Chadd Mason is friendly, talkative and self-effacing. He jokingly describes himself as an ambulance chaser when he talks about his successful practice as a personal injury and product liability lawyer. He fell in love with what he called “street law” in college in Denver, which gave him a chance to represent everyday people. He took on a number of high profile cases when he went back to his hometown of Fayetteville, Ark., in the 1990s. “I’ve tried every kind of case you can imagine from the car wrecks to divorces and criminal cases. Medical malpractice cases. Product liability. Monkey bites. ADA cases. If you can name a case, I’ve done it.” And it was always on the plaintiff side. “So I was always representing just people.” He’s also been a sitting judge.

But the route Mason took from those beginnings might be surprising. In the past 15 years, it led him to run a fast-growing financial advisory firm, Cabana, whose assets under management have ballooned from $26.5 million in discretionary assets at the end of 2016 to $470 million in mid-2018, largely by advising to outside RIAs. The firm, located in Fayetteville and Plano, Texas, also has 341 retail client accounts. The firm’s recent huge growth has been built on an investment algorithm Mason and his team developed from scratch in the mid-2000s.

After forming a hedge fund first, Mason and his partner Louis Shaff formed an RIA in the mid-2000s and christened it Cabana, based on the beach tents they had where they vacationed. This name now covers the firm and its various holding companies, including those that would eventually cover its insurance business and qualified-plan business.

From Chasing Ambulances To Chasing Returns

The “ambulance chaser” tag is said with irony, because Mason said he spent most of his legal career on the side of the little guy. In 2003, he resolved a case for a family whose members were hurt after a pedestrian bridge collapsed at a NASCAR race in North Carolina in May 2000. “In lawyer’s parlance, I hit a big lick.” That case won him enough that he was able to reflect on what he wanted to do in the future. He enjoyed those cases and felt he was on the people’s side of things, he says.

That quality of trusted advice wasn’t readily on display in the other field he was eyeing: financial services, he says. At around the same time he was litigating the NASCAR case, his own family ran into trouble. His grandfather had been a successful businessman and investor who died in 1997 with a $4 million estate. The money passed to heirs, including Mason’s mother, who were approached by a large national bank and its trust department. “I really had no experience at all in the financial services industry,” says Mason, “and didn’t know how to recommend one thing or another. [The bank] had the tallest building on the square and they had nice suits and a big boardroom.”

The family turned over the entire estate to the trust department, liquidating the grandfather’s mutual funds and putting them in proprietary products. “Lo and behold, what happens in 2000? We have a tech bubble. By 2002, these particular professionals had lost over 50% of my granddad’s money,” Mason says.

The bank tried explaining the vicissitudes of the markets to him, but to a lawyer like Mason, that wasn’t good enough. He went looking for answers himself. “Going back to my background being a street lawyer, litigator, that’s the most foreign thing you could ever say to a lawyer is you just take it. Lawyers are going to do something.”

With the windfall from his NASCAR case, he decided to step back and immerse himself in the world of finance. “And I mean I knew nothing. The first book I bought was Investing For Dummies. The first thing I learned was the difference between a bond and an equity. I basically laid in bed for two years and read math books on options.”

Within a couple of years, he had developed his own options strategy, investing in blue chip stocks and developing put and call collars. “I’m by nature a very risk-averse sort of person,” Mason says. “And I gravitated toward options because they sort of were analogous in my mind to insurance. … I was drawn to the idea of why can’t we use insurance in the financial services industry to prevent what had happened during this market crash of 2000?”

By 2005, he had begun talking with his college friend Shaff, who had a finance background and also a law practice in Dallas, Texas (Shaff is married to Mason’s cousin). The two decided to launch a hedge fund, knowing little about the subject, and they each put in $10,000 and used it to trade Iron Condor option strategies.

Mason says that despite his background in law, there were certain continuities between his law practice and the new financial services mission, and he saw the opportunity to create a soup-to-nuts practice.

“I had spent my life representing average people or even middle-class workers, blue-collar people who had been injured,” says Mason. “I would get them a verdict or settlement of $200,000, $300,000 and that was more money than that person or their family had ever seen at one time in a generation. And those kind of people had no access to help. They would get the money and they would be back in my office a year and a half later, two years later because they had carpal tunnel or cut a finger off on a poultry line or whatever and the money was gone. And I wasn’t in a position to help them. … That demographic had been excluded completely from that access [to financial help].”

Accountants have never liked watching somebody run off with money they could be investing, and neither did Mason and Shaff, who were used to getting clients big liquidity events for divorces, settlements and inheritances.

Shaff, who met Mason at the University of Denver and whose own law practice in the 1990s was focused mainly on individual bankruptcies and tax controversy, says a lot of times people would come to him in his practice with some money and ask for a referral. After he sent them away, he didn’t like what happened to them.

“I represented a guy in a car accident,” Shaff says. “He had been a passenger in a car involved in a two-car accident. He was horribly injured. I settled the case for him. … I wrote this guy a check for $500,000. This guy had an education maybe 9th grade. I remember saying to him, ‘Are you sure you don’t want to put this into some kind of structured settlement? I could put this into an annuity for you, some type of insurance product. Something that when you turn 50 will pay you X amount of dollars for the rest of your life.’ He goes, ‘Look man, you’re crazy. I’m really good with money.’ A few years go by … he calls me and he goes, ‘I wanna sue somebody. … I wanna sue somebody because I had sudden wealth syndrome. And I don’t have any of my money left over.’ And I said, ‘Well who are you going to sue for sudden wealth syndrome?’ He goes, ‘I don’t know, you’re the lawyer, you figure it out.’”

Cabana, says Mason, was created with those people in mind and can conceivably offer everything—the firm can fight your divorce for you, get you a settlement and then invest the money and come up with an estate plan.

When working with retail clients, Cabana now works with their legal, tax, estate planning, business succession planning (including funding) and asset protection. The firm looks at clients’ current investments, assets, liabilities, risk tolerance (with Riskalyze), income needs and retirement goals. But the firm doesn’t work out specific day-to-day spending and saving schedules for clients.

“In my experience this type of planning is rarely accomplished by the advisor because it is tedious and difficult for the client to engage,” says Mason. “The end result is often that you have an expensive plan that is not ever implemented. I don’t want to devalue this type of planning because in a perfect world it would be great. Unfortunately, we are far from a perfect world.”

Retirees are a big part of the firm’s client picture, he says, and Cabana has built something called an Alpha Income Portfolio as an annuity substitute. Business owners also make up a big part of the retail client base. “They want comprehensive counsel, planning, asset protection and ultimately, safe investments.”

Investment Approach

His approach to client risk led to him wanting to create his own investment solution that was safer—one that defined risk. He eventually brought in his uncle, James Mason, a statistician, and quantitative analyst David Covington, who had a background in electrical engineering and radio design for companies such as Motorola and Texas Instruments. “We actually built our own hardware at the beginning because we couldn’t even get a computer that would hold 2 terabytes of data,” says Chadd Mason.

The original options strategy was great, but not scalable, says Mason.

He replaced it with exchange-traded funds, using modern portfolio theory to employ inversely or non-correlated assets in lieu of the option collars.

“So instead of using GE and that option put, I’m using let’s say the S&P 500, which is an asset class which would in some ways correlate strongly with perhaps GE or the Dow. And instead of using the put, I’m going to use an asset class that is inversely correlated or noncorrelated with that asset, the S&P 500 or Dow. So I might use a bond index fund which is going to move in the opposite direction of the S&P 500. If the S&P goes down 10%, I’ve got another asset class that is either going to move up or is not correlated with the S&P to act as that hedge. In other words, it causes my overall portfolio to respond in much the same way that the GE stock and the put [option] would respond.”

To find the right mix of indexes, the algorithm takes into account macroeconomics, Mason says. “We’re looking at interest rates, specifically the spread between short-term and long-term interest rates as an indicator of money supply and whether or not economic conditions are favorable for businesses to borrow and for banks to make money. And to do that they have to loan. … Next we are looking at the earnings of the broad U.S. market, particularly the S&P 500. And we are monitoring that because we should see a correlation between favorable economic conditions relative to money supply and companies’ earnings. In other words, if they can borrow at favorable rates, and banks are incentivized to loan.”

The firm is invested in equities, foreign and domestic and large-cap, mid-cap and small-cap stocks, corporate debt and junk bonds, real estate and commodities. “Then we invest in the U.S. dollar via an ETF. … We might be invested a bit more heavily in consumer discretionary or industrials at one particular time in our equity side, [while] at another time we might still be in equities, but we would be in consumer staples and utilities, for instance.” He calls the style all-asset core tactical.

The offering has taken off, in part because it is now on multiple platforms, including TD Ameritrade and Mid Atlantic’s ModelXChange for the 401(k) marketplace. But one of Cabana’s biggest boosts came from Magellan Financial & Insurance Services two years ago. This insurance intermediary and its sister firm, Foundations, puts insurance agents who want to do more fiduciary-compliant work in touch with third-party asset managers, says Bryon Rice, Magellan’s owner. Some 75 agents on the platform are now using Cabana’s investment solution through Foundations, Rice says, and that represents some $375 million.

“To meet Chadd, to go along with the fact that he is extremely bright, he is extremely passionate about managing money,” says Rice. “The other thing I liked about their process is that [they] have a system. A lot of these money managers are picking their spots. They’ll move to cash. … Cabana has a fundamental foundation to what it is they’re doing. They stick to their algorithm and there is no second-guessing or gut feeling or anything like that.”

Mason says Cabana is now onboarding $5 million to $7 million a week and about 70% to 80% is coming from other advisors using its portfolios. Though much of the growth is on the institutional side, he says he wants to stay close to the firm’s roots of working one on one with clients to keep the human touch. 

Law And Finance: Do They Mix?

The arrangements for law firms and advisors mixed together are often “chockfull” of ethical minefields, says a 2012 American Bar Assocation presentation written by Jay Adkisson and Richard LeVine.

“With a few exceptions,” said the paper, “the attorney’s most useful tool in avoiding these mines will be the trifecta of (1) written disclosure of potential conflicts, (2) advice to seek independent counsel, and (3) written waiver by the client. Easily said; but some attorneys may find it unpalatable to disclose their side-commissions to their clientele.”

Financial services and law can be strange bedfellows with differing cultures. Lawyers are held to extremely high ethical standards. They can be disbarred for many a reason, while financial advisors very often tread water in more nebulous ethical terrain based on which laws they use as legal umbrellas.

To Chadd Mason, the idea was fairly obvious: As a lawyer, he could step into financial services already meeting a fiduciary standard of care because the legal profession is so exacting, and thus he already had a leg up on the brokerage world.

Indeed, there is a huge incentive to sell products such as insurance and other financial products to use as part of estate plans, something lawyers would likely be tempted to do since they are so intimately involved with estate planning in the first place and likely have a special window into a family’s soul—who is getting what inheritance, who will need insurance as compensation for being cut out of the family business, etc. The American Bar Association said that there is incredible incentive for lawyers to become a one-stop shop for inheritors and divorcées needing financial planning help.

But there are extra challenges to running a law practice with advisory services, too. One is the need for total transparency. Lawyers acting as investment advisors at the same time must maintain confidentiality; they must be very careful to tell clients when they are wearing their advisor hats and when they are wearing their legal hats. The lawyer must tell the clients that their asset management arm will benefit financially from the way the funds are placed. The lawyer must also tell the client that he or she is free to invest elsewhere and cannot pressure the client to invest with the asset management firm. (Cabana has hired an ex-Finra attorney as a compliance officer, Mason says.)

There are other changing dynamics in play as well. One of those is the eroded trust in banks, which used to be the place people took their estate planning money, says Charles Lowenhaupt, chief of the storied St. Louis law firm Lowenhaupt & Chasnoff, started by his grandfather 110 years ago.

“Thirty years ago, a law firm would have sent a client off to J.P. Morgan or one of these places,” says Lowenhaupt. “Today, ultra-high-net-worth clients, the ones with $100 million, to $5 billion, they don’t trust the banks anymore, right or wrong. They are unwilling to use the banks in the way people used to use them. So part of the reason you see the accounting firms and the law firms going into this is that the bank trust companies have been disappointing. There is the sense that they are selling product.”

Lowenhaupt eventually separated his family’s law firms from the advisory business to make clear what hats the firms were wearing.

Mason still has his law practice and was even called up in 2011 to fill out the term of a sitting judge in Arkansas at the same time he was running his investment practice. “The governor’s office called and asked are you interested in this 18-month appointment as a trial judge,” Mason says. “This particular position involved a drug court. It’s a diversion type court out of the criminal justice system. I have done hundreds of criminal cases and I was passionate about changing the system. I felt like too many people were being put in jail. … In Arkansas we have filled up our jails many times over.”

How does one navigate the ethical channels while sitting on a judge’s bench while also running an investment firm? “What you have to do is get a judicial ethics opinion,” Mason says. “As to whether or not you can maintain that side business while you’re a sitting judge. So you’ve got to do that process. The short story is as long as you’re not dealing with clients who would come before you, then you can do that. Had I not been able to do that, I obviously would not have taken that job.”