had not heard too much about rare earths myself. I was not that familiar with it and being involved in this sector, in this company, for the past few years has given me an education of course. And I mean, I was sad to hear that 50% of all imports into the United States contain are earth elements and it runs the gamut from consumer electronic devices that we use every day. Our cell phones, our laptops, most communication devices, medical equipment. So there's a tie with COVID, which we can touch on at your discretion. Electric vehicles, defense equipment. So pretty much anything or everything high tech today has a rare earth element or critical minerals contained within them.

Ryan MorfinAnd what are some of the names of some of the more important rare earth? I know there's lithium for batteries, but what else is considered in this category, critical?

Pini Althaus: Yeah, so lithium is a separate category to battery material. The rare earths are 17 rare earths. The four, let's call it, key rare earths that we're focused on at our company, the four rare earths that go into the permanent magnets. And these are the magnets that are found, there are a number of them in your back of your cell phone or an iPad. But if you look at an F35 striker jet, you've got about a ton of rare earth magnets in those. And we've got two heavy rare earths and two light rare earths is part of the permanent magnets. You've got dysprosium, ytterbium are the heavies, and then you've got neodymium, praseodymium as the two light rare earths. So those would be key rare earths that are the focus.

Ryan MorfinAnd you use these in, I guess, in military applications as well, but historically, where has the United States sourced the rare earth for supply chain?

Pini AlthausYeah. And that's the shocking part. We've been securing those materials from China. So China controls the rare earth sector and has done so for the past 30 years or so. And it was a significant misstep on the part of the United States, allowing China to have this control. And actually this wasn't a question of China coming in and doing anything nefarious as far as stealing IP or anything. The US government made a conscious decision about 30 years ago to allow China to come to the United States and acquire the processing capabilities for rare earths. So just as part of some background, you've got the rare earth materials containing various mining projects, but once you extract them, you have to then process them and they go through certain phases before they get to the magnet phase. And China, the thought process was let China do the mining, let China do the processing.

Pini AlthausWe don't need to do that here. And we'll buy the materials from China cheaply and the premier of China at the time, Deng Xiaoping made the comment, he said, "The Middle East has oil. China has rare earths." And unfortunately we weren't smart enough to understand what he was saying. And the Chinese understood that the future of manufacturing is going to revolve around control of the rare earth and critical mineral supply chain. So if you think about it today, Ryan, we cannot build... Forget about consumer electronics and medical equipment. We cannot build the equipment that the US Pentagon or the US armed forces require, whether it's F35 fighter jet, Tomahawk cruise missile, communications equipment, without going to China and obtaining those materials. And it's obvious to all that this should be extremely alarming. We've seen China use this as a weapon, if you will, as far as how it interacts with other countries back in 2010, when there was a dispute between China and Japan on the East China Sea.

Pini AlthausSo China cut off rare earth exports from Japan for 40 days. Japan obviously being a significant user of rare earth elements for their high-tech manufacturing sector, that was stopped after 40 days. But in fact, it was President Obama that first made the United States aware of this, formed a division within the Department of Defense to handle this issue, but not much has happened. And we continue to be relying on China for these materials. And what has been made about trade war with China and whether the trade war is really the impetus for China withholding rare earth exports. And that is a huge misnomer. Whilst China had been talking or implying that they would cut off rare earth exports, the truth of the matter is that China, under it's made in China, 2025 mandate, its belt and road initiatives and others. And you seem to control the critical minerals and rare earth supply chain so that it can continue its dominance as a manufacturer or a global supplier of these materials and finished products.

Pini Althaus: It's the backbone of its economy. And in fact, China has become a net importer of rare earths from different countries like Miramar and others. So with that, they are decreasing the exports to countries like the United States, Japan and others.

Ryan Morfin: And was it ever a risk that the Chinese were going to turn off the exports of rare earth to the US during the trade war? How close were we to that? And was that ever some saber rattling that went down during trade negotiations?

Pini AlthausYeah, I think it was saber rattling. I think it would be paramount to an act of war. I can't say with any authority that that would not happen, but it would be probably, aside from war itself, it would be one of the most significant acts of war cutting the United States off from the ability to procure rare earths. But that being said, I mean, if you look at, as an analogy, the oil and gas sector and the reliance of the United States had for many, many years on OPEC countries to supply us with the oil. And we had embargoes and we had price manipulation by OPEC. This is far more significant given the ubiquity of where these rare earths go. And yes, we're always under the threat that China can cut off exports under the guise of a trade war or for any other nefarious reasons.

Pini AlthausBut I think even more importantly, to just as the natural run of the course of things with regards to their business and their desire to maintain themselves as the global leader in manufacturing and exporting of goods, China is in a position now where it actually requires these materials for their own domestic consumption and can legitimately cut off rare earth exports by stating that they need it for manufacturing and that would actually be somewhat correct. So we're in an extremely dangerous position here with this reliance on China. And it wouldn't just be China. If it was another country, it would be similar issues, not to the same extent, but reliance on one country for these materials is dangerous.

Ryan Morfin: And it's been mentioned in the past that in 2010, China flooded the market to really kill all the competitors in the rare earth mining industry. Where was the World Trade Organization during this period? And how did that play out and how does that set the chess board for China to run the tables?

Pini Althaus:

Yeah. So the WTO stepped in when China cut off rare earth exports from Japan, I think it lasted for about 40 days because the US and Japan protested the WTO, and they stepped in and China resumed exports. While I'm not an expert on these trade matters, one thing that I am aware of is that one of the reasons why China had to resume the export of rare earths was it did not legitimately need all the rare earths for domestic consumption. So therefore it was a nefarious act, if you will, to cut off rare earth exports. Now that has changed, which means China have to cut off rare earth exports today, they have a legitimate case to say that they require these materials. There's a shortage of these materials and they require them for their own domestic purposes. It is the backbone of their economy and there's very little we could do about this today, which is why it's becoming an even more urgent issue.

Ryan Morfin:

And the US government started stockpiling some of these after that incident. Can you talk a little bit about what DOD and DOE has done to start making sure that there's not a critical supply shortage going forward, and is it enough?

Pini Althaus:

Yeah, again, there is a national defense stock pile, and there are materials still that the United States needs to procure in order to shore up its stockpile. There are magnets, the finished magnet products as well, the United States government needs to stockpile. Again, there's a limited amount that the United States government has. It requires approval from Congress, whether it's in the NDAA or other approvals from Congress, to allocate monies for the national defense stock pile of these materials. That being said, there's no endless supply of these materials. And unfortunately, the apparatus, the way it's set up right now with the US government, it's going to continue to require having a secure supply chain of those materials for many, many years to come. So it's not a question of stockpiling for 10 or 20 years, and then this complacency and saying, we'll kick the can down the road. But keep in mind as well, Ryan, that US government accounts for low single digits of overall rare earth imports into the United States.

Pini Althaus:

We're talking about defense contractors, we're talking about the manufacturing sector. The direct impact this has on the economy, jobs, the automotive sector, and others is significant. So it's not just limited to the United States government. If you look at over the past couple of weeks, the sanctions that China have put on Raytheon, Boeing, Lockheed, et cetera. I mean, the question is where are they going to get those materials? And if we go beyond that, you need rare earths for the 5G network. Now that Huawei has been banned from installing the network, not only in the US but other countries, we have to have the ability to get a secure supply of these materials as well. Which currently, again, trying to control the hundred percent. So it runs across the board, both for government, defense and manufacturing in this country.

Ryan Morfin:

Well, and so help me paint a picture for our audience. Does China have all the mines for rare earth, or they're the only ones who started mining it? Or are their mines globally dispersed and nobody's been doing the actual infrastructure to do the mining?

Pini Althaus:

Yeah. So finding rare earth projects or rare earth elements is not the difficult part. It's finding them in significant quantities that makes a project economically viable. And part of that consideration are the environmental rigors that companies in the West have to adhere to. And China, even by their own admission, have had a complete disregard for mining these materials and even for processing these materials. And in fact, just the last week or so, the BBC did an expose on this, 60 Minutes has done an expose on this. But the Chinese have not denied this and have talked about cleaning up their act, but it has an effect on the bottom line for what the costs of mining and processing are if you have no environmental standards to adhere to. So China have exploited those rare earth projects they have, primarily in inner Mongolia, and have brought a number of projects online and quite quickly, and in a significant way, with a complete disregard for the environment.

Pini Althaus:

So it was seen as an environmental no-no in the West for many years. Now, what's happened over the past few years is you're starting to see rare earth projects in different parts of the world sprout up. You've got the Mountain World project in Australia owned by Linus, which is a producer of Nd and Pr, neodymium and praseodymium. So two of the light rare earths. They may have some heavy rare earths coming online at some point in time. And you've got Arafura, which is another company in Australia that we're working with to assist them with their processing so they don't have to send the materials to China for processing. But really these are a drop in the bucket for what the requirements are for the United States. And certainly what the requirements are for allied countries, the EU, et cetera. So there is a race, if you will, worldwide to start bringing projects online. The Chinese are very active in trying to secure assets outside of China.

Pini Althaus:

So in Africa. They have ownership of a project in Greenland. So there is somewhat of a race. The Australian government has stepped in and has started limiting the ability for China to own, or have ownership in, or off takes for the Australian rare earth projects. And that's part of the strategic Alliance between Australia and the US. Canada, similar thing as well. There are a number of projects that are looking to come alive, but these projects are, for the most part, will take many, many years to come online. We have to expedite the process. We have to assist with a [inaudible 00:14:41] supply chain and the domestic rare earth sector, because previously investors have been scared off by things like China flooding the market, which is not a possibility at this point in time, given that China can't actually afford to flood the market. They are already very heavily subsidizing their mine to magnet supply chain there.

Pini Althaus:

This is more now a case of being able to get production from non-Chinese sources so that the United States and allies have a viable, secure supply chain of these materials. And it's a concern worldwide. We speak to governments all over the world, and we're all facing the same issue. Some more than others, especially countries like Japan, that don't have their own rare earth projects there and are reliant on Australia where they've made some investments there. And in the United States, they've made an investment recently in Africa. So there is this race, if you will. And I think we've got a five-year window here to at least stand up a few projects worldwide. Otherwise we've lost this race and we will be dependent on China for many, many years to come. And Ryan, it's a bit of a hypocrisy. If you look at it where you've got materials going through clean, green energy applications, like electric vehicles, wind turbines, et cetera.

Pini Althaus:

That we're sourcing these materials from China, where they've, again by their own admission, has been complete environmental devastation to water bodies around these mines and processing facilities, to the communities. People have been getting sick around these projects yet we're putting these materials into our electric vehicles or wind turbines. It makes no sense at all. And people are starting to wake up to this. And that's why the sector is starting to see a lot of support come out of Congress and bi-partisan support. And in fact, it's one of the only bi-partisan issues right now in Washington. And it's good to see that some things decided to move in the right direction.

Ryan Morfin:

And is there a special process? You talk about the expense, is it really difficult to mine these? You have to go through a special chemical process to extract and clean and purify. Is it a lot harder than, say, gold or silver or some of the other, we'll call, more traditional elements?

Pini Althaus:

Yeah. It's all about the processing to some extent. So if you look at MP Materials in California, which used to be Molycorp before they went through their bankruptcy. They are a miner of Cerium and Lanthanum, which are two of the light rare earths, the lower valued light rare earths. Given that they do not currently have processing technology, they are sending those materials to China for processing where China is tariffing those heavily. Linus is also, they're doing their processing work in Malaysia and elsewhere. So it's really about the processing at this stage. One of the things that we've done, after we put out our PDA last year with our upgraded resource, which now includes a significant amount of lithium. We make a decision that, based on the test work that we had done around our processing methodology, that we were not going to send our materials to China. That it's paramount for us to do this work in the United States and in a collaborative effort as well.

Pini Althaus:

We've been asked by some of our investors, "Well, why would you be looking to help other projects with their processing?" And the answer is simple. There's no one project or one company that's going to put China out of business or make a dent, or somehow be able to take care of the overall demand worldwide for rare earths and critical minerals. And it's very important for us to have processing capability in the West. So that was the impetus for us opening up our own rare earth and critical minerals processing facility earlier this year, which we did in Wheatridge, Colorado. And in fact, we've made some significant progress on the method that we're using for this. And we're starting to collaborate with Australian companies, Canadian companies. We're currently talking to a group over in Europe as well, because this has to be a collaborative effort.

Ryan Morfin:

How does Europe solve for these problems? Do they have this better under control than the US?

Pini Althaus:

No, they're in a far worse position than we are. The EU commission recently put out a report, I think, a couple of months ago that the requirement for rare earths is going to increase tenfold within a short period of time. Lithium 18 times. They don't really have rare earth projects. Again, there are the Greenland projects, which people have heard in the news recently. Those need to further development work so they don't have rare earth projects ready to come online there. There are a couple of lithium projects that are spread around Europe, but for the most part, Europe is in an even more precarious position. If you look at Germany with the auto manufacturers, you look at the big companies like ThyssenKrupp and others, all these countries and companies are looking for alternatives to China, because we've already seen in the news about China withholding or reducing exports of some of these rare earths that are required for these industries.

Ryan Morfin:

And you mentioned earlier the regulatory posture of the US makes it difficult to mine. Is it becoming a more bi-partisan issue that we need to maybe relax some regulation around the mining exercise, to incentivize private sector to come in and start producing this? Or is the Republican party versus the Democratic party on two separate pages of music?

Pini Althaus:

Yeah. Good question, Ryan. I mean traditionally the Republican party is obviously being more pro-mining and in favor of less regulation when it comes to these things. With regards to our project, we're on Texas state land. So we don't trigger federal environmental permitting at this point in time. And obviously Texas being Texas, a mining state and oil and gas state, things are a lot easier in Texas than they are on projects on federal land where the Bureau of Land Management controls the environmental process around that. But the thing is here, and I don't want to step into what other companies are doing, et cetera, but we do need to be reasonable about allowing projects to come online if they're adhering to environmental standards that are acceptable worldwide. And what we do know, is that China is destroying the environment and cities and water bodies around their mines and processing facilities.

Pini Althaus:

We have standards here in the United States, and I think what we need to do is make it easier for companies to mine, while at the same time protecting the environment. And there are ways to do that. And we're definitely seeing buy-in from Congress, from both sides, with regards to looking how we can stand up a secure supply chain. And, obviously under the Obama administration, they had very strict regulations when it comes to mining. And that's changed under the Trump administration. Hopefully what we start to see is some normal middle ground that'll allow other projects to come online.

Ryan Morfin:

And typically in these rare earth mines, is it amalgamation of different minerals that are all consolidated together and you have to separate them out? Or do you ever find pure play, Europium, I can't even pronounce some of these. Gadolinium, Cerium. I mean, are they all mixed together and you've got to filter and sift them through, or are they pure play mines?

Pini Althaus:

No, they're generally they have a mix. So they're polymetallic projects. They have a number of different materials. Some projects, you more to what we call the light rare earths like MP in California or Linus in Australia. Our project is actually on the opposite end of the spectrum. We have a very high concentration of heavy rare earths. That being said, we do have to go through a process of separating these materials. But the case of our project where we've got 30 materials. We're not going to produce 30 materials. We're not going to market 30 materials. So what we're doing is we're focusing on the key materials that are marketable, that we need for permanent magnets, lithium as well, and working on the separation and the optimization of those materials in particular. But we're all faced with the same processing challenges and that is something that can't be set.

Pini Althaus:

There's no easy way to do this. There are different technologies that have been used in different parts of the world. So predominantly there's a process called solvent extraction, but it's big, it's bulky, it's not benign. It's a bespoke solution for one particular project. So it doesn't work for feedstock from other projects. What we've done is we're using a processing technology that's actually been around since the 1940s. It was part of the Manhattan Project. It's called continuous ion exchange. In fact, the Chinese use it to increase the purities from 99.99 to four nines, five nines, and even six nines. So for some applications you require higher purity levels. It's a far easier processing method to scale up and to take feedstock from other projects. In fact, we've demonstrated for the Department of Energy that we can take coal waste from Pennsylvania and do high purity separation of rare earths using our processing methods. So it's not a step that can be skipped unless one needs to send it to China for processing, which is not going to help us with our objectives here.

Ryan Morfin:

How many other, we'll call it, going concerns on any other businesses that are doing this, that are trying to, I guess, start the development of these mines. Are you guys one of a few or are you one of many? And is it an international or just a US game? Who's leading the charge at going after this?

Pini Althaus:

Yeah, well, I'd say the Australians are leading it outside of China right now. You've got some really good projects in Australia. Again, more skewed toward the light rare earths. There's one more heavy rare earth project in Australia, which is not yet producing. The United States, you've got MP Materials, you've got Ucore in Alaska, you've got the Bear Lodge project in Wyoming, which is also another light rare earth project. So as far as a heavy rare earth project that looks like it will come online in the near term, that would be our project. In Canada there are a couple of projects there as well, and again, more skewed toward the light rare earths. But we really need to get as many of these projects online as possible. Because again, I don't see it as competition. We all have a problem doing supply agreements or offtake agreements for our materials.

Pini Althaus:

In fact, one of the things that we're going to have to consider is looking at potentially scaling up our production, based on the demand that we're already starting to see. And I think other companies would find that as well. So it's all about the economics of the project. You have projects that were economically viable back in 2012 or rare earth prices with 35% or so higher than they are today, and are not necessarily viable today. So that's the challenge as well, economically viable projects. And we've got to get as many of them online as possible. It takes many, many years. I mean, our project has had over $70 million put into it to get to where we are today, and we're close to getting to the production scenario. It all revolves around processing at this point in time.

Pini Althaus:

We'd be very happy to see another couple of projects come online, because this is extremely important for national security and for the economy as well. I mean, if you think about it, Ryan, if you've got a billion dollars of rare earth materials, that translates into a trillion dollars or I should say trillions of dollars of finished product. So you've got a magnet in your phone there that's worth a couple of dollars and the cell phone's a thousand dollars. And electric vehicles and defense applications even more.

Ryan Morfin:

Yeah, everyone has one of these iPhones now, and there's tremendous amounts of rare earth on the circuit boards here. And I think people take it for granted that that supply chain is not secure right now. So one question for you, there's talk of this maybe medium term to longterm, but there's talk about mining in space. Do you think that's a feasible option in the longterm, medium term? What are your thoughts on that?

Pini Althaus:

No, that's just ridiculous. I mean, we're trying to find ways to make mining on earth economically viable. I think the cost of going up to space would be more than what our capex will be bringing our entire project into production. I mean, we've got about a 350 to $400 million capex to bring 130 year mine life into production. I'm not an aerospace expert, but I think sending a rocket, building a rocket ship and sending it up, I think maybe on the fuel alone, you could bring a couple of projects into production. So unless we have a fortunate situation or an asteroid lands on earth, and fortunate if it lands somewhere where we don't care, I don't see how that happens. And if it's big enough, it's a problem as well. It's nonsense. And even, options aside of the deep sea mining for rare earths, I mean, you've got all sorts of environmental issues around that as well. I think we need to look at projects that we can bring online, that can be done so in an economic way, that can be done so in an environmentally responsible way.

Pini Althaus:

I mean, one of the things that we've done at our project is we've got in excess of 60% of the materials that have come out around top, will have a clean green energy applicability to them. So we're using the benign processing method. We're going to be using renewable energy on site. In fact, we will likely be putting a solar farm on site as well. We've talked to a couple of companies that have approached us about that, and we'll be a net producer of power for the surrounding area. So there are ways to do it which don't affect the environment. Obviously if there's a project that's situated on a sensitive area, that's a unique situation for that specific project. We've seen it with the Pebble project, which is not a rare earth project. The Pebble project in Alaska where their environmental concerns is we've been recognized by both Republicans and Democrats, but we have to be reasonable about the projects that don't have environmental concerns.

Ryan Morfin:

So Pini, in season two, we ask all of our guests a series of six questions. They're usually, yes, no questions, but trying to take a survey of our conversations. And if you want to add a little context to the yes or no, feel free, but here goes the first question. If there was a COVID vaccine available today, would you take it?

Pini Althaus:

Yes.

Ryan Morfin:

Who do you think is going to win the election?

Pini Althaus:

Which election?

Ryan Morfin:

The US election.

Pini Althaus:

Well, I think it looks like Joe Biden's going to win it, but I think what happens, if we go past January six from my understanding is that the house will vote on it and it's one vote per state. But I don't know if I see it getting there at this point in time. I really don't have a crystal ball.

Ryan Morfin:

Third question. What type of economic recovery are we in? What type of shape is it taking? A V-shape, W, U, L?

Pini Althaus:

Yeah, I think 2021 is going to be challenging. I think we've been, and rightly so. I mean, we've had no choice as of almost every other country. We've been printing money for the past year because of COVID. And I think we've got to brace ourselves that, at some point in time, the chickens come home to roost. It was a necessary step. People needed it on an individual level. Businesses needed it as well, but I think we've got to do whatever we can to stimulate the economy, give people confidence to go out and work again, employ people. So I think we've got to watch ourselves, especially in 2021. And I have some concerns, but long-term, I think the approach in the United States is a healthy one.

Ryan Morfin:

During lockdown this summer and quarantine, was there anything in particular that you accomplished that you're particularly proud of?

Pini Althaus:

Yeah. A great amount of family time, which, if you would've asked me a few years ago if I could sit at home and be at home for six months, I would have told you absolutely not. I wouldn't be able to do it for six days, but it has... I'm sure it's done this with a lot of families as well. It's brought families together. We had a baby actually last year on Thanksgiving. So I was doing a lot of travel at the time and thought I wouldn't get to see my daughter in her first year or couple of years too often. And being home with her every day is actually been just the most amazing experience. So thankful at least for some silver lining in COVID.

Ryan Morfin:

Are there any silver linings that you see in the economy going into 2021?

Pini Althaus:

Yeah, I think we've gone through an absolute beating and it looks like we've got the ability to come out of it. And I think that's a testament to how strong the economy was built up in the years preceding COVID. So overall I remain an optimist. I mean, we are a country built on opportunity and going out and making it happen. And we're not a socialist country sitting and waiting for people to send us paychecks or wealth distribution or anything like that. I think the American dream still lives on. I think if you go out and you're willing to work and put your head to it and heart in it, I think we do have the ability to climb out of it. So if we look at what the economy is doing over the past few weeks, it looks like it's starting to rebound. And to me, that's assuring because it could go completely one way as well.

Ryan Morfin:

And the last question is, is there anything that you're watching, or listening to, or reading today that has been impactful on your thinking that you'd like to share with our audience?

Pini Althaus:

Yeah, that's a good question. I think it's been more personal stories. The news, I sort of take that in context or with more than a grain of salt. In some cases stay off the news channels for a number of days at a time, it became quite repetitive. But I think on the personal side, talking to friends, my family's all back home in Australia, they've just come out of 110 day lockdown, which we can't relate to that. It's been very trying on them and seeing the fortitude that they've had to come out of that and stay intact. I think the mental health issues that will come out of COVID are going to have a far longer effect than the economic issues. I think we're going to have to focus on mental health issues in this country for a long time to come.

Pini Althaus:

The impact on kids has been significant with regards to lockdown or remote schooling, et cetera. But to see people come through it. I think it's a testament to people in general and to the country and other countries as well, to see got that fortitude and survival instinct to try to get through whatever adversity we can. So hearing the personal stories, the challenges that people have gone through, I think it's made me a lot more aware of things that I have to be thankful for and where we can help out other people as well. I think we have to be united going forward because there are things...

Pini Althaus:

I think one of the things that COVID has shown us is we can get into this complacency and life goes on and we go one day to the next. And all of a sudden we get hit by something that affects everybody equally. I mean, COVID, whilst there were groups of people, whether it was the elderly or people with underlying health conditions, that got hit the worst. I mean, we all got hit in some form or another. So really, this should be something that unites us, not divides us.

Ryan Morfin:

Well, Pini, I appreciate you coming on today to talk to us a little bit about the supply chain crimp on rare earth and we'll definitely keep an eye on it and would love to have you back in the future.

Pini Althaus:

Thank you, Ryan. Thanks for having me.

Ryan Morfin:

Absolutely. Thank you. Bye-bye. Thanks for watching Non-Beta Alpha. And before we go, please remember to like, and subscribe on Apple podcasts and our YouTube channel. This is Non-Beta Alpha, and now you know.

 

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