RPF0117-Canadian_Couch_Potato
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00:00:15.500 | I thought about opening today's show with my best Canadian joke.
00:00:19.000 | And since one of my best friends for the last 15 years is from Canada,
00:00:23.500 | I've got a bit of a repertoire I could go to.
00:00:26.500 | But I decided that's not quite in the spirit of the show.
00:00:29.500 | So let me be the first to fight for world peace
00:00:33.000 | and extend an olive branch of non-Canadian jokes to my friends in the North.
00:00:38.000 | And simply say this, the Canadian contingent of this show is strong and vocal.
00:00:43.500 | I've heard you all.
00:00:45.000 | And today I'm thrilled to bring you the first interview with a Canadian.
00:00:50.000 | We're going to speak with Dan Bordelotti from the Canadian Couch Potato blog.
00:00:54.500 | [Music]
00:01:09.500 | Welcome to the Radical Personal Finance Podcast.
00:01:12.500 | My name is Joshua Sheets.
00:01:14.000 | Today is Thursday, December 11, 2014.
00:01:18.000 | And today I've got a really great show for you with Dan.
00:01:21.500 | Dan is a former personal finance blogger turned professional financial advisor.
00:01:26.500 | He's an expert on Canadian finance.
00:01:29.500 | But even if you're not from Canada, I think you'll still enjoy today's show.
00:01:33.500 | It's chock full of good information, no matter where you're from.
00:01:37.500 | [Music]
00:01:42.500 | I have had quite the--I wouldn't say surplus.
00:01:46.500 | I've had quite a few requests from the Canadian contingent of the audience
00:01:50.500 | simply asking, "Joshua, bring us some information."
00:01:52.500 | But frankly, my response has been, "I'm totally ignorant on it."
00:01:55.500 | So every single one of them I said, "Send me your best person that you want me to interview."
00:01:59.500 | And several of them mentioned Dan.
00:02:01.500 | So today I've got a great show.
00:02:03.500 | This is an excellent interview whether you're listening from a Canadian context
00:02:07.500 | or whether you're listening from a U.S. American context.
00:02:10.500 | There's a lot of interplay, even from another country.
00:02:13.500 | I know we have many other international listeners.
00:02:15.500 | There's a lot of information in today's show which is universally applicable.
00:02:19.500 | And it'll be interesting to you regardless of where you're from.
00:02:22.500 | I hope you enjoy.
00:02:23.500 | [Music]
00:02:26.500 | So Dan, welcome to the Radical Personal Finance Podcast.
00:02:28.500 | I appreciate your allocating your time this morning to chat with us.
00:02:32.500 | My pleasure. Thank you.
00:02:34.500 | I've invited you on today because I've had several requests from the audience
00:02:39.500 | to provide some information on investing and financial planning within the Canadian context.
00:02:46.500 | But I am entirely ignorant when it comes to any of the topics that would be unique to Canadians.
00:02:53.500 | So today what I'm hoping we can accomplish is provide some information,
00:02:57.500 | focus on some of the ideas and concepts that would be universally applicable to U.S. investors,
00:03:03.500 | Canadian investors, German investors, regardless.
00:03:06.500 | But then we'll highlight some of the differences and the uniqueness between the Canadian situation
00:03:11.500 | and the U.S. American situation.
00:03:13.500 | But before we go into the specifics of financial planning,
00:03:17.500 | would you please share with us a little bit about your background and your story
00:03:20.500 | and how you got into the world of investing?
00:03:23.500 | Sure. It's sort of an unconventional background, I would say.
00:03:28.500 | My education was in English literature and I started my career as a journalist about 20 years ago.
00:03:35.500 | And I worked primarily as a magazine editor and later as a freelance writer and an author.
00:03:42.500 | And I did that for about 20 years.
00:03:44.500 | But over the last, let's say, six or seven years, I started to focus most of my writing on personal finance,
00:03:52.500 | which was not what I was doing in the beginning of my career.
00:03:56.500 | I just sort of backed into it.
00:03:58.500 | It became something that I was quite passionate about,
00:04:01.500 | and I set out to learn as much as I could about index investing specifically,
00:04:07.500 | which was the strategy that sort of caught my attention.
00:04:11.500 | And so I spent a lot of time reading, learning as much as I could.
00:04:14.500 | I started to write more and more about this strategy.
00:04:18.500 | And I started a blog in 2010 called Canadian Couch Potato,
00:04:24.500 | which is a reference to Scott Burns' original couch potato portfolio,
00:04:29.500 | which he created in the U.S. back in the early '90s.
00:04:32.500 | And this was just the idea of a very simple index-based portfolio.
00:04:37.500 | The original couch potato was actually just two funds, one stock fund, one bond fund, and nothing else.
00:04:42.500 | So I set out to try to Canadianize that because I noticed that all of the best writing
00:04:50.500 | and all of the best academic work about index investing had a U.S. focus.
00:04:55.500 | And as we'll talk about, I'm sure, later on, there were some practical and logistical challenges
00:05:00.500 | for Canadians who were trying to implement that strategy here.
00:05:04.500 | So I set out to do the blog.
00:05:07.500 | It became something that really took over a lot of my time.
00:05:10.500 | I was posting about twice a week, and the blog is now five years old.
00:05:15.500 | But about two years ago, I started to think about, well,
00:05:21.500 | how can I actually make the step from writing about investing to actually working with clients?
00:05:27.500 | I was getting a lot of email from readers asking me for advice.
00:05:30.500 | And, of course, I said, listen, I can't give you investment advice.
00:05:34.500 | I'm not a licensed advisor.
00:05:36.500 | I never thought that I would actually want to become a financial advisor.
00:05:40.500 | I didn't really like the industry very much.
00:05:42.500 | I still have a lot of problems with it.
00:05:45.500 | But I was very fortunate to find a group and a firm that was very supportive of what I was doing
00:05:52.500 | and had a very similar philosophy.
00:05:54.500 | And so I joined that company.
00:05:56.500 | It's called PWL Capital here in Toronto.
00:05:59.500 | About two years ago, and I just became licensed early in this spring.
00:06:05.500 | And so I'm now a fully licensed advisor, and it's mostly my full-time work now.
00:06:10.500 | And the writing is something I've been just kind of doing in my spare time.
00:06:15.500 | So a lot of people, when they think about hiring a financial advisor,
00:06:19.500 | especially someone with your background, where I'm sure that much of the initial phases of your
00:06:25.500 | learning about investments and writing about investments was focusing on how to reduce the cost of investing.
00:06:31.500 | This is one of the central linchpins of index investing.
00:06:36.500 | Why would you make the transition to earning money and adding additional cost to clients' portfolios by becoming an advisor?
00:06:44.500 | Well, that's a great question, and it's one I wrestled with too,
00:06:47.500 | because certainly at the early part of my career, and I think if you dig into my archives,
00:06:52.500 | you can find things that I wrote five or six years ago that said, you know,
00:06:55.500 | the first thing you should do to lower your cost is fire your advisor.
00:07:00.500 | And obviously I don't feel that way anymore, and the reason for that is just simply experience.
00:07:05.500 | I mean, I have encouraged many, many people to become do-it-yourself investors over the years.
00:07:12.500 | Some of them have done so very successfully.
00:07:16.500 | But I've come to appreciate, you know, now that I've worked with dozens and dozens of people closely,
00:07:22.500 | many people are just simply not equipped to become do-it-yourself investors.
00:07:28.500 | So they may lack the time, they may lack the technical knowledge, they may lack the discipline,
00:07:33.500 | they may lack the inclination.
00:07:35.500 | I mean, a lot of people just simply have no interest in this, and they recognize it's important.
00:07:40.500 | They just don't want to be the ones who actually do it.
00:07:43.500 | And they're quite happy to pay an advisor to do that.
00:07:46.500 | So I guess the subtlety that I've come to appreciate is that it's not about building a portfolio
00:07:53.500 | at absolute rock-bottom cost and to avoid fees at all costs.
00:07:58.500 | The idea is to make sure that whatever you're paying for is delivering value.
00:08:03.500 | And I think the distinction that sometimes gets lost is that I would say that in most cases,
00:08:10.500 | investment management--so, you know, trying to pick specific stocks or funds that beat the market--
00:08:16.500 | is generally a loser's game.
00:08:18.500 | And most people would agree that it's not likely to add value over time, and so it's not something you pay for.
00:08:24.500 | And that is what most people pay for when they use an advisor.
00:08:28.500 | On the other hand, things like financial planning, things like risk management, you know,
00:08:35.500 | things like imposing discipline and regular savings and just simply having a strategy in place is worth paying for.
00:08:43.500 | So the question is, you know, is your advisor delivering those useful services?
00:08:48.500 | And if so, is he or she delivering it at a reasonable price?
00:08:51.500 | I mean, if you're paying 2%, 2.5% for it, it's not going to add value no matter how good it is.
00:08:57.500 | But if you're paying a reasonable price, you know, 1% or less, well, then all of a sudden you can certainly add some value
00:09:04.500 | compared to what you would have been able to do on your own.
00:09:07.500 | Right. I'm seeing this across the industry, and, I mean, the academic literature is very difficult to argue with.
00:09:15.500 | When you get to the academic literature of the superiority of returns as compared, you know,
00:09:20.500 | between an active investment manager versus purely an index, there is, in my opinion,
00:09:28.500 | a nuance in the literature that it's not as conclusive as some people lay it out to be.
00:09:34.500 | There's a little bit of nuance.
00:09:35.500 | But the majority, I think, of portfolio managers are finding that the academic literature is not bearing out
00:09:43.500 | their ability to consistently deliver excess return in a reliable fashion.
00:09:49.500 | I'm comfortable saying that.
00:09:50.500 | What's interesting is much of the consumer-focused information that I read is still hammering on that, with good reason.
00:09:59.500 | But I'm seeing the industry acknowledge that and move away from that.
00:10:03.500 | And two anecdotal pieces of evidence, I know, well, actually three, I know many advisors who,
00:10:08.500 | it sounds like similar to you, accept the fact that so-called outperformance is not a fundamental value proposition
00:10:15.500 | that they can reliably, consistently deliver on.
00:10:18.500 | And they've just factored that into their practice.
00:10:20.500 | And I know many advisors who do everything within the context of a passive indexed portfolio,
00:10:27.500 | but still provide additional services.
00:10:29.500 | Number two is many advisors, just even from the beginning, that's becoming a standpoint, a starting point.
00:10:37.500 | Many young advisors that I know, they just kind of accept that and move in.
00:10:40.500 | But then another, the third example is I attended, just last week I attended a presentation here in town
00:10:47.500 | by a casual friend of mine who works for one of the large, well-regarded trust companies on Palm Beach Island.
00:10:54.500 | And this is one of the very storied names in trust management and trust services.
00:11:00.500 | And what's interesting is this entire trust management, this is a company that built their reputation upon being active managers.
00:11:08.500 | With one of these storied greater than a century histories, they've accepted the academic research
00:11:17.500 | and poured through it and recognized that what they thought they were delivering in measurement after the fact,
00:11:24.500 | they're actually not finding that they've been able to deliver it as successfully as they thought.
00:11:29.500 | They're transitioning their entire service platform slowly away from security selection into portfolio management,
00:11:40.500 | the science-based portfolio management, to deliver slight excess return, but not based upon security selection,
00:11:47.500 | but rather based upon the weighting of the portfolio and the connection of the portfolio weights to the client's actual goals.
00:11:54.500 | I was really impressed and really, I just thought for me it was a watershed moment,
00:11:59.500 | where here I am with an advisor who's running massive portfolios within this very large, very storied trust company,
00:12:07.500 | and this advisor is saying, "This is the position that we're going forward."
00:12:11.500 | So I think that people who are writing, yeah, there's still a lot of ups and downs in the retail market,
00:12:16.500 | but people who are, I mean, the writing is on the wall, the market has spoken,
00:12:20.500 | and low cost, low fees have really, are winning the day, hands down.
00:12:27.500 | Well, I agree with everything you said, and I would say that our, you know, the philosophy that we use at our firm is almost identical to what you described.
00:12:35.500 | The issue is that that message is not getting through in Canada the way it has in the U.S.,
00:12:41.500 | and unfortunately we are several years behind the curve,
00:12:46.500 | and it is really depressing in many ways to see the way most Canadians still think about investing.
00:12:55.500 | The mutual fund industry in Canada is enormous and a very powerful sales force,
00:13:02.500 | and this idea that, you know, the way to invest is not to look for star managers and not to, you know, look for advisors who will deliver out performance,
00:13:13.500 | is a minority here. It's a small minority here.
00:13:16.500 | I don't know what the numbers are specifically, but I do know that the percentage of assets in Canada that are indexed is much, much lower than it is in the U.S.,
00:13:27.500 | and so, you know, we really, I think, look to the U.S. in many ways to see where our industry is headed,
00:13:35.500 | but we're definitely way behind in that category.
00:13:38.500 | Well, that means you've got a good market outlook for your business.
00:13:42.500 | Well, I think that's true. I think we're kind of in the right place at the right time for that reason.
00:13:46.500 | Like, a lot of people will probably listen to our philosophy and our strategy in the U.S. and say, "Well, what's the big deal?"
00:13:53.500 | I mean, there's everybody in the U.S. is doing that. Or not everybody, but there are lots of firms that are doing that.
00:13:58.500 | Here, there are very few, and one of the things that we've found, you know, when we meet with prospective clients is they're surprised by what we have to say
00:14:07.500 | because they haven't heard it from too many other people.
00:14:10.500 | So, it really is an opportunity here, and we're hoping five years from now we'll be in the situation where I can make the argument that you just made.
00:14:20.500 | Right. What are the lessons that you're learning as you transition from writing about financial advice to giving financial advice to individuals?
00:14:28.500 | What have you learned that has surprised you, and what has been consistent with what you thought before?
00:14:33.500 | Yeah, so many things. That, I think, has been the real insight for me.
00:14:38.500 | I would say that when I first started writing, my focus was really on things like products, you know, how to find the right investments,
00:14:48.500 | try to find that perfect portfolio allocation in order to minimize risk and maximize return.
00:14:55.500 | It was technical things, right?
00:14:57.500 | And I focused on, you know, I tried to sort of find the right answer in all cases.
00:15:03.500 | And what I have learned over the years, especially from working with people, you know, people are human.
00:15:09.500 | We all have our biases. We all have our behavioral issues.
00:15:12.500 | And I've come to be much less ideological, and I started to really understand that what makes a successful investor is largely behavioral.
00:15:24.500 | So, there are many different ways to implement, you know, an index strategy.
00:15:29.500 | There are many different products you can use. There are many different asset allocations that may be appropriate.
00:15:35.500 | And all of that stuff is important on some level, but, you know, at the most basic level, you need to be a good saver.
00:15:42.500 | You need to have low costs, broad diversification, and you need the discipline to stick with your strategy when it feels like it's not working.
00:15:50.500 | And if you can do all of that, all of the rest is just details.
00:15:54.500 | And I still find, you know, when I write on the blog and there'll be a new product launch, for example,
00:16:00.500 | and people will say, like, you know, is it time for us to revamp our portfolios and get rid of the old products and get this new stuff in there because it's three basis points cheaper?
00:16:10.500 | And, you know, I always try to stress, you know, no, you don't have to feel like you have to constantly tinker with your portfolio, right?
00:16:17.500 | I mean, let's focus on the big picture and worry less about those small details.
00:16:21.500 | And that is something, you know, over the years, it's been strange.
00:16:25.500 | I would say my attitude and my overall investment philosophy has become simpler, not more complex.
00:16:32.500 | Like, as I've learned more, I realized that the number of things that truly matter are actually smaller.
00:16:39.500 | And so I've really tried to emphasize simplicity over technical sophistication over the years.
00:16:46.500 | And I really think that that's where most people go wrong, is that they get those big picture things wrong.
00:16:52.500 | It's interesting to listen to you because your experience mirrors much of my own.
00:16:58.500 | The first book I ever read on index investing that I remember was the book called The Lazy Person's Guide to Investing.
00:17:06.500 | And it was written by Paul Farrell.
00:17:08.500 | And he put in there the couch potato portfolio.
00:17:12.500 | And that was my first introduction to the couch potato portfolio.
00:17:15.500 | It blew my mind.
00:17:16.500 | I bought several copies of it, immediately started giving it away to people.
00:17:19.500 | And, you know, look at this great topic of investing.
00:17:22.500 | And I was very much anti-financial advisor.
00:17:26.500 | I was like, "Why would anybody ever be a financial advisor?
00:17:28.500 | It's a waste of money. It's a waste of time.
00:17:30.500 | You know, I can do better on my own.
00:17:31.500 | All of you can do better on your own."
00:17:33.500 | Then I, through a series of circumstances, I got into the financial services industry.
00:17:38.500 | And that expanded me.
00:17:40.500 | And I faced all of the same learning that you are talking about.
00:17:45.500 | And today I share that I have the conviction that although I think it's theoretically possible for somebody to be a do-it-yourself investor and to be a do-it-yourself financial planner,
00:17:55.500 | it's only theoretically possible if they have a very simple financial situation.
00:18:00.500 | And if they are very knowledgeable and willing to put in the time to really dig into the meaty technical books.
00:18:10.500 | And there are a couple of listeners to the show who have written to me.
00:18:13.500 | And they're exactly the kind of person who should be the do-it-yourself investor.
00:18:18.500 | I remember one listener wrote her own living trust for herself.
00:18:23.500 | But she read, I think, four legal books on it.
00:18:26.500 | And she was the person that could actually do it.
00:18:30.500 | For the vast majority of people, I cannot comprehend how in today's world that anybody can survive without good financial advice.
00:18:40.500 | Now, the structure of that financial advice may vary.
00:18:43.500 | But I think almost everything is relating to behavior.
00:18:47.500 | And a massive part of that is behavior of the investor as regards their portfolio.
00:18:52.500 | But then there's everything else related with personal finance.
00:18:55.500 | There is the portfolio management stuff.
00:18:56.500 | But then there's how much do I save?
00:18:58.500 | How do I grow my income?
00:18:59.500 | What decisions do I make that are efficient and useful from a tax perspective?
00:19:05.500 | And there are so many little gotchas, at least in our system in the United States.
00:19:09.500 | Every single transaction has little gotchas and has little bits of ideas that in the right situation could save hundreds or thousands or tens of thousands of dollars.
00:19:21.500 | But it's hard to articulate that to people because people are accustomed to thinking in terms of this manager is going to choose in an excellent manner the companies that I invest in.
00:19:33.500 | But in the real world, the reality is many times the people with the most money, that's what they're good at.
00:19:38.500 | They've built a company and they've sold it or they're building a company and having large profits.
00:19:42.500 | So they're not so concerned with what are the great companies that I can choose.
00:19:46.500 | They've already hit the home run for some people.
00:19:49.500 | And now they need a lot of help though with all the technical details.
00:19:52.500 | So it's interesting to me to hear your story because it sounds like so much of what I've told and I've never before 17 and a half minutes ago I've never said we've never talked in our life.
00:20:02.500 | Well, it definitely sounds like we both kind of arrived at the same conclusion maybe through different paths.
00:20:08.500 | And I think that's so true.
00:20:10.500 | And I thought a lot about this.
00:20:12.500 | And I should say that one of the things that we have done that's unique at the firm I'm with now is we do offer a service for do it yourself investors.
00:20:22.500 | As far as I know, it's unique in Canada.
00:20:24.500 | But the idea is that we will work with clients and we will do a basic financial plan for them.
00:20:31.500 | And we will come up with an asset allocation that's appropriate to them.
00:20:35.500 | But also we'll go through their saving strategies and things like this.
00:20:39.500 | And then we will help them open discount brokerage accounts and build a portfolio of ETFs they can manage on your own.
00:20:47.500 | But you're right. We have to kind of screen that.
00:20:49.500 | We have to make sure that the people that we are doing this for are going to be capable of managing it on their own.
00:20:55.500 | And what we've also learned as we've been doing this for a couple of years now is the portfolios that we built for them have become simpler over time for that reason.
00:21:04.500 | Because we used to say, well, let's add a little slice of real estate and let's add six, seven, eight funds.
00:21:10.500 | And now we keep it as simple as possible because we recognize that most people are not really willing or inclined or able to manage a complex portfolio on their own, especially across multiple accounts.
00:21:24.500 | And so if really what their goal is to just build something that they can manage on their own and keep costs low, we can definitely help them do it.
00:21:31.500 | But we need to keep it as simple as possible.
00:21:36.500 | But the other thing that I thought was really interesting in what you're saying is that, you know, I think people just think of financial advice in the wrong way.
00:21:45.500 | They think that the role of an advisor is to tell them what investments to buy.
00:21:50.500 | And we get that all the time with prospective clients.
00:21:53.500 | And, you know, I always try to say to people, I mean, think about it.
00:21:57.500 | If you are a superstar active manager, I mean, what sort of outperformance can you realistically expect over time?
00:22:05.500 | And I think most active managers would jump for joy for one percentage point outperformance over the long term.
00:22:12.500 | That would be phenomenal.
00:22:13.500 | So then I think you need to ask yourself, well, what difference would one percentage point make in your life?
00:22:19.500 | You know, if you were to improve your investment returns by one percentage point, it would certainly make a difference.
00:22:25.500 | If it was a very large portfolio, it would make a pretty big difference.
00:22:28.500 | But really what makes a much larger difference in your life is, you know, the basic planning decisions.
00:22:35.500 | Like, are you saving enough? Are you saving in the right investment vehicles in order to keep your taxes as low as possible?
00:22:41.500 | And, you know, are you making boneheaded behavioral decisions by, you know, I just think of the people, for example, who sold out of the market in '08 or '09 and took three years to get back in, or maybe are still sitting in cash.
00:22:54.500 | Do you think that that is going to cost you one percentage point over your lifetime, or do you think that's going to cost you double, maybe triple digits over your lifetime?
00:23:02.500 | So those enormous mistakes cost you much, much more than the benefit that any star active manager could deliver.
00:23:11.500 | And let's remember, too, that those star active managers who deliver one percent outperformance, what is that, one out of 100 people?
00:23:17.500 | So for the vast majority of people, you're looking at underperformance, and for those who are lucky enough to get the outperformance, it's probably not a make or break benefit.
00:23:27.500 | And so I just, why are we focusing so much of our attention on these things?
00:23:32.500 | Why not focus on what we can control, and why not focus on what actually has a meaningful difference in your life?
00:23:39.500 | And once you get around that mindset, I think then, you know, the type of service we offer and just the type of philosophy that we espouse makes so much more sense to them.
00:23:49.500 | And most people come around to that, especially after they go through the financial planning process.
00:23:54.500 | I think you must have seen this, too, right?
00:23:56.500 | Clients will not really know what a financial planning process is like because they've never had it.
00:24:01.500 | Right, exactly.
00:24:02.500 | But once they go through it and they experience it, and then you know what, all of a sudden their investments and their financial situation has real context to their own life.
00:24:11.500 | So it's not about lines on a graph, it's about whether I can retire in 10 years, right, or whether I can pay for my kids' college education.
00:24:19.500 | And then they get engaged with it, and once you've got them engaged with it, then you've made a real breakthrough.
00:24:25.500 | And then they stop talking about the details of the investments, and they focus more on that big picture.
00:24:31.500 | The financial planning process is the answer and the solution for just about every financial woe, but it's usually not what people think.
00:24:38.500 | A client comes in, I've had, I think of always two specific clients in my mind when I share these stories, but it's real, and it's happened more than just with these two cases.
00:24:48.500 | But a client comes in, or I go into the prospective client's office, and they sit down and they think we're going to talk about, you know, how much money is in their 401(k).
00:24:58.500 | And through the course of a 45-minute conversation, what actually comes out is that they hate the house that they live in, and so they walk out and they sell the house.
00:25:07.500 | And, or another situation was they thought, "Okay, well I'm feeling guilty because I'm not saving enough money for retirement."
00:25:14.500 | And the financial planning process revealed that retirement was not even a factor.
00:25:19.500 | Retirement in the sense of being financially independent at the age of 65 to go and golf for 30 years was of zero importance.
00:25:27.500 | But what was of real importance was to be able to allocate the money toward a round-the-world trip with the family and take a sabbatical.
00:25:35.500 | Well, the financial planning process reveals that, and you have to understand that while we have this amount of money, we have these assets,
00:25:42.500 | but all a financial planning process is, it's saying what are the goals, what's important to you as an individual, not what society has said is important to you,
00:25:49.500 | what's important to you, what are the risks of prioritizing one goal versus another, are you comfortable with those risks, can we mitigate them in some way.
00:25:58.500 | And that client walks out and says, "I'm not putting money in my 401(k) for the next couple years because I'm going to save money to take my round-the-world trip with my kids."
00:26:06.500 | That's what financial planning should reveal, and it usually has nothing to do with security selection.
00:26:12.500 | And it often, it's just a matter of working some math and illustrating that look, you don't need to save any more money until 65, you're on track for that,
00:26:22.500 | so why don't you dedicate and prioritize these other goals. That's what financial planning process is.
00:26:27.500 | It's got to be, it must be intensely personal to each individual.
00:26:32.500 | One person wants to buy a big fancy house, the other person wants to sell the big fancy house.
00:26:36.500 | It's got to be personalized to what your individual goals are, and within that context, then investments are only one piece of it,
00:26:44.500 | it's just what works with us as an investment solution that's going to help us to achieve our goals,
00:26:50.500 | and it usually pretty naturally reveals itself, and sometimes it's not even publicly traded equities or index funds,
00:26:56.500 | it's something completely different because there's a unique situation that calls for something different.
00:27:01.500 | Well, and it's interesting, I think that one of the big problems is that as important as the financial planning process is,
00:27:08.500 | and it does need to be personal and tailored, like you described, and I don't know what the regulatory regime is like in the US,
00:27:15.500 | but in Canada, a financial planner does not necessarily need to be licensed.
00:27:21.500 | I mean, there are financial planning designations, we use the CFP designation up here as well,
00:27:26.500 | but anyone who gives investment advice needs to be a licensed advisor through the provincial securities regulators,
00:27:33.500 | and so what happens is you've got people who are financial planners but not investment advisors, or the other way around,
00:27:41.500 | and so if, you know, and I know for a fact this is one of the things that surprised even me over the last few years,
00:27:49.500 | is most people don't recognize that distinction, and so they will use the terms financial planner and financial advisor as though they were synonymous,
00:27:58.500 | but they're actually quite different, and so what they'll do is they'll go to their investment advisor and ask for planning advice,
00:28:05.500 | and they won't get it, because it'll be on the most basic level, or they'll go to a fee-only financial planner,
00:28:13.500 | they won't like to pay a flat fee, and they'll go through the process and they say, well, you know, where's my investment plan,
00:28:19.500 | and the planner can say, look, I can recommend an asset allocation for you, but I cannot tell you what funds to buy, you know, I'm not licensed,
00:28:26.500 | and I think that's a big surprise for people. I get people all the time asking us, you know, can I send my portfolio to you for review,
00:28:34.500 | and you can make some recommendations, and I have to say, no, I can't do that, because I can look at your portfolio,
00:28:39.500 | but I cannot make recommendations for you without going through the whole know your client process,
00:28:45.500 | and so I guess what I'm getting is there's a disconnect and there's a lack of understanding, I think, among the public,
00:28:52.500 | because this is not an obvious fact, that your financial planner and your investment advisor are not the same person in most cases.
00:29:01.500 | Now, a lot more and more firms are integrating the two, you know, you will have a lot of people who are both CFPs and licensed advisors,
00:29:08.500 | which I think is the best combination, but even they may have some conflict of interest in the sense, like, you know, you, for example,
00:29:15.500 | when you talk about a client who wanted to spend some money traveling, right, well, if you're an investment advisor who charges a fee based on assets under management,
00:29:23.500 | you have a bit of a conflict of interest if a person decides to spend their money rather than to invest it.
00:29:28.500 | You have a bit of a conflict of interest if they decide to pay off their mortgage rather than giving you the money to invest,
00:29:34.500 | and so you need a certain amount of integrity there, you know, and I know we have advised clients, for example, like,
00:29:41.500 | look, take this non-registered, you know, taxable money and use it to pay off your mortgage, right, why don't give it to us?
00:29:48.500 | I mean, sure, we would like to earn a fee on it, that's not what's best for the client,
00:29:53.500 | and so I think as a client of an advisor, you need to be aware of those conflicts of interest too,
00:29:58.500 | and make sure that the advice you're getting is best for you and not best for the person giving the advice.
00:30:04.500 | Right. I know a couple, you bring up a good point on the conflict of interest,
00:30:08.500 | I know a couple of advisors in the US context that instead of charging a fee which is based upon a percentage of the assets that they are managing,
00:30:21.500 | the investment accounts that are under their stewardship, they're charging the fee which is calculated based upon the client's net worth of other assets,
00:30:29.500 | so if the client has a large real estate portfolio or something along those lines,
00:30:33.500 | and the idea is that that will lower the conflict, the potential conflict of interest.
00:30:38.500 | I'm not sure that the clients necessarily, I haven't, I've never done that with a client,
00:30:42.500 | but I haven't heard of clients really buying into that model, and it seems, if I put myself in the client's shoes,
00:30:48.500 | I think I would personally struggle a little bit with that one.
00:30:51.500 | But it'll be interesting to see as time goes on if that becomes a more equitable scenario,
00:30:57.500 | because a lot of people have that complaint, you know, my advisor is, they're concerned,
00:31:01.500 | is my advisor saying not to pay off the mortgage because I'm actually probably going to make more in another investment,
00:31:08.500 | or because they need the money under their stewardship where they can charge me fees.
00:31:12.500 | Right. Well, I mean, and that's always going to be an issue, and I don't know whether charging based on net worth makes a lot of sense,
00:31:20.500 | but I do think that what we're going to see in the industry over the years is that the fee charged for investment management is going to come down,
00:31:28.500 | and the fee charged for planning is going to either stay the same or maybe become a bigger portion of that,
00:31:35.500 | which really I think makes sense in many ways.
00:31:38.500 | The difficulty will be presenting that to clients, because people don't like paying out of pocket for planning until they've experienced it.
00:31:48.500 | You know, as you said, once they get engaged with the process, they see the value.
00:31:52.500 | But, you know, to present to somebody it costs $2,000 or $3,000 for a comprehensive financial plan,
00:31:58.500 | they don't want to think about that, but they seem to be willing to pay 2%, you know, for a rotten mutual fund.
00:32:05.500 | So, you know, I think that there is a little bit of -- I think clients need to come to a little bit better understanding of what they're paying for,
00:32:15.500 | what really has value.
00:32:16.500 | Right. So let's transition to focusing on the Canadian market, and essentially I'd like to learn how it works.
00:32:26.500 | So I know it's a very generalized question, but in the United States, in the U.S. context,
00:32:33.500 | we're comfortable with talking about 401(k)s and IRAs and Roth IRAs and things like that,
00:32:39.500 | but I know in Canada you have slightly different terminology.
00:32:42.500 | Could you share maybe an overview of some of the different -- let's start with the investing vehicles,
00:32:50.500 | the tax-deferred accounts, things like that, through which you can invest in the Canadian context,
00:32:55.500 | of what they are and how they work?
00:32:57.500 | Sure. Okay. So what in the U.S. you'd call 401(k), we would mostly call here group RRSP.
00:33:04.500 | So RRSP stands for Registered Retirement Savings Plan, and that is our basic tax-deferred retirement account.
00:33:11.500 | The fact -- when I say group RRSP, it means because this type of plan would be administered by an employer,
00:33:18.500 | and most often the employer would make contributions as well as the individual.
00:33:24.500 | And so you would contribute $100 a month, and your employer would match 50 percent or something like that.
00:33:31.500 | Once you left the employer, you would be able to transfer those funds into a self-directed account.
00:33:37.500 | What you would call an IRA would just be a regular RRSP for a Canadian.
00:33:43.500 | Again, it's just our tax-deferred retirement account.
00:33:47.500 | So you get a tax deduction when you make a contribution.
00:33:51.500 | So you get to deduct your contribution from your income.
00:33:54.500 | And then after retirement, when you begin to withdraw those funds, the funds are taxable upon withdrawal.
00:34:01.500 | So you have a maximum contribution limit. Right now it's 18 percent of your earned income.
00:34:06.500 | Up to a maximum that's close to $25,000 a year now would be the maximum.
00:34:11.500 | And you can carry forward that contribution from year to year if you don't use it all.
00:34:16.500 | So that would be the basic retirement savings vehicle for most Canadians.
00:34:22.500 | In 2009, the Canadian government introduced what they call a tax-free savings account, or TFSA,
00:34:29.500 | which is very similar to the Roth IRA, I believe.
00:34:32.500 | So in this case, there is no tax deduction for a contribution, but there is also no tax upon withdrawal.
00:34:39.500 | So the maximum contribution room now is $5,500 a year.
00:34:44.500 | That's expected to go up with inflation over time.
00:34:49.500 | But it does allow you to, especially if you're a low-income person, for example,
00:34:54.500 | to shelter at least some of your savings from tax basically indefinitely. Right?
00:35:00.500 | So you can--the growth is tax-free all the way, and then when it's time to withdraw it, it's tax-free upon withdrawal as well.
00:35:07.500 | So that has been a good vehicle for Canadians who have a lot of taxable accounts as well.
00:35:13.500 | They can move $5,500 a year into those accounts and shelter a little bit of it going forward.
00:35:19.500 | Because the program is relatively new, I mean, the maximum TFSA contribution now is only $31,000.
00:35:27.500 | So that's, you know, since 2009.
00:35:30.500 | So it's really not an enormous amount of money.
00:35:33.500 | For people who have a lot of savings, that's going to represent a pretty small proportion of their overall portfolio.
00:35:40.500 | But those are the two basic options. And I think, you know, for young Canadians getting started with saving,
00:35:45.500 | I mean, the number one decision is to figure out which of those two vehicles, RRSP or tax-free savings account, make the most sense for you.
00:35:54.500 | So the high-income people are more likely to use the RRSP and get that immediate tax break,
00:36:00.500 | and lower-income people would be more likely to use the TFSA, since the tax break wouldn't be that big anyway,
00:36:06.500 | and this way they can just shelter their money going forward.
00:36:09.500 | So that's the basic framework.
00:36:11.500 | Did you say that past contributions can be accumulated for the future?
00:36:17.500 | Yes.
00:36:18.500 | Wow! That's a really useful tool.
00:36:23.500 | It is. And what you'll have is a lot of people, for example, who have been working and earning a decent income,
00:36:28.500 | and for whatever reason are not saving in their RRSP accounts, will have huge amounts of contribution.
00:36:36.500 | It's not unusual to see people with $50,000, $100,000 of contribution room accrued over the years.
00:36:43.500 | And if at some point in the future, you know, they have a very large windfall, they can use that room.
00:36:50.500 | So, you know, let's say you have $100,000 of RRSP room built up, and you get an inheritance of $100,000,
00:36:57.500 | you could contribute all of that in one year.
00:37:01.500 | Now, it wouldn't be a very smart strategy, because you'd bring your tax rate down to next to nothing.
00:37:06.500 | But what you could do is put that money in your RRSP and then claim a portion of it over the course of, say,
00:37:13.500 | four or five years or something like that, take a little bit of a tax break each year.
00:37:17.500 | So the nice thing about that is, although it is always important to start saving early,
00:37:23.500 | if you need to defer some of your retirement savings, because, you know, if you're a young family,
00:37:28.500 | you've got expenses with kids and a big mortgage and whatnot, you can defer some of that savings
00:37:34.500 | until later years and then make it up.
00:37:37.500 | You know, if, let's say, you're at a stage where your kids are out of the house, the house is paid off,
00:37:42.500 | you're making a good income, you're able to save 30 or 40 percent of your income,
00:37:47.500 | you can catch up a lot on those RRSP contributions.
00:37:51.500 | I could also see it, and you answered the next question I had, which was going to be,
00:37:55.500 | if you have accumulated past contribution limits, which are now available to you,
00:38:01.500 | do you then take the full deduction in the year that you use those limits?
00:38:05.500 | And it sounds like you just answered that would be yes.
00:38:07.500 | So that would imply for somebody who has perhaps a variable income, large bonuses,
00:38:12.500 | or perhaps they're an attorney with their total compensation being based upon the cases that they win or lose,
00:38:18.500 | that that flexibility might be useful as you march up and down the tax rates
00:38:24.500 | to be able to accumulate it and to defer it and accumulate and defer it.
00:38:28.500 | That'd be an interesting planning idea. I had no idea.
00:38:32.500 | Yeah, I don't think that most people in practice actually do that.
00:38:37.500 | And the reason being that most people will take a tax deduction now if they can get it,
00:38:42.500 | rather than deferring it to later.
00:38:45.500 | There would have to be a very specific situation where, you know,
00:38:48.500 | let's say that you were planning on getting a job in the near future
00:38:53.500 | and it involved a very large pay increase, then it might make sense to defer taking that deduction.
00:38:59.500 | But for most people they don't plan that far ahead,
00:39:01.500 | and so most people will make their RRSP contribution and then just take the deduction in the current year.
00:39:07.500 | But yes, if you were in a situation where you had a very large contribution,
00:39:12.500 | let's say you put $100,000 in it, you might want to just deduct $20,000 a year for the next five years
00:39:18.500 | rather than taking the hit, because the tax system in Canada is a progressive system.
00:39:25.500 | So of course the higher your income, the greater amount of tax you pay.
00:39:30.500 | And yeah, you'll probably cringe when I tell you this,
00:39:32.500 | but in some provinces, you know, that tax rate is as high as 50 percent.
00:39:36.500 | And so it's really important to get that tax deduction if you have a relatively high income.
00:39:42.500 | And by high income, I mean you're in the highest tax bracket here in most cases
00:39:46.500 | if you make about $140,000 a year.
00:39:49.500 | Are you serious?
00:39:50.500 | Yeah, your marginal rate there is between 45 and 50 percent.
00:39:55.500 | Wow.
00:39:56.500 | So the amount of tax deduction you get,
00:39:59.500 | so if you make $180,000 a year and you can put $30,000 in your RRSP,
00:40:04.500 | I mean it really only costs you about $15,000.
00:40:07.500 | Certainly.
00:40:08.500 | So that's, yeah, getting that tax break in the high marginal tax brackets is very important.
00:40:15.500 | Wow.
00:40:16.500 | Of that 50 percent, do you know off the top of your head,
00:40:21.500 | is there a system of employment taxes like we have in the United States,
00:40:25.500 | Social Security, Medicare taxes, and then in addition to that, income taxes?
00:40:30.500 | And what are those rates, ballpark if you know them?
00:40:32.500 | So we do have--our equivalent of Social Security is the Canada Pension Plan.
00:40:37.500 | So it's a forced pension contribution that's 4.9 percent comes off of the payroll
00:40:44.500 | and then the employee also contributes the same amount.
00:40:47.500 | So there is that payroll tax.
00:40:50.500 | There are no Medicare payroll taxes in Canada because, of course,
00:40:53.500 | we have a socialized medicine system, which is one of the reasons why our taxes are so high.
00:40:58.500 | The benefit there is that, you know, in most cases when you need medical care,
00:41:03.500 | all of that is 100 percent covered.
00:41:05.500 | You don't need any individual health insurance in order to get access to that.
00:41:10.500 | So in that sense I think there's less of a burden on the employer,
00:41:14.500 | because they're not responsible for paying so much of that tax.
00:41:19.500 | That burden falls more on the individual.
00:41:22.500 | But, of course, the benefit is much higher, too.
00:41:25.500 | That's also--we have a large contingent of the audience that's involved in the early retirement community.
00:41:32.500 | It's always a challenge to transition between employer-provided health insurance
00:41:37.500 | to government-provided health insurance at 65.
00:41:41.500 | So I would imagine it's a little bit simpler to manage that early retiree process
00:41:45.500 | if the coverage is just based upon your existence as a citizen rather than based upon your employment.
00:41:51.500 | Yeah, that's definitely right.
00:41:53.500 | It's really not an issue here.
00:41:55.500 | I mean, you're fully covered at every age and at every income level.
00:41:59.500 | What is the makeup--so I know one of your primary focuses of writing is about the investment markets
00:42:05.500 | and the offerings from a U.S. context versus the Canadian context.
00:42:09.500 | What is unique about the Canadian investment market, whether it's from the mutual fund perspective
00:42:15.500 | or just from the public-traded securities markets?
00:42:19.500 | Well, there's a few things.
00:42:21.500 | I always joke that being an investor in the U.S. I think is so much easier than it is in Canada,
00:42:26.500 | because there are just so many more good choices.
00:42:31.500 | One of the things that I found frustrating when I would read about index investing from a U.S. perspective
00:42:37.500 | is most of the advice was, you know, just open an account with Vanguard or, you know, find a--
00:42:42.500 | then there are others, Fidelity and Schwab, and that who have, you know, discount brokerages
00:42:47.500 | with zero commissions, index funds that charge five or ten basis points.
00:42:52.500 | And it was so easy to build a diversified portfolio at rock-bottom cost.
00:42:59.500 | Here you can do that, but it's quite a bit harder.
00:43:02.500 | Vanguard just came to Canada in 2011, and they offer only ETFs.
00:43:08.500 | So there are no Vanguard index mutual funds.
00:43:11.500 | You cannot open an account directly with Vanguard like you can in the U.S.
00:43:16.500 | And so if you want to build a low-cost portfolio here, you need to open a discount brokerage account
00:43:22.500 | and learn how to trade ETFs.
00:43:24.500 | And as we were talking about earlier, most people are not equipped to do that.
00:43:28.500 | It sounds very simple.
00:43:29.500 | It's something that you've been doing for a long time.
00:43:32.500 | You know, it's tempting to say, well, just open up a brokerage and build your own account with ETFs.
00:43:37.500 | And then people start to do it, and they realize it's not as easy as it sounds.
00:43:42.500 | So the challenge here is if you want to build a low-cost diversified index portfolio,
00:43:48.500 | there are very few simple solutions for doing so.
00:43:52.500 | I wish there were more.
00:43:54.500 | There are a couple of one-stop, you know, balanced index mutual funds,
00:43:59.500 | but you can expect to pay 1 percent for those, which most Americans are shocked when I say that
00:44:04.500 | because they will think that 1 percent sounds like a high fee for a mutual fund.
00:44:09.500 | But in Canada, that's a bargain.
00:44:12.500 | And so most people end up with mutual funds that have embedded trailing commissions
00:44:19.500 | that go to the advisor as well as expenses that go to the fund manager.
00:44:24.500 | The average mutual fund fee in Canada is well over 2 percent.
00:44:29.500 | Morningstar has done a couple of surveys of the fee climate around the world,
00:44:36.500 | and Canada consistently scores at the very bottom of the list.
00:44:40.500 | So we pay the highest mutual fund fees in many cases,
00:44:44.500 | and the so-called fee that goes to advice doesn't go to advice at all.
00:44:51.500 | It just goes to pay a salesperson who pushes more funds.
00:44:55.500 | And so that's the climate that most people deal with in this country,
00:44:59.500 | and that's why, you know, we had to create this do-it-yourself service for clients
00:45:03.500 | who want to build their own portfolios.
00:45:05.500 | I don't think it would fly in the U.S. because you could call Vanguard.
00:45:09.500 | They'll give you a little bit of asset allocation guidance,
00:45:12.500 | help you open an appropriate account in no time flat.
00:45:15.500 | But you just don't have that option here.
00:45:18.500 | You have to be a little bit more savvy,
00:45:20.500 | and you need a little bit more technical knowledge in order to make those good decisions.
00:45:25.500 | Do you have any insight into why Canada might consistently rank at the more expensive end of the spectrum?
00:45:33.500 | Such a good question.
00:45:36.500 | I don't know if I can explain why this is,
00:45:39.500 | but I think I can say with some confidence that Canadians seem to be in general less price sensitive than Americans.
00:45:47.500 | They're less likely to try to negotiate better prices.
00:45:51.500 | They're more likely to be complacent about high costs.
00:45:55.500 | And one of the things that I've noticed that seems to be unique here,
00:45:59.500 | or at least unusual compared to the U.S., is Canadians seem to really like hidden costs.
00:46:06.500 | They don't like to pay up front for things.
00:46:09.500 | They would prefer to fool themselves into thinking that they're getting something for free.
00:46:14.500 | And the example I like to use is the cell phone industry in Canada is dominated by a couple of or three major carriers.
00:46:22.500 | Most Canadians will, you know, if they want a new iPhone,
00:46:25.500 | instead of going out and buying the phone and then finding an independent carrier to get them a cell phone package,
00:46:33.500 | will sign up with one of the carriers.
00:46:36.500 | They will receive a quote unquote free phone in exchange for a three-year contract with that carrier.
00:46:44.500 | And so you're locked in.
00:46:46.500 | You're paying a little bit more every month than you would have, well, a lot more every month than you would have if you had bought the phone and did that independently.
00:46:54.500 | But they fool themselves into thinking that this is a great deal because they got a free phone.
00:46:59.500 | And I think that the same approach happens with investing.
00:47:03.500 | Most people don't want to pay a transparent fee to a planner or advisor.
00:47:09.500 | They are more willing to accept hidden fees that are buried in mutual funds and fool themselves into thinking that they're not really paying for it.
00:47:17.500 | And I see this time and again, even when it's pointed out to people, it's like, listen, you are paying 2.5 percent on that mutual fund.
00:47:25.500 | Right. You could be paying 1 percent to an advisor.
00:47:28.500 | Now, that fee is going to come out of your account every month and you're going to see it.
00:47:32.500 | But it's less than half of what you're paying now.
00:47:35.500 | They just fool themselves into thinking that that's not the case.
00:47:39.500 | So I don't understand why that seems to be more popular in Canada than it is elsewhere.
00:47:44.500 | But I've observed it not only in finances, but in other industries as well.
00:47:50.500 | A good proxy perhaps would be the oft debated subject of universalized health insurance coverage.
00:47:58.500 | That is one of the most singularly unpopular things that's happened here in the United States, is this institution of mandatory health insurance coverage.
00:48:10.500 | And it's nowhere near universal, so-called single payer system like you have in the Canadian context.
00:48:18.500 | But it's incredibly unpopular here in the United States among certain circles.
00:48:22.500 | And it's incredibly popular among other circles.
00:48:24.500 | But it's, from my perspective, although I can't cite specific data, my impression is that the system that you have in Canada is generally fairly popular among the population.
00:48:38.500 | And it drives me nuts because as a cultural aspect, I want to know exactly what I'm paying and I want to pay for exactly what I need and want.
00:48:47.500 | I don't want some generalized system where I don't have choice in the matter.
00:48:52.500 | But perhaps that would be a good proxy for your illustration between cultures.
00:48:57.500 | Yeah, it's an interesting comparison because I would say too that occasionally you will hear Canadians saying that we get free health care.
00:49:06.500 | So we do on a transparent, when I go to the doctor I don't write him a check.
00:49:11.500 | But certainly it's not free.
00:49:14.500 | But I think you're right. I mean, you know, it's not an obvious parallel in the sense that, you know, I think most Canadians would say we like the health care system that we have here because it treats everybody the same.
00:49:26.500 | So, you know, when poor people get cancer, they get the same treatment as rich people.
00:49:30.500 | And most of us would agree with that.
00:49:33.500 | But I do think there is some parallel in the sense that once you remove the direct, you know, the transaction, once you sort of obscure the cost so it doesn't become obvious, there is more of a likelihood of people to start to think that things are free or that there is less of a transaction-based sort of approach to it.
00:49:57.500 | And that may work well for health care. And I want to criticize the Canadian health care system, but it doesn't work well in the financial services industry.
00:50:05.500 | And so I think we need to get we need to get past this idea that we should be embedding costs and making them, you know, so why are you paying, you know, an investment manager to give you financial planning services?
00:50:17.500 | Why is the, you know, management fee on a mutual fund supposed to cover, you know, the financial planning services that you're getting?
00:50:26.500 | That doesn't make any sense because there's no obvious connection between the two.
00:50:31.500 | So I think we need to separate those costs and people need to become a little bit more conscious over about what they're paying and what they're paying for.
00:50:40.500 | It's interesting. The term that I use for that is salience. The salience of costs and fees.
00:50:45.500 | Just simply that, you know, how much you see them.
00:50:48.500 | And this is a subject that I struggled with when I was in the process of starting my own registered investment advisory firm.
00:50:55.500 | And I was thinking through what my offering would be. I've since put that on the back burner because I'm not able to effectively produce my show and run that firm at the moment with my bandwidth of time.
00:51:05.500 | But I thought through how would I how would I do it? And you don't want, I mean, it's a potential conflict of interest as an advisor.
00:51:13.500 | I don't want my client to be intensely conscious of my fees because if, as you say, when they're seeing them come out every month or every quarter being billed to their account, they're going to notice them.
00:51:23.500 | Whereas if they don't show up and it's much more likely that the client is going to question them than if they are invisible.
00:51:32.500 | But I had to make the choice and I said, I preach the idea of make all of the costs in your life salient.
00:51:41.500 | Notice all of them. So when I have people do their income statements, I say start with your gross income and calculate exactly what your tax burden is.
00:51:49.500 | Don't start with this stupid, you know, I'm going to do my monthly budgeting and ignore my taxes.
00:51:54.500 | I'm just going to go with what my net number is on my paycheck.
00:51:57.500 | Get all of the fees out there and then assess each one of them and make sure that the value is there.
00:52:03.500 | In my mind, that's a fundamental skill for successful long-term wealth management and growth of wealth because every cost that you can eliminate allows you to save more money and that additional savings wisely invested leads to more wealth.
00:52:18.500 | But step one is getting them all on the table so you can look at them and there's nothing wrong with choosing to pay a higher cost as long as you're getting the --
00:52:26.500 | I try to stay away from $10 words, but as long as you're getting the concomitant value of the actual -- as long as you're getting more value than the fee, that's fine.
00:52:38.500 | But you have to know. Knowledge and recognition is step one.
00:52:43.500 | Yeah, it's true. I think that you're right. There is a certain value in -- it makes some business sense, for example, to bury that fee.
00:52:55.500 | Even if it's the same, you could make the argument -- and we've made this argument, too.
00:53:00.500 | We can use two different classes of funds with our clients, one that has our fee embedded in it so they don't see it.
00:53:07.500 | It just gets taken off the return that the fund delivers and the other one that subtracts that fee and then they pay it directly.
00:53:14.500 | Now, the net cost to the client is identical and you could argue that some people would prefer to have that fee sort of buried within the fund and they don't see it and it's convenient.
00:53:25.500 | But we've made a decision not to do that very often.
00:53:28.500 | I mean, we had done it in the past, but we don't do it with new clients anymore just because we feel, like you said, it's just important for us.
00:53:35.500 | If we're going to preach transparency of fees, we need to put it out there.
00:53:39.500 | The interesting thing is the regulators here in Canada are enacting a whole bunch of new requirements that are going to be rolled out over the next couple of years.
00:53:49.500 | And one of them is going to include, including on your statement, the fee that the client pays in dollar terms, not just percentage terms anymore.
00:53:58.500 | So now it's going to be out there for everyone to see.
00:54:01.500 | And I was speaking with someone in the industry the other day who said, you know, I really think a lot of the poor advisors are going to really suffer from this because they're going to get a lot of pushback from their clients.
00:54:12.500 | Now, I expect we'll get pushback from our clients too because there may be some who are just oblivious to what they were paying, even though we've been transparent about what it is.
00:54:21.500 | But now it's going to be in their face.
00:54:23.500 | But we feel that we can justify it and we can say, listen, here's our value proposition.
00:54:30.500 | Here's exactly what you're paying for.
00:54:32.500 | If you're uncomfortable with that, you know, you can find somebody else.
00:54:36.500 | I just don't expect that that's going to happen very often.
00:54:39.500 | Two final themes I want to explore with you in the few minutes that we have remaining.
00:54:44.500 | One is the topic and the idea of home country bias, especially as it relates to your asset allocation suggestions to a Canadian investor.
00:55:00.500 | In the United States, all the investment literature that I've seen has shown that basically everybody has a home country bias.
00:55:10.500 | That instead of looking at various investment markets equitably and saying, well, if I as a U.S. citizen can find good deals on the German market, that I'm just as comfortable investing on the German exchange in German companies or any country.
00:55:25.500 | I'm usually more comfortable owning a U.S. based company or investing on the U.S. stock exchange.
00:55:34.500 | And that seems to be consistent across countries.
00:55:37.500 | Within the Canadian context, clearly perhaps the total size of the economy would be smaller than the U.S. economy.
00:55:47.500 | Do you find there's a difference in how you set up asset allocations for Canadian investors as compared to what you read about in the U.S. context?
00:55:56.500 | Do you try to get more international exposure because of that weakness?
00:55:59.500 | How do you handle that?
00:56:01.500 | Yeah, it's a great question and it's one that comes up all the time with investors.
00:56:05.500 | So let's start with the context.
00:56:08.500 | Last time I checked, the U.S. market is about pretty close to 50 percent of the overall global capital markets.
00:56:16.500 | It's also the most broadly diversified market in the world.
00:56:19.500 | And so as an American investor, if you invested 100 percent of your equity allocation in a U.S. total market index fund, you have pretty good diversification.
00:56:30.500 | I mean, it's maybe not ideal, but it's pretty good.
00:56:32.500 | It's really good. Yeah, absolutely.
00:56:34.500 | In Canada, it's a disaster.
00:56:36.500 | I mean, we are 4 percent of the global market and we have a very poorly diversified market.
00:56:43.500 | We are about one third banks and about one quarter energy producers.
00:56:48.500 | And we have virtually zero health care.
00:56:51.500 | We have virtually zero information technology.
00:56:55.500 | So all the sectors that are so big in the U.S. and in the S&P 500 are negligible in Canada.
00:57:00.500 | So to build a portfolio that is 100 percent Canadian stocks is a pretty bad idea.
00:57:07.500 | And yet there are many, many Canadians who do exactly that.
00:57:12.500 | The last survey I saw suggested that the average Canadian allocation is--or the average Canadian's portfolio has about 60 percent Canadian stocks.
00:57:23.500 | Okay. So 60 percent.
00:57:25.500 | And to be honest, I'm surprised it's that low.
00:57:27.500 | I thought it would be higher than that.
00:57:29.500 | I've seen many investors who are 100 percent Canadian stocks.
00:57:32.500 | So it's a problem here.
00:57:34.500 | We definitely have to encourage people to look more globally.
00:57:39.500 | Now, that argument has become extremely easy to make over the last couple of years.
00:57:44.500 | The U.S. market has absolutely pounded the Canadian market in relative performance over the last few years.
00:57:50.500 | It was not the case throughout most of the 2000s, the first decade of the 2000s, right.
00:57:55.500 | The Canadian market was an extraordinarily good performer.
00:57:59.500 | It did much better than the U.S. for, you know, the year, say, 1999 to 2009.
00:58:06.500 | And so it was difficult. I mean, we would have clients--I had readers tell me all the time,
00:58:11.500 | why would anybody invest in the U.S. or international?
00:58:15.500 | I mean, Canada is the place to be.
00:58:17.500 | It sounds absurd now, but it was a very widely held opinion a few years ago.
00:58:22.500 | So what we have recommended, though, is not that you take a straight-ahead global market cap approach and go with, you know, 4 percent of your equity allocation in Canada.
00:58:33.500 | That's a perfectly reasonable argument if you want to do that.
00:58:37.500 | There are some issues. There's currency risk, for example, that might be excessive in that case.
00:58:43.500 | So what we have often recommended or what we typically recommend for clients,
00:58:48.500 | and I recommend in my model portfolios on my website, is just a simple one-third Canada, one-third U.S., one-third international.
00:58:57.500 | That would be developed and emerging markets combined.
00:59:00.500 | And that's a really nice balance. I mean, it's simple, it's easy to manage.
00:59:05.500 | There are some advantages to holding Canadian stocks in taxable accounts here, because we get a generous dividend tax credit,
00:59:12.500 | whereas foreign dividends are fully taxed as well as being subject to withholding taxes from their home countries.
00:59:20.500 | So you could argue that it's cheaper to invest in Canadian stocks here, so you could overweight them slightly.
00:59:26.500 | And there's also a behavioral bias that you have to consider.
00:59:29.500 | I mean, I think any time the Canadian market outperforms, you're going to have Canadians filled with regret
00:59:35.500 | because they only have 4 percent of their equity allocation in Canada.
00:59:39.500 | So just by going with that nice balance, one-third, one-third, one-third, has been a nice mix and has worked out very well.
00:59:46.500 | It makes it easy to rebalance the portfolio from year to year,
00:59:50.500 | and it is much, much more broadly diversified than an all-Canadian portfolio.
00:59:56.500 | In the U.S. context, we face little concern, especially among just the average retail investor, of currency risk.
01:00:03.500 | The U.S. dollar is essentially the world reserve currency, and so that brings a lot of stability.
01:00:12.500 | Do you find that in a Canadian context, do Canadian investors think more about hedging their currency risk,
01:00:17.500 | or do you do that on portfolios, trying to hedge currency risk?
01:00:22.500 | That's not it, by the way. I think in many ways the Canadian currency is probably...
01:00:27.500 | Well, we'll ignore that discussion right now.
01:00:30.500 | Do you find Canadian investors are more comfortable and more familiar with the idea of hedging currency risk?
01:00:36.500 | They're certainly more comfortable with it.
01:00:39.500 | And if you look at the product lineup in Canada, there was a time not so long ago,
01:00:45.500 | maybe we go back three years, where most U.S. and international equity funds in Canada,
01:00:52.500 | or at least in the index fund space, had currency hedging built in, and that was your only option.
01:00:58.500 | So if you bought U.S. equities, it was currency hedged. You couldn't get it unhedged.
01:01:02.500 | Or at least the options were few and far between.
01:01:06.500 | And that was, I think, because the Canadian currency, the Canadian dollar,
01:01:11.500 | was appreciated so dramatically during the early 2000s that if you weren't hedged here,
01:01:17.500 | your investments got clobbered.
01:01:19.500 | And so there, again, there was a behavioral bias where people thought currency risk only went in one direction.
01:01:25.500 | If you were exposed to foreign currency risk, that was bad.
01:01:29.500 | Well, now we know, and I hope we understand that currency risk works both ways,
01:01:34.500 | and over the long term it should even itself out.
01:01:37.500 | I mean, the expected return of a currency over the long term should be zero.
01:01:41.500 | So there are more options available now, and we are finally able to make the argument more convincingly
01:01:48.500 | that we just don't use any currency hedging at all.
01:01:52.500 | So with our clients, we don't use it.
01:01:55.500 | We prefer to just get a little bit of currency risk in there.
01:01:59.500 | And this is the other very interesting thing that the research shows.
01:02:03.500 | And again, this was something that took me a little while to understand,
01:02:07.500 | because I had read a lot about the benefits of currency hedging in institutional portfolios,
01:02:12.500 | and it was all from a U.S. perspective.
01:02:15.500 | So, you know, if a U.S. investor was investing in foreign stocks, should they hedge the currency?
01:02:21.500 | And the overall, you know, opinion was they should partially hedge it.
01:02:26.500 | I mean, that was a way of reducing the volatility by hedging part of the currency.
01:02:30.500 | In Canada, actually, the research shows the opposite,
01:02:33.500 | that the least volatile portfolio from a Canadian perspective is the one that is completely unhedged to currency.
01:02:40.500 | So if you add currency hedging, you're actually increasing the volatility of a portfolio
01:02:46.500 | if you measure your return in Canadian dollars.
01:02:48.500 | And I think the reason for that is there's just some negative correlation between the U.S. dollar and the global stock market.
01:02:56.500 | And so the U.S. dollar tends to get strong when stock markets around the world go down.
01:03:01.500 | And so that offers a little bit of a diversification benefit if you're outside of the United States.
01:03:06.500 | So all of which is to say we don't recommend currency hedging.
01:03:10.500 | We like to have a little bit of that currency risk in there.
01:03:12.500 | But it is a very different argument for a Canadian than it is for an American.
01:03:16.500 | Yeah, that makes a lot of sense to me. Interesting.
01:03:19.500 | Final theme I'd like you to touch on.
01:03:22.500 | I sit at the moment in many ways squarely between two industries,
01:03:28.500 | the personal finance industry with the subsets of financial blogging, financial podcasting, financial media,
01:03:37.500 | and the financial advice industry.
01:03:39.500 | And the problem is that actually creating interesting and useful content by the financial advice industry
01:03:47.500 | is much more difficult based upon the regulations that we face, at least in the U.S. context.
01:03:52.500 | However, I see the lines being blurred, and I've recommended to many personal finance -- to some --
01:04:00.500 | I've recommended to some personal finance bloggers and people that are contributing that they consider becoming an advisor
01:04:06.500 | because there's a really great natural evolution where they can help clients with their writing
01:04:15.500 | and then help clients personally with their in-depth financial plans.
01:04:18.500 | And they've built up trust, and it seems to me like a very intelligent way to earn an income off of something like a financial blog.
01:04:25.500 | And then we see on the other side more and more financial advisors turning toward blogging, publishing, podcasting
01:04:32.500 | as a way to get their message out, as a way of attracting clients.
01:04:36.500 | And I think that's also good because it opens up a little bit and breaks down some of the walls
01:04:42.500 | that often exist between the professional financial advice industry and the interested devotees of personal finance.
01:04:55.500 | Do you recommend the transition that you've made to other personal finance bloggers,
01:05:01.500 | and do you think that is a potentially reliable way to generate an income from one's online blogging activities?
01:05:12.500 | Yeah, great question. I didn't really set out to do what I did. It just kind of happened the way it did.
01:05:18.500 | Would I recommend it to others? I mean, sure. I think that I've already seen it here.
01:05:24.500 | A couple of bloggers that I follow have started to move in that direction.
01:05:29.500 | The real challenge, if you're going to make that move from, say, being a financial blogger to an advisor,
01:05:36.500 | is how do you make an income in the meantime?
01:05:41.500 | Because it definitely takes a few years to not only build up a clientele, build up a business,
01:05:50.500 | but to build up your skills and get your licensing and your certification and whatnot.
01:05:55.500 | So you need some sort of plan for the intervening years.
01:06:00.500 | You can't just flip a switch and become an advisor tomorrow with a bustling book of business.
01:06:06.500 | I was very fortunate that I'm at a firm that is supporting that and allowing me to straddle both worlds for a little bit
01:06:15.500 | until we get to the point where I can make the transition to doing this full-time and drawing all of my income from it.
01:06:24.500 | I think that I was very fortunate in that situation.
01:06:27.500 | I'm not sure that I would be able to say to anyone else, "You should go out and try to find that opportunity,"
01:06:33.500 | because it might just be very difficult or impossible to do so.
01:06:37.500 | But I do think that everybody who does this as a writer or a blogger for enough time and interacts with enough people
01:06:45.500 | is going to be tempted to do that, because I think you connect with people.
01:06:50.500 | I really enjoy helping people. I love getting emails back from people saying,
01:06:56.500 | "You've really made a big difference in my investing life. Thank you for your help."
01:07:00.500 | I find that very gratifying, and I really like to work directly with people.
01:07:05.500 | So it's really just a matter of figuring out pragmatically how you can make that work.
01:07:10.500 | One of the problems you see is from the advisor perspective,
01:07:14.500 | many of the things that have often been so effective for getting started in the financial advisory business are more challenging.
01:07:22.500 | If you're an established financial advisor with an established client base and you are excellent at what you do,
01:07:30.500 | you can run your business entirely off of non-requested referrals.
01:07:35.500 | Your client base says, "Hey, you need to talk to my friend Joe. He just sold his business. He's got $10 million.
01:07:40.500 | He needs a good advisor." I see this all the time.
01:07:43.500 | But as far as building a practice, that's the challenge.
01:07:47.500 | Traditionally, in the past, building a practice was built on—
01:07:52.500 | this was back when it was more selling and less advice—
01:07:56.500 | but building a practice was built on cold calling, on outbound cold telephone calls.
01:08:00.500 | Cold calling is—some advisors are able to build their practices on that,
01:08:05.500 | but it's certainly different and more challenging than it was in the past.
01:08:12.500 | Even just based upon outbound warm calling—one of your clients says,
01:08:19.500 | "Here, I recommend that you consider calling my friend Joe. He's a good guy."
01:08:23.500 | You call him up. It's a warm, cold call.
01:08:26.500 | That's also changing in an era where I don't answer my phone anymore.
01:08:30.500 | I've made that transition of I don't answer.
01:08:32.500 | I always swore to myself, promised myself I'll always answer my phone.
01:08:36.500 | Having made plenty of outbound phone calls, I'll always answer the phone.
01:08:41.500 | I've come to the point where I just can't do it.
01:08:43.500 | I can't answer the phone. I get so many calls.
01:08:46.500 | I can't answer the phone unless I know who it is.
01:08:48.500 | All the calls are screened with voicemail.
01:08:50.500 | I don't respond to all the emails. I can't keep up.
01:08:54.500 | As an advisor, advisors have to build this other—we have to learn new methods.
01:09:02.500 | I think a lot of people are testing things.
01:09:04.500 | The challenge with writing financial advice is that you're only contacting people who are interested,
01:09:09.500 | who are out searching, which are ideal—those are ideal prospective clients.
01:09:14.500 | But in many ways, it's a lot better to work in how do you reach those people who aren't interested.
01:09:19.500 | It's just interesting. I'll be following your comments as you learn and share
01:09:24.500 | because it's a subject that I get asked about by young advisors of how do I build my practice.
01:09:29.500 | I struggle to know how to answer that question sometimes.
01:09:32.500 | Yeah, it's really unique to the advisor.
01:09:34.500 | But I would say that one thing that we've been able to do or that I—because I spent so many years
01:09:40.500 | writing about this type of material with a very specific focus, I mean I was zeroed in on index investing specifically
01:09:48.500 | and argued against alternate strategies for so long, you self-screen, right?
01:09:55.500 | So we get a lot of prospective clients coming to us online because they've seen my work or my colleagues' work online.
01:10:03.500 | And we don't get people who call us up and say, "We want to become stock pickers and active investors,"
01:10:09.500 | because they know that we're not going to be interested in that philosophy.
01:10:13.500 | So mostly we get people who have already understood what we do, which makes the meetings much easier, right?
01:10:21.500 | Because when somebody comes in for a visit and they say, "Listen, I've been reading your stuff for a couple of years,
01:10:25.500 | and I'm a big fan of the philosophy and I understand the strategy," well, that makes our job much easier.
01:10:31.500 | So if you're out there with a consistent message, I think your prospective clients will come to you already
01:10:38.500 | with a certain amount of familiarity with what you do, and I think your likelihood of bringing those people on as clients
01:10:45.500 | will be much higher too.
01:10:47.500 | Yeah, absolutely. At this point, I've started to experience the joy of that over the last year—
01:10:52.500 | excuse me, the last six months that I never could have before.
01:10:55.500 | At this stage, I wouldn't want to work with a prospective client unless they'd listened to at least 20, 30 episodes of the show
01:11:01.500 | to get a sense of who I am, because I'm so different than other people.
01:11:06.500 | And not bad, not good, just different.
01:11:08.500 | There's got to be a synchronization of the personalities.
01:11:12.500 | It's got to be mutually beneficial for it to work.
01:11:17.500 | Dan, this has been super fun. I've really enjoyed our conversation.
01:11:22.500 | Is there anything that you think that I've missed or any other final topics that you think would be pertinent to the topic?
01:11:29.500 | No, I think you did a great job covering all of what was on my mind as well.
01:11:35.500 | It does sound like, even though we operate in pretty different contexts, we've come to a lot of the same insights
01:11:42.500 | about investors and about what's necessary for an advisor to do a good job
01:11:47.500 | and what's necessary for an investor to succeed.
01:11:50.500 | I really enjoyed the conversation as well.
01:11:52.500 | Absolutely. So your website is CanadianCouchPotato.com.
01:11:54.500 | Your advisory firm, what's the name of your advisory firm?
01:11:58.500 | It's called PWL Capital.
01:12:00.500 | And there are links, I guess you can get through there through CanadianCouchPotato.com if people are interested.
01:12:04.500 | Yeah, you can visit PWLCapital.com as well.
01:12:07.500 | Well, keep up the great work. I appreciate your coming on the show today.
01:12:10.500 | My pleasure. Thanks very much.
01:12:14.500 | As we head out the door today, I just want to emphasize a little bit of the information on home country bias
01:12:20.500 | and just encourage you to consider that yourself.
01:12:23.500 | Do you have a home country bias from wherever you are?
01:12:27.500 | Or do you look on a global basis to see what the best opportunities are?
01:12:33.500 | Now, there are certainly additional risks and rewards with every form of investing.
01:12:38.500 | Investing in Zimbabwe because they're offering higher interest rates on savings accounts
01:12:44.500 | than you can currently get in Atlanta, Georgia is not necessarily a straightforward decision.
01:12:51.500 | There are some other risks, but you need to consider it.
01:12:54.500 | And it's one of the most, I guess, understandable but puzzling scenarios
01:12:59.500 | because essentially with home country bias, we're basically just more comfortable with what we think we know.
01:13:06.500 | But I'd encourage you to expand your horizons a little bit.
01:13:09.500 | Expand your horizons in the same way that I constantly talk about.
01:13:12.500 | Expand your horizons outside of just simply focusing on public-traded securities as the only form of investment.
01:13:21.500 | Also, expand your horizons internationally and look for good deals wherever they be.
01:13:27.500 | That's it for today's show. I hope you enjoyed this.
01:13:30.500 | I have another interview lined up with another Canadian as well.
01:13:35.500 | And I'm going to try to do something similar that I did today to learn a little bit and give some information for the Canadian audience
01:13:42.500 | but still be useful to the rest of the audience.
01:13:45.500 | I hope you guys liked it.
01:13:46.500 | Thanks so much for listening today. I appreciate it very much.
01:13:49.500 | I'm planning a couple more interviews than normal this week and next week
01:13:52.500 | due to trying to get some stuff done behind the scenes here on the show and on the business.
01:13:56.500 | I've got to amp up the game a little bit here and take everything up a notch.
01:13:59.500 | So thank you all so much for your support.
01:14:01.500 | If you'd like to get in touch with me, you can email me joshua@radicalpersonalfinance.com.
01:14:05.500 | Twitter, we're @radicalpf and Facebook.com/radicalpersonalfinance.
01:14:09.500 | If you liked today's show, this show is listener-supported.
01:14:13.500 | For details on that, consider going to radicalpersonalfinance.com/membership.
01:14:18.500 | That's how this show is provided, is with the membership program.
01:14:21.500 | I've got a couple of things I'm just about ready to put in there, some extra member benefits to get that thing going.
01:14:26.500 | And that's a major focus for me over the next few months.
01:14:29.500 | So thank you for those of you who have joined.
01:14:31.500 | I would be thrilled if about eight times as many of you who have joined
01:14:35.500 | that would really open up some major options for the show
01:14:38.500 | to amp up the game a little bit here and bring you guys better and better content.
01:14:42.500 | So consider joining if you would like.
01:14:44.500 | I'll be back with you tomorrow.
01:14:46.500 | Thank you for listening, and I hope you are enjoying the holiday season.
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01:15:25.500 | Thank you for listening to today's show.
01:15:49.500 | This show is intended to provide entertainment, education, and financial enlightenment.
01:15:56.500 | Your situation is unique, and I cannot deliver any actionable advice
01:16:02.500 | without knowing anything about you.
01:16:04.500 | This show is not, and is not intended to be any form of financial advice.
01:16:12.500 | Please, develop a team of professional advisors who you find to be caring, competent, and trustworthy.
01:16:22.500 | And consult them, because they are the ones who can understand your specific needs,
01:16:28.500 | your specific goals, and provide specific answers to your questions.
01:16:33.500 | Hold them accountable for your results.
01:16:36.500 | I've done my absolute best to be clear and accurate in today's show,
01:16:40.500 | but I'm one person, and I make mistakes.
01:16:43.500 | If you spot a mistake in something I've said, please come by the show page and comment,
01:16:47.500 | so we can all learn together.
01:16:50.500 | Until tomorrow, thanks for being here.
01:16:53.500 | With Kroger brand products from Ralphs, you can make all your favorite things this holiday season,
01:16:58.500 | because Kroger brand's proven quality products come at exceptionally low prices.
01:17:03.500 | And with a money-back quality guarantee, every dish is sure to be a favorite.
01:17:08.500 | [MUSIC]
01:17:11.500 | Whether you shop delivery, pickup, or in-store, Kroger brand has all your favorite things.
01:17:18.500 | Ralphs. Fresh for everyone.
01:17:21.500 | [MUSIC]