Key Points From This Episode:
Grass fed beef [0:01:22]
The benefits of independence [0:05:27]
The Ontario government wants to keep the deferred sales charge (DSC) [0:07:01]
DSC back in the day [0:07:48]
The old financial advice model [0:17:19]
DIY investors are responsible for their decisions [0:20:51]
1/3 of people say money is their biggest stressor [0:24:01]
Locus of control [0:26:42]
A better way to invest responsibly [0:32:11]
Read the Transcript:
Ben Felix: This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision making for Canadians. We are hosted by me, Benjamin Felix, and Cameron Passmore.
We're back with week 10, or episode 10, of the Rational Reminder Podcast. I had a pretty interesting weekend. Well, not that interesting. This is not the first time I've done this, but we picked up a quarter of pasture-raised beef on Friday.
Cameron Passmore: So which quarter, front or hind?
Ben Felix: Front.
Cameron Passmore: The front?
Ben Felix: We always do the front. [crosstalk 00:00:46]-
Cameron Passmore: I was a butcher in a past life. That's why I'm asking.
Ben Felix: You know all about it.
Cameron Passmore: So why the front? Lots of ground beef?
Ben Felix: We just like the cuts. Yeah. We did a lot of ground beef. We had half of the ground beef made into sausages. And we got a bunch of roasts as well.
Cameron Passmore: To do in the Instant Pot.
Ben Felix: Maybe in the Instant Pot. I don't know. The prime rib, you have to do in the oven, I think.
Cameron Passmore: Yeah.
Ben Felix: You can't do that in the Instant Pot.
Cameron Passmore: No.
Ben Felix: I did a blade roast on the weekend, which was great.
Cameron Passmore: A blade in the Instant Pot is phenomenal.
Ben Felix: It was a 180-pound quarter. It was a big quarter.
Cameron Passmore: Right.
Ben Felix: $1600.
Cameron Passmore: So what's your main reason for doing that? Economics or quality?
Ben Felix: Quality first. Well, quality is why I get the pasture-raised beef, grass fed and grass finished. It's a totally different ballgame than the kind of beef you buy at Loblaw's. I haven't bought beef from a grocery store in years.
Cameron Passmore: So when you buy it, do they age it for you?
Ben Felix: None of this was aged. They butchered it, and we got it the next day. Frozen.
Cameron Passmore: Oh, so it's all frozen?
Ben Felix: Yeah. So quality for grass fed or pasture raised. And then the reason for doing the quarter, as opposed to buying it bit by bit from the farm, is that it's cheaper.
Cameron Passmore: Terrific. So last week, I was out west, as you know, so I got back late Friday night after visiting four other offices out west that are in the same business as we're in, so we're part of a quasi peer group, I guess, where everyone's willing to share how they manage their practices and how they work with clients, and it was a terrific trip. Three offices in Calgary and one in Vancouver, and it's amazing the quality of people that are doing work like we are across this country. So we know a lot of these people by being at various conferences over the years, mainly in the DFA-type world, but still you always learn stuff about how to deliver better service from these people, and not only from the formal presentations, but we also meet up afterwards and go for dinner, so it was a terrific trip.
Ben Felix: What was your biggest takeaway in talking with other people doing similar work that we are?
Cameron Passmore: One big takeaway was there was a number of bank-owned firms that we visited who, just based on the size of the bank, they don't have the flexibility. For example, we're doing a podcast now, which, in a bank environment, I think would be tough to do, to get approval and compliance. So we're able to be more creative in how we communicate ideas to clients. Like the idea behind this podcast was really for clients to get an insight into our practice. Not so much about marketing. So we have small-firm, boutique-type firm flexibility to do a podcast or a YouTube channel or the various different events that we do, which are very hard in that kind of environment. So I think they're frustrated with that, but being part of a bank, you get the brand and a certain amount of, I guess, business development support from them based on the brand. But I think our team really appreciates being part of a private, creative... We get to create our environment. Even our physical environment you can't create in a bank branch. You're part of a branch [crosstalk 00:03:48].
Ben Felix: Right.
Cameron Passmore: So people have been here. They know our meeting rooms are designed specifically with clients in mind and our working space with couches and whatnot. It's a little bit more creative. It reflects who we are, which I think is very nice.
Ben Felix: Being at a bank, do they talk at all about sales pressure, anything like that?
Cameron Passmore: No. These are all high-performing teams. So there's no pressure on sales at all. They're just as professional as we are in our investment philosophy, just as disciplined as we are. High-quality people. All four of those teams I would deal with personally if I -
Ben Felix: So when you think about teams like that and like-minded people, what do you think keeps people like that at a bank, as opposed to seeking out a firm like PWL?
Cameron Passmore: Well that was kind of the burning question, right? I don't know what the answer is, because you leave a lot of revenue on the table for the banks, right? So you can go out on your own and arguably perhaps do things a bit cheaper for clients, although market base dictates what the fees are. I would think the fear of the unknown. You know you're at a bank, it's going to be solid. Like if you're an advisor at RBC, you know RBC's going to be there. I think there's a certain amount of cache with clients who are RBC people. So I'm sure there's people who won't deal with us because we're not a big brand name like that.
Ben Felix: That's never come up.
Cameron Passmore: It's never come up, but I think we've got selection bias.
Ben Felix: True, true.
Cameron Passmore: We're getting a lot of people who don't want to deal with the banks.
Ben Felix: Right.
Cameron Passmore: Right? I agree. I've never had that issue come up before, but if you were a bank-type person, you would never talk to us, anyways.
Ben Felix: True. Right. That's really interesting.
Cameron Passmore: Likewise, if you're an independent-minded type person, you would never talk to a person at a bank. So we end up with selection bias, and we get-
Ben Felix: Wow.
Cameron Passmore:... but quality practices, quality people. They say it's really weird working inside one of the branches. They're one team out of 62 advisors. He says, "There's basically us surrounded by 61 acting managers." It's just crazy how you can work next to people that don't believe in what you believe in, but I guess that's what makes a market, and they seem to be all okay with it.
Ben Felix: The thing that blows my mind is why would that team, one out of 60 some odd teams who have different philosophies... Why would that one team that thinks the way we do not want to join our platform? Interesting. That's a big-
Cameron Passmore: I don't know.
Ben Felix:... big problem for another day.
Cameron Passmore: Yeah.
Ben Felix: Because I bet if it's everybody, then PWL as a firm gets more scale. It works better for everybody, including clients. Anyway, like I said, bigger problem for another day. So as everyone knows, or everyone that listens, we had our first guest on last week, and the process was great. The guest we had, Carson, was fantastic. Not rehearsed at all but it sounded so professional.
Cameron Passmore: Yeah. We kept talking afterwards, off mic, and we could have kept the tapes rolling.
Ben Felix: Yeah. We kind of wished we'd... Almost the second half of the conversation was more interesting, but... next time. But based on that experience and the feedback that we got from listeners, we're going to continue having guests interspersed throughout the episodes, so we've got a few really great ones lined up that we'll talk more about as we get closer to those episodes.
Cameron Passmore: So this first topic's got you pretty fired up, I know.
Ben Felix: Yeah. So, for today, I think it's pretty obvious. I bet a lot of our listeners could guess what we're going to start off with, but the Ontario government's come out and said that they're no longer going to back getting rid of the deferred sales charge. So this is a big... some proposals that went through, and it looked like they were going to be approved and we were going to be done with deferred sales charges in Canada. For anyone who's listening and doesn't know what that is, a deferred sales charge is like, if I'm an advisor selling a DSC, deferred sales charge mutual fund, I sell it to the client. I get a big 6% or 7% up-front commission in my pocket that day, and the client then has to stay in that fund, or at least with that fund company, for six or seven years.
Cameron Passmore: I remember when that was created, back in the early 90s, by Mackenzie Financial.
Ben Felix: Wow.
Cameron Passmore: And that was what really kicked off the mutual fund revolution. Chilton's book had just come out, The Wealthy Barber.
Ben Felix: Right.
Cameron Passmore: And I remember going to roadshows from these companies. Mackenzie actually funded it by selling limited partnerships. So you could sell a limited partnership, which raised cash to finance the backend load. So you sell a limited partnership, get a commission on that, and then sell the fund and get a commission on that. And I understood the argument. It's going to force you to be more a buy-and-hold investor because you're not going to sell it if you know you have to be in for seven years. It makes you wonder, then, "Well, what's the advisor doing? Isn't it the advisor's job?"
Ben Felix: Right. That's exactly right.
Cameron Passmore: But frankly we didn't know any better. This is going back to '91, '92, '93, and that's what first tipped us off to look at going fee based, because we were getting clients as they were being let go in that big release from the federal government back then. You'd pick up someone with $100,000 severance, and all of a sudden, you're getting a $5,000 commission.
Ben Felix: That day.
Cameron Passmore: Well, it would show up like a week later, but for one, maybe two meetings and a little bit of paperwork. All of a sudden, you do a two hundred and then a two hundred, then a two hundred, you're making $8,000 to $10,000 often. And it's like, "Yeah, I think we're pretty good, but we're not this valuable," so it just felt totally wrong. So that's when we started to look out for options and decided to go fee base after that.
Ben Felix: Yeah.
Cameron Passmore: But it was a huge... I remember people writing million dollar tickets. Not in our firm, but I knew of people. They were making a $50,000 commission.
Ben Felix: Yep. I remember. Even when I was in the mutual fund business for that year and a bit, I saw people doing similar stuff.
Cameron Passmore: But I was stunned the government went against what the industry recommended, and I think they've squished it, right?
Ben Felix: That's what it looks like, yeah. I don't know how explicit the wording was, but as far as I could tell, it looks like it's done. The decision's been made to not move ahead with the ban.
Cameron Passmore: And then you found out what the head of Advocis-
Ben Felix: Yeah. Well, Advocis posted. I didn't do any fancy digging or anything. They posted a release. I'll read a quote from... Advocis is an industry lobby group that represents mostly mutual fund salespeople. Like when I was in the mutual fund business, you were strongly encouraged to join Advocis and be a member and all this kind of stuff. So their statement said, "Our intention as an association is to ensure Canadians have equal access to trusted financial advice. Today's announcement by the government demonstrates that the government of Ontario shares that vision and intends to work alongside stakeholders to protect consumers."
Cameron Passmore: Wow.
Ben Felix: Then he carried on and said... basically arguing that, because people have small accounts, like on average Canadians have less than $25,000, 80% of Canadians have less than $100,000 to invest, and they're basically saying that, with that amount of money to invest, you can't access professional financial advice unless the deferred sales charge exists. That's their argument.
Cameron Passmore: That's nonsense.
Ben Felix: It's absolute nonsense. And when you think about somebody looking for investment advice, if the only way they can get advice is by buying a high-fee product that's terrible for them in the long term, they don't need that... They're better off [crosstalk 00:11:04]-
Cameron Passmore: Yeah. We know the options, like robo-advisor or the Vanguard One Decision balance funds at whatever, 25 or 30 basis points.
Ben Felix: Exactly.
Cameron Passmore: It'd be cheaper to charge them $1,000 or $2,000 for the advice than to jam them perpetually into 2.5%.
Ben Felix: Yeah. So with the robo-advisors, and there's some interesting firms popping up now that are either fee only, and there's some other ones that are fee only with a subscription model. I don't remember the name, but I saw one of them recently. It's like $40 a month for ongoing financial advice. So that's pretty interesting.
Cameron Passmore: Yeah. I was shocked. I listened to a podcast, and we should put it in the show notes, with Michael Kitces, who's a consultant to our industry. So he was interviewing Ric Edelman, who's the founder of Edelman Financial, which is a $20 billion firm, similar structure to us, in the US. They don't believe in minimums. Their minimum is $3,000 account. And he says, "Either you care about helping people or you don't." I mean, it's common in our industry to try to aim higher all the time for efficiencies, but his approach is totally different, and he is growing like crazy in the US.
Ben Felix: Yeah. In that statement from Advocis, one of the things that really set me off is they say that getting rid of the DSC would be restricting access to professional financial advice. So, to me, I say, "Okay, what does that mean?" And you start looking at, "What does it take to give that type of advice that they would be banning?" So basically, "What does it take to sell a mutual fund?" If you go through the Canadian Securities Institute, they have one exam that you've got to take, and they estimate between 90 and 140 hours of study to complete this mutual funds licensing exam. And then after that's done you're required to do a 90-day training period. And then that's it. Then you're licensed to sell mutual funds. So when we're talking about getting rid of DSC and that's going to restrict access to professional financial advice, is that professional financial advice? Is that what it takes to be a professional? 140 hours of study and a 90-day training period? I certainly hope that's not it. That's what they're arguing. So anyway, I don't think that any consumer is being wronged if they don't have access to somebody who's spent 140 hours studying so that they can sell high-fee mutual fund ]-
Cameron Passmore: No. Thankfully, I don't think DSC is as big a deal anymore in the industry. Like sales-
Ben Felix: Well, Investors Group killed it. Investors Group is no longer doing it.
Cameron Passmore: - know how much sales are being done DSC anymore. We rarely see it. Once in a while, we'll see a DSC -
Ben Felix: It's still a big chunk. If you look at the buy assets, the amount of assets in cash-
Cameron Passmore: Oh, for sure where money is. But I'm saying new money. How much new money is going... I don't know.
Ben Felix: I don't know either. It's tougher now. I mean CRM2, I think, did a lot of the work by explicitly showing clients how much they're paying, so if you go and do a DSC on a million dollar account, and you get a $50,000 commission, the client's going to see that in their year-end statement.
Cameron Passmore: But this gets to the other issue, which I know we want to talk about later with the CBC story, but people have to be aware. Think of the amount of money that's in DSC funds where the DSC has melted away, and they may be able to move over to lower-cost-type options, like F class options or something. I can only imagine how many people just have no idea that were in a DSC fund, and the DSC has gone.
Ben Felix: Yeah. People don't even know they're in a commission fund. People don't know they're in an active fund. Most people don't even know what an active fund is, I would wager.
Cameron Passmore: Or a lot of people might be in a DSC fund, and what typically an advisor will do is, once the load schedule is over, they'll flip you to the A class fund to get the higher trailing.
Ben Felix: They'll do 10% free every year.
Cameron Passmore: 10% free, and so instead of getting a half a percent fee in perpetuity, you get a 1% fee in perpetuity.
Ben Felix: Well, break that down. So when the DSC is applied, two things happen. You get an up-front commission, but then your trailing commission, which is your ongoing commission that you get monthly, and it's quoted as an annual percentage, drops from 1%... So if you don't do the DSC, you get a 1% trailing commission. If you do do the DSC, you get the big chunk up front and then 0.5% ongoing for service and things like that. DSC allows you to free, so take 10% of your unit each year, and remove them from the DSC fund without penalty. So a lot of the times, what the practice is, and I don't have data on this, but from experience I know, the practice is you do the DSC in the first year, and then each year, you take the 10% free and you flip it into the regular A class funds, so you get the higher 1% trailing, and that's how you do it. That's how it's done. It's all about generating higher commissions. Now I guess, to be fair, in that instance, even though... the client's getting screwed, anyway, but they're not getting any more screwed with the 10% free-
Cameron Passmore: value... The value's in the eye of the payer, I guess? You're not paying any more, but you're advisor's getting paid more. So I guess your advice should be going up over time. I don't know.
Ben Felix: So all this stuff is going on. It's been in the last six years that the consultation on trailing commissions and DSC has been going on, and we've had new disclosures come out, and all this is happening in the world, and groups like Advocis are fighting to keep DSC and fighting to keep trailing commissions because they're arguing it gives investors more options for advice and whatever, whatever. While all that's been happening, PWL has grown from managing about $700 million five years ago, and now we're just under $3 billion today. And we are doing fee based. We're doing evidence-based portfolio management. Our costs are low. I mean even when you look at our peer group our fees, the fees that we're paid for our full-service wealth management service... We're aggressive in pricing. Our portfolios are cheap because we're using index funds, and people want that. So if Advocis and mutual fund advisors and those types want to continue selling high-fee products and using DSC and using trailing commissions, they're going to die out.
Cameron Passmore: And even things for efficiency, like eSign options for new paperwork and using vaults. These are things that are not implemented yet in the banking world. For sure it's coming, but I learned last week I think we're pretty progressive on some of the technology, believe it or now, and all these things enable us to keep some of the fixed costs lower. We're not in the highest ranked district, certainly, in Ottawa. We have a nice office. We invest heavily in people, which is what really matters to clients, I think.
Ben Felix: I think the point is, if the industry wants to hang onto commissions and stuff like that, that's fine, but they're going to lose clients. I talked to somebody last week who is in that model, and I can't remember the exact wording that they used, but they said something... and they had a sizable account. But they're in DSC mutual funds, and they said something along the lines of they wanted to get out of the old financial advice model. I think people are starting to see it that way. The old, rolling-over DSC funds, the traditional financial advice model, I think that's... In the eyes of consumers, I think that's becoming obvious, that it's going to die out.
Cameron Passmore: But I think that's why people are finding us through nontraditional channels. If you realize there's something wrong with your portfolio, instead of going and asking your neighbor, which is kind of the old referral model, I think people are just going to the internet and finding us, hopefully, that way.
Ben Felix: Right. Yeah.
Cameron Passmore: So with that, we kind of linked in the story from this great video that the guys at Ritholtz Wealth Management put out, talking about the change in the fiduciary role in the US, so basically a rule was proposed in the US that has basically been killed that would force all financial advisors to act in their clients' best interest. And so the guys at Ritholtz used to be very aggressive about promoting this new proposed rule and saying, "This is what must happen." They still believe that, but now their tack is basically, "You know what? [inaudible 00:18:40]. If you're going to be this stupid, we're just going to eat your lunch and basically get all your clients. If that's the way you want to be." And this video, which I hope we put a link to in the notes, is pretty incredible, from some pretty savvy people with millions of followers. They're coming out swinging, saying, "Go ahead. Don't make people work in their clients' best interest. Have fun."
Ben Felix: Yeah. They're saying, "If you're going to go after the interest of your clients, then good luck."
Cameron Passmore: "At court, if you want to lobby against your clients, go ahead."
Ben Felix: Yeah.
Cameron Passmore: "Our firm and our movement will win because it's the right thing to do."
Ben Felix: It's the same thing we're doing. We're not as maybe American and aggressive about it. We're a little more Canadian.
Cameron Passmore: Yeah. Josh Brown's pretty aggressive about it, for sure.
Ben Felix: Yeah. Very New York. New York American. We're a lot more Canadian. But it's a similar approach. We're doing the same kind of thing. And the end result, the assets are still flowing to us. The growth that we've seen in the last five years has been unbelievable, firm wide.
Cameron Passmore: But this next topic, you're kind of pro industry a bit, right?
Ben Felix: Well, yeah. So I'm not the first person to have this opinion. Rob Kerr wrote about it a while ago, but CBC had a big go-public sob story. Sorry. That's offensive to the person the story's written about. I didn't mean to be offensive there, but the fact is the story's about someone who is self described as a sophisticated investor, which I take issue with alone, but anyway. They are complaining that they have been paying trailing commissions by owning A class funds while having their assets at a discount broker. So the reason there's a disconnect there is the trailing commission on an A class fund, that's the 1% trailing fee that we were talking about earlier, that 1% is designed to be for ongoing service and advice. Now a discount broker is legally obligated not to give any advice. So if you own an A class fund -
Cameron Passmore: You're paying for something you cannot get.
Ben Felix: You cannot legally receive. Now I do agree that is wrong, and that's one of the things that regulations are going to address, so that, as far as I know, is not going to be changed by the Ontario government. That will go through-
Cameron Passmore: Yeah, I believe so.
Ben Felix: ... so discount brokers will not be able to offer A class... or they won't be able to receive commissions from A class funds. They might have to rebate them. I don't know. Now there are these things called D series funds, which are designed for DIY investors. I don't know if people realize, when you read that CBC article, it seems like the D series funds have no commissions. That's not true. They still have embedded commissions. They're just a bit lower. The only way to get no commissions is with F class funds, but you can't buy F class funds through a discount brokerage.
Cameron Passmore: Exactly.
Ben Felix: Yeah. So the point I'm talking about with this story is that I don't feel bad in the slightest for somebody who has purchased A class funds through a discount broker. You should not be crying about that.
Cameron Passmore: You are the DIY rube.
Ben Felix: That's right.
Cameron Passmore: You're the Y.
Ben Felix: That's right. You have taken on a very important decision. I mean we talked about, and we'll talk more about this in a minute, but the money is so important. Love it or hate it, it is what it is. The way that the world is structured right now, money is exceptionally important, and investing is an important part of money. If you're not investing, then you miss out on the gains of capitalism while the rest of the world doesn't. So if someone's taken on this massive task of being a DIY investor, they better be doing a good job. They better know what to do. They better do their research. And for someone to come out and complain, "Well, I didn't know. I bought the wrong..." Too bad. What's the difference between that and buying an oil stock? "Oh, yeah. I didn't mean to buy that one." It just doesn't work that way. So anyway, I have zero sympathy for someone who's taken the route of being a self-directed DIY investors and has been paying commissions. I agree it should be fixed, and it will be. It has been. But you shouldn't be complaining. That's a big undertaking, being a DIY investor.
Cameron Passmore: Yeah. You're on record.
Ben Felix: And you look at stuff like the Canadian Couch Potato blog. That gives you a pretty explicit and easy-to-implement way of being a smart investor. It's not perfect in some ways, but all things considered, it's pretty good.
Cameron Passmore: Yeah. If you're DIY, what are you doing in a high expense ratio active fund anyway, right? When you can go buy an ETF portfolio for a dime.
Ben Felix: Well, I saw some data on online brokerage accounts. The majority of assets in the accounts are individual stocks. Only 7% of assets-
Cameron Passmore: Really?
Ben Felix:... in self-directed online accounts are mutual funds.
Cameron Passmore: There must be a ton of cash, too, because-
Ben Felix: 9% cash.
Cameron Passmore: Oh that's all?
Ben Felix: Yeah.
Cameron Passmore: I thought it'd be more. Because they make money off cash in the overnight.
Ben Felix: But it's mostly individual stocks. So that's the other thing, like you've chosen to be a DIY investor, and you're investing in mostly individual stocks. Is that any better than buying... You might have been better off in the A class fund, as opposed to buying a bunch of oil stocks or something like that.
Cameron Passmore: What is it, relative absurdity?
Ben Felix: Yeah.
Cameron Passmore: A couple of surveys that... Well, you found one, and I found one last week, just talking about what's causing stress in people's lives, and for many people, money is a huge stress in their life. So the one that I found suggested that 36% of people have money stress in their life, and yours was a little bit lower at 33%.
Ben Felix: Same idea, though. Yeah, the one survey that I found came from Wealthsimple and the other one from Bankrate, but you found a story from Jonathan Clements, who used to be the personal finance columnist for Wall Street Journal, and now he's got his blog, HumbleDollar.com. And he wrote a nice little piece about the Bankrate survey. He suggested, "If money's a major stressor for you, then you should turn to a fee-only financial planner who acts in your best interest for advice or speak to a nonprofit credit counselor if it's a debt issue, make a plan of action," so you've got to actually make a plan, implement it, execute it, and cut back on expenses. Those are his-
Cameron Passmore: Yes, the money stresses aren't just about retirement, although that is the big one, and as you get older, the money stresses go up, but it's debt, the ability to pay your bills-
Ben Felix: Education costs.
Cameron Passmore:... kids' education costs. In the US, of course, it'd be healthcare costs would be out there. So it's that whole basket of stresses, but as you get older, like that... young Baby Boomers, the big stress is saving up for retirement, and we live that every day.
Ben Felix: Yeah. And this kind of ties back to the DIY conversation. Does the average person save enough? They probably have no idea because they probably don't know how much they need to save because they haven't done a financial plan.
Cameron Passmore: And so many people, how much you save matters way more than how much you earn.
Ben Felix: How much you earn, how much you pay in fees, how much your returns are, yeah. The savings rate is arguably more important than all those things, which, in a way, to tie it back to the Advocis thing, is maybe an argument for paying high fees to a DSC fund so you can know how much to save. I'm just joking. That's not actually a good argument for that. I think it's... Just on this survey, I think it's totally normal for money to be a source of stress. Like I said a minute ago, love it or hate it, it's one of the most important things in our lives. To a point. Obviously, there are diminishing returns after a certain level of income and wealth, and there's been lots of studies done on that. But financial stuff is hard. Budgeting's hard. Making smart purchases is hard. Saving is hard. Investing is hard.
Cameron Passmore: Delayed gratification.
Ben Felix: And you know I was thinking about this before the show. I think one of the reasons that all that stuff is hard is because everybody wants to take your money from you. Because we're in a capitalist society. Everybody out there wants to take your money from you. And they make those decisions hard, so they can get your money.
Cameron Passmore: Everybody from Amazon to your farmer with the beef to your car dealer-
Ben Felix: I think they-
Cameron Passmore:... to... I mean it's choices, right?
Ben Felix: I trust my farmer.
Cameron Passmore: Of course you do. This isn't about trust, but it's appealing in a capitalist society to get this stuff.
Ben Felix: Right. I've been listening to the book Smarter Faster Better by Charles Duhigg. The subheader is The Secrets of Being Productive in Life and Business. It's an interesting book. But he talks about, or the book talks about, locus of control. And if you have an internal locus of control, you're generally more satisfied with life, less stressed, and what it means is, if you have an internal locus of control, you take responsibility for everything in your life, as opposed to having an external locus of control, where you blame external factors. So I was thinking about that in terms of personal finance and investing. If you have an internal locus of control, you will save. Because that is in your control. You'll minimize your investment fees, so seeking out stuff like index funds. You'll seek advice as needed. Someone with an external locus of control will be more likely to not save and hope for higher investment returns, which would lead them to active management, hoping for better returns, even though statistically they're unlikely to get them, and then blaming bad investment advice when the returns don't work out.
Cameron Passmore: So what do you mean by locus of control?
Ben Felix: I don't know. It's a term in psychology. The book talks about it. Locus of control just means-
It's more like how you frame your interactions with the world. If you have an internal locus of control, it's like, if you didn't get a job that you wanted, it's because you weren't prepared enough, not because the interviewer was a jerk.
Cameron Passmore: Oh, I see. Okay.
Ben Felix: Yeah.
Cameron Passmore: That's really interesting. I hadn't heard of that book.
Ben Felix: Just to wrap up, I think. The last thing I wanted to talk about was that there was an article in Investment Executive last week, and I saw... The guy who wrote it tweeted it. I wasn't too familiar with him, so, "Ah, this looks interesting," and I went and read it. It was terrible. I actually sent an email to Investment Executive to say... It's for a column. I can't remember what it's called, but it was for a column where I think industry professionals write about stuff, so the article was so bad, that I emailed Investment Executive and said like, "If this is kind of stuff you guys are publishing, can I write for you, too? Because I'm sure I can do better." They're going to get back to me. They're about to publish their September issue, but anyway.
Cameron Passmore: It's kind of like we've got angry Ben today.
Ben Felix: I'm not angry.
Cameron Passmore: Fired up Ben. How's that?
Ben Felix: I'm happy. So anyway, the author of that article talked about... The point of the article was that socially responsible investing, or responsible investing, as he calls it, gives you at least as good as, if not better, returns, so socially responsible investing, he's arguing, gives you at least as good as, if not better returns than traditional investing. It was framed to be a very evidence-based-type article. It cited an academic study, though, which I dug into, and it was... I mean it just makes you laugh. So the study was based on a list of funds that his company... so he's got like a socially responsible investing and consulting firm or something. As far as I can tell, they certify mutual funds, so if I'm an AGF and I want to be certified as responsible, they'll certify you. I think. Something like that.
Cameron Passmore: Okay.
Ben Felix: And then, as an advisor, you can also get a designation from these guys. So anyway, the study was done with their list of approved funds, so there's obvious biases in there, but then I read the study, and it had zero correction for survivorship bias.
Cameron Passmore: Which is?
Ben Felix: Well, it's taking into account funds that no longer exist. If you look at a list of funds today, just by nature of still being in existence, they will be the funds that have done well.
Cameron Passmore: They're the successful ones.
Ben Felix: That's right. Whereas a bunch of funds, and if we look in the last 10 years in Canada, about 50% of funds have closed.
Cameron Passmore: Yep.
Ben Felix: Presumably due to poor performance. So anyway, the study said 63% of responsible funds beat their benchmark. It's like, "What the heck? Because they're responsible, they're going to beat their benchmark?" It doesn't make any sense. But it didn't correct for survivorship bias. That was my first issue with the article. But the bigger issue, and I've written about this in the past, is that socially responsible indexes and funds, they tend to accidentally focus on factors. Here we are talking about factors again. But they accidentally focus on factors that explain returns. So I did regressions on the indexes that this article referred to. It showed the MSCI ACWI versus the ACWI ESG, so the socially responsible version of the ACWI, and it also showed the S&P/TSX 60 versus the Jantzi, which is a Canadian index of socially responsible stocks. So I ran regressions, and-
Cameron Passmore: I think everybody knows where this is going, but go ahead.
Ben Felix: Well, the difference in returns... Because the article says these social indexes did better. The difference in returns was fully explained by exposure to profitability factor.
Cameron Passmore: Right.
Ben Felix: And in this article, he does actually quote a study from MSCI that says, "Socially responsible companies tend to have higher profitability," so it's like, "Okay, but you don't get better returns because they're socially responsible."
Cameron Passmore: That's not the explanatory factor.
Ben Felix: Correct. It's just profitability. So-
Cameron Passmore: If you want profitability, buy profitability.
Ben Felix: That's right. Instead of accidentally getting it by way of... Because the thing is with socially responsible investing, you might not always get profitability.
Cameron Passmore: Right.
Ben Felix: So if you want profitability, go target profitability. Anyway.
Cameron Passmore: But it's not fulfilling all the objectives of the investor. If you have an objective to get utility out of knowing you're perceived making a difference with your investments, there's no fulfillment in that by going for profitability stocks.
Ben Felix: Correct. Yeah. So that's a reason to invest this way, with social responsibility in mind. If that makes you feel good, that's a whole other story.
Cameron Passmore: The big problem is that you're not really having impact on a company by not buying stock.
Ben Felix: None! None.
Cameron Passmore: And you're actually ending up in a higher MER portfolio, so why not just cut the MER and go take that savings and go make a donation, a targeted donation to a-
Ben Felix: Where you can have a direct impact on some organization. And if it's a registered charity, you can get a tax credit. But you start thinking about people who don't want to own those types of stocks, and it's... If you feel sad about getting profits from a firearms manufacturer, that's fair enough. But maybe a more responsible or more sensible way to approach it is to own a low-cost index fund, accepting that you're going to own some companies that you may not agree with, but then, like you said, take the difference in cost and go and donate that directly to causes that are important to you. It seems to me to be a more sensible way to approach it.
Cameron Passmore: Agreed. Anything else on your mind this week?
Ben Felix: Nope.
Cameron Passmore: All right. See everybody next week.
Ben Felix: All right. That's it.
Books From Today’s Episode:
Smarter, Faster, Better: The Secrets of Being Productive — https://amzn.to/2zG3VNR
The Wealthy Barber: The Common Sense Guide to Successful Financial Planning —https://amzn.to/3izWucC
Links From Today’s Episode:
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
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Benjamin on Twitter — https://twitter.com/benjaminwfelix
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'Investment industry stunned as Ontario opposes proposed ban on mutual fund early-withdrawal fees' — https://www.theglobeandmail.com/investing/article-ontario-opposes-proposed-ban-on-deferred-fees-for-funds/
'Ontario’s Ford government is shamefully backing the investment industry over investors' — https://www.theglobeandmail.com/investing/personal-finance/household-finances/article-governments-deal-a-one-two-punch-to-consumer-protection/
'Advocis Welcomes Statement from Minister Fedel' — https://www.advocis.ca/pdf/Advocis-Response-to-ONT-MIN-Finance.pdf
'Controversial commissions: DIY investors fight back against trailer fees' — https://www.cbc.ca/news/business/do-it-yourself-investors-charged-trailing-commissions-for-no-advice-1.4820813
'Busting the RI performance myth' — https://www.investmentexecutive.com/inside-track_/dustyn-lanz/busting-the-ri-performance-myth
'Responsible/ESG Investing' — https://csinvesting.ca/blog/2018/9/12/responsibleesg-investing