Thank you for tuning in to this episode of the Rational Reminder. We start this show with some great news about the comment section and our migration to Discourse. Having an open dialogue has always been crucial for us—it has even led to our latest hire—so we felt it was time to add more structure to it. We then talk about mortgage rates and why so many people do not know that it is possible to negotiate them down even further. There is often a big gap between what is publicly advertised and what you can actually get, so it’s worth shopping around. Following this, we touch on IPOs, SPACs, and why some are saying it is similar to 1999. In the heart of this discussion, we unpack the relationship between the US election and stock market returns. If you are like Ben, perhaps you thought there is not much material difference, and while over the short-term there is not, the election cycle data is truly astonishing. We find out the fascinating explanation of why there are higher excess returns under Democratic leadership, and it is probably not what you think! Moving on, we chat with our newest advisor Jordan Tarasoff where he sheds light on his previous employment at a sales and product-centric advisory firm. We talk about how this affects both the customer and the advisor, and Jordan ends with talking about his positive time at PWL so far. To hear more, be sure to tune in today! 

Key Points From This Episode:

• Some great news about migrating the comment section to Discourse. [0:00:09.3]

• The new PWL team member we are welcoming and our shop opening. [0:01:27.3]

• Why Cameron recommends everyone watch The Social Dilemma. [0:04:19.3]

• Recommended books: Open and Succession Planning for Financial Advisors. [0:08:27.3]

• Results from a survey around people’s knowledge of mortgage rates. [0:11:43.3]

• Some of the reasons that mortgages can be tricky. [0:14:20.3]

• What is happening with IPOs and why it is being likened to 1999. [0:15:26.3]

• Insights from Hendrick Bessembinder about how investors should use his findings to structure their portfolios. [0:19:16.3]

• A follow up about safe withdrawal rates we touched on a while back. [0:21:44.3]

• Today’s investment topic: The US election and stock market relationship and Ben’s assumptions prior to research. [0:24:13.3]

• Are returns affected by US elections? Hear Ben’s findings. [0:27:26.3]

• The relationship between beliefs and optimism in the market. [0:30:31.3]

• Unpacking the link between volatility and the election. [0:32:09.3]

• Looking long-term at the stock market through election cycles. [0:33:14.3]

• How the timing of a Democratic president being elected results in positive excess returns. [0:39:26.3]

• The short-term effects of the election are minimal compared to changes over an entire election cycle. [0:44:39.3]

• Get to know Jordan Tarasoff, PWL’s newest advisor, and his previous experience. [0:47:01.3]

• Some of the conflicts and tension Jordan experienced in his former advisory role. [0:49:33.3]

• What to keep in mind about adding segregated funds to your portfolio. [0:54:47.3]

• Why you should not put a great deal of money into life insurance. [1:01:11.3]

• The flawed hiring model that Jordan experienced at his former workplace. [1:02:49.3]

• Jordan’s advice for anyone with a product-centric financial advisor. [1:05:49.3]

• What PWL does better, according to Jordan. [1:07:55.3]

• Bad advice of the week! [1:08:57.3]

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're hosted by me, Benjamin Felix, and Cameron Passmore.

Cameron Passmore: So episode 119. We have some pretty good news to share with you. 

Ben Felix: Yeah, we have some really cool news. Some listeners who frequent the Rational Reminder discussion, which is a whole... You know what? Let's start with that for a sec. The comment thread, which is just one big common thread, and we kind of knew going in that this wasn't going to be the longterm solution. I didn't realize how quickly it would become not a disaster but not the most efficient way to have a discussion, that there's just a lot more activity in there than I think we expected. And so now the page is taking a while to load because there are so many comments. And there's such great discussion in there. So I am kind of sad I have to leave it, but we'll lock that thread, keep it alive so people can go back and reference it. But we are going to try out discourse, which is a forum software that's designed for more structured discussion. So it'll have topic categories and all that kind of good stuff. So that should help this. 

Ben Felix: That should be out when this episode is out and we'll put links on the Rational Reminder site and in the show notes. So hopefully we can migrate the discussion over there. And like I said before, we're going to lock the old discussion so that so much good content in there from people chatting back and forth that's not going to go away. It'll still exist. We're just going to have going forward that will be locked in. We'll have a better place to have all these conversations. Now where I was going before is if anybody frequents the Rational Reminder discussion, they may be familiar with Braden Warwick's name. He's had tons of great posts in the discussion and he answers lots of people's questions. He's even done some cool analysis and posted it there. And Braden is joining our team at PWL.

Cameron Passmore: A great story.

Ben Felix: Which is pretty cool. So Braden's got a PhD in Mechanical Engineering and he's been teaching in academia and he decided he wanted to make a change into the world of finance. And it just ended up being good timing, good fit, and we've hired him to join our team. So we are thrilled. It's going to be great to have somebody with the type of analytical skills that he has to work on projects that I either don't have the technical abilities or time or combination of those two things to get done. So we've already got a list of really cool research projects that I've been pushing off and yes, the model portfolios paper and all that stuff is possibly going to be included in that. So that's that, very, very excited and it should open up all sorts of new avenues for the kinds of things that we can talk about here. 

Cameron Passmore: In other news, the merchandise shop opened up to a soft open last week. I mentioned on Twitter. So there's now a shop button on the rationalreminder.ca website. So we have a few products available. We have a tee shirt, a hoodie, and a mug.

Ben Felix: It's nice stuff. 

Cameron Passmore: They're all up there. They're pretty cool. And we just want to share this stuff. We've had a lot of requests for this. People see our hoodies on the YouTube, so we're not sure to do this.

Ben Felix: We can't [crosstalk] actually see that.

Cameron Passmore: We're not. The Burgundy's not available yet. Just the black shirts.

Ben Felix: Shirt in a storm. 

Cameron Passmore: Shirt in a storm.

Ben Felix: So anyways, we are breaking even on the grievance in the whole little bit for every product that goes out. We're not looking to make money out there. They're just looking to get this fun stuff out, there's for fun and coolest stickers also that Angelica had made up for us to give out to shoppers. And if you have other ideas for type of merchant you'd like to see just again, drop us a note anywhere you'd like, and shop away, we'll ship it out right away. Also wanted to thank the bunch of people who send incredible comments. 

It never stops, but I think it's worth just thanking you for that. So it's Christopher LM, Christiana 050, EN A.S and Near and Mojo. And we're so happy that the content that we work to put out helps you with your ethic exam. So that's terrific. Also worth mentioning that the books that we mentioned, I know it's a huge list, but all the books we've mentioned are now on that website as well with Amazon links. And a couple of weeks ago, we had Mark Hebner on, three weeks ago, I guess now. And he's asked us to embed a few of your videos on his ifa.com sites. That's pretty cool. Very nice of them. 

Cameron Passmore: Yeah. That's great.

Ben Felix: Last question for you. Have you seen the Social Dilemma yet?

Cameron Passmore: No, but this is not the first time I've been told to watch it. So if you're going to tell me to watch it, I might have to.

Ben Felix: You got to watch it. It is wild. It's just wild. I mean, we've all heard about this social experiment of connected iPhones and the impact of Facebook and everything else, social media. It is incredible. So Tristan Harris is one of the big people in the shows. He's been on with Sam Harris a couple of times on his podcast. It is a really well done documentary on the perils of this global experiment of social media, especially on kids, kind of like my kids or maybe younger, born like 2000, 2010, who basically grew up from a young age connected to this world. And the impact that has on you is just incredible. So it's on Netflix t's a great documentary.

Cameron Passmore: All right, I'll check it out. We also wanted to mention the Bank of Canada interview. We had lots of colorful feedback about the interview. Well, we appreciate the feedback. 

Ben Felix: We thought it was a pretty cool opportunity to engage with the Bank of Canada on something like that. 

Cameron Passmore: Yeah. And we hope it opens up a relationship to do more stuff with them in the future. We are aware from our limited experience in podcasting, that reading from a script is a challenging way to convey a message, but all things considered, we are very grateful for the Bank of Canada for doing that. So we appreciate the feedback from listeners, but we also appreciate the Bank of Canada doing that with us. 

Ben Felix: Exactly. Anything else? 

Cameron Passmore: I did start watching Kingdom, which you recommended that to me a couple of episodes ago.

Ben Felix: And?

Cameron Passmore: It's good. It's not as good as Animal Kingdom. 

Ben Felix: It is not.

Cameron Passmore: But it's still pretty good. 

Ben Felix: It's pretty crazy. 

Cameron Passmore: All right. All kinds of tips and tricks here today.

Ben Felix: Go to the episode. We didn't mention also in the episode we did something we don't usually do. We had somebody else from our team join us for the conversation. So that was Jordan Tarasoff who joined us this year as a client facing financial planner. Jordan actually found us, I think, through the podcast or through my YouTube videos or something, but he got in touch with me, basically laying out his situation and saying he loves financial planning. He loves the planning work that he's able to do for clients and how he's able to help people, but he felt like he was stuck in a situation where the incentives just did not line up with the type of work that he wanted to be doing.

And he was just asking me for advice. He was just saying, "What do you think a guy like me could do to improve my situation?" And I came from a similar background where I was in a commission environment, selling mutual funds and insurance, and I was lucky enough to find PWL and Cameron. I think I ended up basically pitching Jordan, I think, something like that, or he pitched me. I don't know. I'm pretty sure I pitched him first, but just kind of said no.

Cameron Passmore: [crosstalk] So yeah.

Ben Felix: Yeah. And just kind of told him, "Well, what you're looking for is basically what we've built." Where there's no sales targets, there's no incentives. We don't have any sales bonuses or anything like that within our team. Everybody makes a competitive salary, but that's it. No one's sent it to sell clothes, whatever. We focus on doing great work for clients. And that was what Jordan was looking for. So I gave him the pitch, I guess. And he ended up meeting with you Cameron and with Tessa. So anyway, we had Jordan on for our financial planning topic, just to talk about, since he's now been in that world of commission-based mutual funds and he's also been on this other side where he's working in the model that we've created, so he's able to speak a little bit about what it's like out there from the perspective of an advisor. I thought it was a pretty interesting conversation. 

Cameron Passmore: Certainly some takeaways for everybody. 

Ben Felix: All right. Now, that's it.

Cameron Passmore: That's it. All right. Enjoy the episode. 

Ben Felix: Welcome to episode 119 of the Rational Reminder Podcast. So another book that our friend Aiden recommended, I take a look at is called Open by Andre Agassi, the tennis star. I won't talk much about it. It's interesting although a pretty sad story of someone who was raised by his father to be like a tennis prodigy and absolutely hated tennis through his whole life. It's really sad. So I'm about two thirds of the way through it, but I got kind of sidetracked onto other stuff, but interesting books. So thanks to Aiden for the recommendation. If you're into tennis, if you're into kind of stories like that, you might find it interesting, but I'm not sure I'll go back and finish it or not. 

But the book I took a break from Andre Agassi's book from to read is a book by David Grau Sr. called Succession Planning for Financial Advisors. And I raised it because it's an issue in our industry. Succession planning is a huge issue frankly for any business, but in our industry in particular, the average investment advisor now is in their mid to late 50s. So I'm kind of average on that front, but many, many firms do not have a succession plan in place. So you can tell by just the fact that we're here together and we have a fully developed team with duplicity in every role, you can tell it for a number of years that we've taken this very seriously to make sure that we have proper backup, not just for me, the old guard, but for everyone in every role there's backup in every single role.

So we've taken this very seriously, but I give a high recommendation. We have a lot of advisors that listen to this podcast. I give a high recommendation for David Grau's book. It is excellent book on this. And I also want to mention it for clients because as you look at your advisory service and the advisory platform that you're working with, make sure that you see progressive research going on inside the team, like the kind of research that you're doing, that you bring up every other week on the podcast, that there are a younger credential people in the team. That those younger people are free to engage with you, the client. You want to make sure there's a fluid comradery, a team environment in place, as opposed to eat what you kill type of environment. Because if you're advisors in an eat what you kill environment, you may not have proper backup, even though they're part of a big firm, there's a high likelihood that there's different philosophies, different structure, different compensation models inside that that may not be best for you should something happen to your lead advisor.

Cameron Passmore: Yeah, definitely. 

Ben Felix: So that's my main takeaway from that for you. So a great book on succession planning. I've actually recommended to a friend of mine who is in a completely different business, but it's a good framework on how to do it and how to create a platform that is appealing to the next generation. Any drive to that topic?

Cameron Passmore: No, I mean, like you said, we've as a firm been taking it seriously at least since I started. And there's always been the conversation about the next generation of the firm and that's been front and center, I think since I was hired. I think that one of the first things I did was go to, we used to have these business days, we don't have them anymore. All of the teams from PWL across the country would come together in one city back when people used to do that and talk about practice management and things like that. And this was one of the things on the table to discuss. 

Ben Felix: So you can talk mortgages for a bit? 

Cameron Passmore: Sure. I just thought this recent conversation with a client reminded me that so many people simply accept the posted rate from their bank when their mortgage comes up for renewal and mortgage rates are super low. In fact, you can now see them. They're in my Instagram feed regularly at well below 2% for a five year mortgage. So I did a little bit of poking around to see what studies like it fine. And I found a study from lowestrates.ca from 2019 that found that Canadians want clarity and transparency when it comes to their mortgage rates. So they were asked, "Did you know that you can negotiate your mortgage with a bank?" 37% said no, which is incredible to me. Do you feel that having to negotiate a mortgage is unfair? 46% said yes, that's unfair. Do you think banks should make their lowest mortgage rates public? 89, almost 90% of their respondents said, yes, the lowest rate should be made public because there's often a big gap between the public rate and the rate that same mortgage broker can have.

And it's so easy now to do a quick Google search to get what the lowest rate is. But I also found another study from CMHC in 2019, the Mortgage Consumer Survey Results. So they surveyed 1,385 first time and repeat home buyers who had taken on a mortgage in the past 18 months. It's almost a 50, 50 split between first time and repeat applicants. So get this, 60% of buyers paid the maximum price they could afford for their house, which sounded high until you learn that that was down from 78% in 2018, amazing. 23% said their current level of debt is higher than they were expecting. A third did not have a monthly budget before buying a home. That while almost 50% of buyers interact with a mortgage broker, 70% of buyers have a fixed mortgage rate and 60% of those chose five years as a renewal term.

So all that to say, it's worth shopping around, it's worth taking a look at what is out there. It makes a big difference in the payment. How much of your payment goes towards capital or towards principle versus interest. But this person I was speaking to, I had no idea that you can negotiate. When I told her, she said, "Well, I can get a rate of like two point." I forget the rate now. At 2.2% what the bank offered me. I said, "Well, I know another client that just got 1.7 something for five years." And she was stunned. So we'll just take this. You have to make sure you're comparing apples to apples and all the benefits and features you want in your mortgage, but still it's worth shopping around and being aware of this.

Ben Felix: Yeah. Mortgages are tricky too, because like you're just saying Cameron, the lowest rate will typically be the loan with the most restrictions on portability and prepayments and stuff like that. I think talking to a knowledgeable mortgage person, whether it's somebody at the bank or an independent broker, and there are trade offs between those two as well but talking to somebody that knows what they're talking about, to explain, well, here's the cheapest mortgage in terms of the interest rate, but here are the potential downsides of doing this because five years is a long time in life and a lot can change. I mean, we've seen it many times where people are in a mortgage, I've seen it once where somebody was not allowed to pay off the loan. Like that's it, you're stuck. So the cash becomes available and we decide as an asset allocation decision that makes sense to pay off the mortgage and this is just like, no, you can't. 

Cameron Passmore: So how about we talk about the IPO parties. So this is a Wall Street Journal article I found last week. IPO market parties like is 1999. 

Ben Felix: Hold on. Is this about SPACs? 

Cameron Passmore: Yes.

Ben Felix: All right, let's go.

Cameron Passmore: So here's a term that I'm willing to bet many listeners have never heard of. So even though we're in the middle of the pandemic, money is absolutely pouring into new IPOs. And you have not seen this level activity since going back to the .com era, hence the reference in 1999. So there's three months left in this year, US listed IPOs that raised nearly $95 billion, which surpasses every year's, except 2014, since 2000 tech bubble. It beats every year, but 2014. In 2014, it raised 96 billion, but a quarter of that was Alibaba and we still have three months to go. So it's going to blow through it, right? 

Ben Felix: Wow. 

Cameron Passmore: The average IPO is up from its issue price 24% so far. There's been 235 IPOs this year compared to 439 in 2000. And they fall into three main buckets, healthcare, technology and SPACs. So SPAC is a special purpose acquisition company. 40% of the money raised this year has been into SPACs and they are flying out. I know in the next few weeks there are many, I think there's hundreds. I read something there's 300 potential in the queue, but it's in the hundreds that may be coming. So the SPAC is basically reverse merger IPO. Some call it a blank check company. So basic cash is raised into this blank check company that isn't a company, it's just a listing. And then they go searching for a company to acquire, to become the company that's in the IPO. So you're basically, I guess, investing in the underwriter and the promoter of this that they're going to find a suitable acquisition, but you don't know and they're not allowed to say what they have is targets they don't believe. You're truly buying a blank check issue.

Ben Felix: What I'm about to say may make SPAC seem like a bad thing. And they're not necessarily, but Nikola, the electric vehicle company that is going through a whole bunch of bad stuff, their share price tanked and their fraud allegations bouncing around. I haven't paid attention to the story for the last week or so, but it wasn't looking good. And they got listed through this avenue.

Cameron Passmore: So now that you've heard of SPACs, you'll see them everywhere. The news media is filled with SPAC articles.

Ben Felix: And we can talk more about it maybe in a future episode, that could be an interesting investment topic just because this has been probably one of the big features of the 2020 market is the prevalence of SPACs, which have been around. It's not like this is a new thing, and I've seen a couple of companies that have data on SPACs. So you can go and look at how SPACs has done in the past. Although this current market seems to be a little bit different from anything in the past, just because they've blown up so much in the interest in them and so high right now. And I hadn't heard of them until they started blowing up in the media. 

Cameron Passmore: There you go. 

Ben Felix: Yup. Future discussion. I wanted to mention I reached out to Professor Hendrik Bessembinder. I wanted to see if he would come on the podcast, but he has a policy where he does not go on podcasts. He's done them in the past and well, that's the policy. He's not doing it anymore. 

Cameron Passmore: It's too bad. 

Ben Felix: Yeah. He would have been great. And I did listen to some of his previous podcast conversations. He's great, but I didn't dig into it too much. I accepted the policy, but he did say that he's happy to answer questions by email and that's his preferred method of communication for stuff related to his research. 

Cameron Passmore: Awesome.

Ben Felix: So I sent him a question and so Hendrik Bessembinder, he's the author of the papers that we've mentioned a few times that describe how for global stocks, 1.3% of stocks explain all of the return and excessive UST bills from 1990 through 2018, I believe was the data series for that one. And then similarly did the same analysis for US stocks only. And in that case found that 4% of US stocks were responsible for all of the net wealth creation in excess of T-bills. So that skewness, that description of skewness in individual stock returns. I think people had an understanding that it was there, but I don't think anybody realized to what extent until these papers came out. So they were really important papers in the world of financial economics. So I asked him, how should individual investors think about your empirical findings when deciding how to allocate their investment portfolios? 

Cameron Passmore: Pretty good question. 

Ben Felix: It would've been awesome to discuss his research and papers, but anyway. And he has a whole bunch of other papers that I started looking at before I emailed him too, but we're not going to get bogged down with wishing we could have had him on the podcast. I will read his answer though. So this is a quote, "In my view, it makes sense for most individual investors to use low cost and broadly diversified index funds in a buy and hold strategy. There will be some exceptions, investors who particularly value skewness, the possibility perhaps small of a very large gain might want a more concentrated portfolio since diversification reduces skewness along with volatility. The other exception arises from the principle of a comparative advantage. 

There will be some, perhaps only a few investors and investment managers with the right skills to identify miss valued securities with sufficient reliability to justify active trading and narrower portfolios. The challenge is in identifying them, given that there is also a lot of randomness and realize performance. And for those individuals who believe that they themselves have the right skills, it might be useful to review the evidence regarding overconfidence." I got to check a lot of that. I'm sure he does too. 

Cameron Passmore: A great, great quote. 

Ben Felix: Yep. 

Cameron Passmore: Something as I thought more about this and this is still a pretty new thought, but it would be really cool to go recreate his research for factor premiums. Like if you take all the small stocks and compare them to the returns of big stocks, how many of the small stocks described or are responsible for the net wealth or I guess the net size premium? What does the skewness look like in factor premiums? So that's an avenue I want to explore eventually. I had a followup to our safe withdrawal rate discussion from two episodes ago that I wanted to mention here. 

Cameron Passmore: So we talked about how small value had the best historical withdrawal rate in the US data. And I guess I was just poking around the data. I don't know what I was doing. I guess I just do that before I went to bed or something. I don't know. But I found that and I knew this data point, the worst time to retire in US history was 1968. And we probably talked about that in the safe withdrawal rate, episode two. So from 1968 to 1984 and the reason it was the worst time to retire was because real stock returns, stock returns after inflation were basically flat for that full period from 1968 to 1984. So brutal, like if you retired in 1968, you had a big chunk of time where you earned nothing in stocks in real terms, but it's tricky too because if you look at just the returns data, stock returns weren't so bad, it was just the stock returns weren't great and inflation was also high. 

Ben Felix: Exactly. 

Cameron Passmore: So brutal if you had a market portfolio, but over that same period, US value stocks delivered 6.24% real net of inflation returns and small value stocks returned 8.58% in real terms over the full period. So I don't know if it's appropriate to call factors diversifying because you're just changing the weights of the market portfolio. It's not really diversification, but it is an additional source of expected return. And in that case, it was very clear what the benefits of doing that can be. The year 2000 until 2010 is another example where market was flat in the US but US size and value did quite well. And that time period looked a lot like today in terms of valuations for small value relative to large growth. 

Cameron Passmore: I'm not predicting a crash or flat returns for the next decade, but last time things looked like this ended up being a great time to hold value in small value. We'll leave it there. Although we won't quite leave it there because the main investment topic that we have ties into that as well interestingly. US elections and US stock market returns, can't you see more articles that are in your Twitter feed on the elections and so many people commenting on what they mean? There's all kinds of different opinions all over the place. So that's why I'm glad you're digging into this. 

Ben Felix: What they mean for the market?

Cameron Passmore: What they mean for the market, what they means for expected returns should it be a Democratic, should it be Republican winner, it's just a bit of a dog fight it seems.

Ben Felix: I'll preface this by saying that the research blew me away, caught me off guard. I went into it with some assumptions, I guess, about how things might look and maybe I'll just say what they were. So based on my understanding previously, there's no real relationship between stock returns and political parties in the States.

Cameron Passmore: That was your baseline assumption going into this.

Ben Felix: Yeah. Before I started digging into the numbers, my understanding was that there's not a material difference, whether it's a Republican or a Democrat in power in the States. The returns have been unrelated to that. So I thought that going in. And then the second thing that I thought was that if there was a relationship, it's probably going to look better for Republicans because Republicans are known for being a lower tax and pro-business and all that kind of stuff. So I figured probably no relationship, but when you look at the data, maybe it's a little better for Republicans. And I explained this data to a couple of other people too and they had similar thoughts. Well, it must be better under Republicans, right? Holy smokes that that could not be more wrong. Couldn't be more wrong. 

And that's kind of the longer term though, like over the course of a presidential term or terms, what do returns look like? The other question is in the short term. So leading up to during and after an election, what is the relationship between that immediate result and stock returns? I think those are the two main things that people have in their minds. Like is the market going to crash basically in the short run? And then once this new political party is in power or not new party, once the elections have been decided, does that mean anything for expected stock returns?

Cameron Passmore: And this is such a common question. I mean, we get this fairly often where some people will say, "Why don't I just sit in cash until the election is over and see how things look?"

Ben Felix: Well, I remember in 2016. So 2016 I had been in this industry meeting with clients and giving people advice and stuff like that for a few years at that point, like for four years. And I remember this very well, there were conversations exactly like you just described where it was like, okay, well, there's a chance Trump gets elected. And as that started to look more and more realistic, people were saying, I think we should go to cash and wait till this all blows over. Now, with that specific example and I'm not saying anything about Trump here, but the market did not crash when he won the election and it actually ended up doing quite well throughout his term counter to the data that we're going to talk about, which has also interesting. It shows the limitations of historical data, I guess. It didn't describe the future.

Ben Felix: Okay. So the first thing I did is I looked at... This is my own analysis not a paper or anything. I looked at the 12 month returns in November of election years and non-election years, this is for US data from 1926 through 2019. So all of the 12 month periods, starting with the Novembers where elections happened and compared that to all of their 12 month period starting in November from 1926 through 2019. In election years, the returns were a little bit lower. So 10.6% for the average 12 month period, where there was an election versus 11.9% for all 12 month periods, where there was no election. 

Cameron Passmore: Interesting.

Ben Felix: So positive in both cases, not a huge difference either way. Is there a relationship there that I didn't dig into? And I don't know if I have the statistical abilities to do so, we'll leave it there. It looks like no relationship probably. There are 23, 12 month periods in total. Seven of them only, which is not bad, had negative returns. And that was in 1936, 1940, 56, 68, 72, 76 and 2000. So it's a 12 months following elections, seven of the 23 had negative returns, the rest were positive. 

And there's another papers that we're going to talk about that dug into this in a more, I don't know what you call it, statistically robust way than me running 12 month return numbers. And then they came to the same conclusion that there's no relationship. So you start thinking from a theoretical perspective, why wouldn't there be a relationship because it seems like there should be in the short term. Leading up to and then following an election it seems like the market should be pricing a whole bunch of new stuff or if like in the case of Trump, why didn't the market crash? If it seemed like such a scary thing, well, why didn't it crash? 

Cameron Passmore: It's was because you're assuming people are pricing in ahead of time. Is that one of your beliefs? 

Ben Felix: Well, yes, that's part of it, but it's also that people are pricing in different beliefs. So if we use Trump as the example, big people who I would have been talking to about them thinking the market's going to crash, if Trump gets elected, those would have been people who didn't think that Trump should get elected. And then they were worried about him getting elected. But the reality is he got elected, which means that there were a lot of people, even though he lost the popular vote, but still there were a lot of people who did vote for Trump in the US. And when you think about asset prices, they're set at the equilibrium of everybody's expectations, not just the people who don't think Trump is going to be good for the country, but also the people that think he's going to be great for the country.

Cameron Passmore: Correct. 

Ben Felix: And so I found an actual study that looked at this called... It was a 2012 paper titled Political Climate Optimism and Investment Decisions. So these guys got data from Gallup surveys, the National Longitudinal Survey of Youth, and they got their hands on portfolio holdings and trading data from a big US discount brokerage. So they were able to match all these data sets together and look at how people behaved under different circumstances, because they had the actual investment account data but then they were able to cross reference that with what those people's beliefs were. So that was pretty, pretty cool to think about doing this research. So they found that individuals become more optimistic and perceive the markets to be less risky when their political party is in power, which maybe that's just intuitive. It makes sense. So if you have a bunch of people who believe one thing and a bunch of people who believe another thing, those expectations all get priced in.

Ben Felix: And if the outcome happens, some people are going to be sad about it. Some people are going to be happy about it. It'd be expected to somewhere close to balance out equilibrium, which is exactly what has happened in the historical data. Now, as much as returns don't seem to be affected by election results, volatility does get affected. Then this could make it, if you had the expectation that prices were going to be effected, the returns were going to be affected, the volatility might make it even harder to hang on through an election cycle. So there's a paper in the journal of index investing titled With Greater Uncertainty Comes Greater Volatility. And the premise of the paper is kind of obvious. They were just looking at different conditions that might increase uncertainty. So in this case, they looked at the... There's an index called the US Economic Policy Uncertainty Index, which measures economic policy uncertainty.

And they compared that with past elections that were tight or contentious. So 2000, 2004, 2016, they found economic policy uncertainty in all of those cases spiked and stock return volatility also spiked around the same times. And this is one of the things that I think Barry Reynolds wrote something about how the things that people say that he can't stand or something. And one of them was that the market hates uncertainty. And it's just kind of funny because that's kind of what this is talking about is that when an uncertainty increases volatility can also increase. But in Barry's point is that the market doesn't hate uncertainty. It just prices the information in. So we might get some volatility, especially in tight elections, where things are bouncing back and forth in terms of the economic policy that might be put in place but I think that the more interesting question and the more interesting data to explore is in the longer run through the course of a presidential term, what does the data look like? 

Ben Felix: So there's a 2003 paper in the journal of finance that as far as I could tell was the first time this was really examined and it was called the Presidential Puzzle Political Cycles in the Stock Market. So obviously relevant to what we're talking about by, the author's names were Santa-Clara and Valkanov. So they looked at the stock market through election cycles from 1927 through the end of 1998. And this is the paper that I mentioned before that they found no significant evidence of stock price changes immediately before, during, or immediately after elections, which matches up with what we were just talking about. And then they actually referenced in their paper a different paper from 1989 titled to What Moves Stock Prices. And that one just more generally found that important news does not tend to be related to large stock market returns.

Cameron Passmore: Yeah. 

Ben Felix: Also interesting, but as it relates to elections specifically, I guess the point of that references that this shouldn't be a surprise based on how important information tends to get reflected in stock prices. Now what they did find, and this is the part that blew my mind when I read it is that stock returns equity risk premium is much higher on average when Democrats are in power over their sample period. So the excess return of the US market over three months treasury bills was on average 9% per year higher under Democrats than it was under Republicans in their sample. 

Cameron Passmore: That's the entire term that they're empowered, not just that one year term you're talking about, I assume, right?

Ben Felix: Yeah. This is no longer the 12 month periods that I was looking at. This is for the full period of time that Democrats or Republicans were in power.

Cameron Passmore: Wow. What a massive difference.

Ben Felix: So when Democrats are 9% per year higher, I think it was like 11% for Democrats versus 2% of for Republicans or something. But the difference was 9% higher for Democrats. So as my reaction too like, "Oh, okay, well, I wasn't expecting there to be a clear relationship. And I definitely wasn't expecting it to be in favor of Democrats." And the reason that they titled their paper, The Presidential Puzzle was because they didn't have an answer. In their analysis, there was no... I think they looked at different business cycle variables. So they called it a puzzle because the difference in returns was not explained by business cycle variables. And it was not concentrated around election dates, which again speaks to the initial points about elections not typically affecting markets in the short run. Now, I mentioned that our previous discussion was going to relate back to this. So here that is. They found that there was a monotonic increase in this Democrat effect, if you want to call it that, with company size. So as companies got smaller, the Democrat effect got more significant. So the largest firms-

Cameron Passmore: Wow.

Ben Felix: Yeah. I know. So the largest firms had an excess return of 7% increasing all the way to 22% excess return for small caps when Democrats are in power relative to when Republicans are in power, 22% higher for the smallest firms.

Cameron Passmore: Okay. Wow. 

Ben Felix: Yeah. I know. I read this and it's like, okay, great. Now what do I even do with this? Because there's no explanation for it. Is it just a random relationship? 

Cameron Passmore: I found myself holding back my assumptions as to why it doesn't really matter why, it just is. 

Ben Felix: Yeah, it's just is. And then there's another paper that I found I think in the journal of Portfolio Management that tied all of this back to federal reserve policy and tried to explain it that way. And there seemed to be a relationship there. So maybe there's something there, but there's a whole other. I found this next paper to be from what I could find out there, the best explanation. And it was a direct response to The Presidential Puzzle paper that we just talked about. We'll jump into that. So it was a 2017 paper by Pastor and Veronesi and this paper is titled Political Cycles in Stock Returns. So they basically updated and responded to the initial Presidential Puzzle paper. They extended it from 1927 through 2015. So the previous one went to 1998. So it was a bunch of extra data now. And they found that the excess return under Democrats is 11% higher now than it is under Republicans. 

So it's increased by adding this new data. So it's not like they rerun the numbers in and out of sample. It was a spurious relationship and didn't continue out a sample. They showed that it did continue. And they actually found for the full period, 1927 through 2015, all of the equity premium over the full period was earned under a Democratic president. So if you didn't own stocks, when Democrats were in power, you did not earn any of the equity risk premium. 

Cameron Passmore: Wow. It sort of a link back to Bessembinder comment earlier.

Ben Felix: Last time Bessembinder was talking about diversification of securities.

Cameron Passmore: It was the same kind of principle where you had to be there to capture the returns. 

Ben Felix: Yeah. So that kind of blew my mind. I think it was like you lost 0.2% to T-bills if you own stocks only during Republican power and then Democrats were 11 point whatever percent. And they also found that relationship to be statistically significant. So now they have out of sample data, it's statistically significant. So they're saying, okay, empirically, this clearly can't be ignored, but from a theoretical perspective, what's going on? And the initial Presidential Puzzle paper, that's why they called it a puzzle because they didn't know like, well, how do we even explain this from a theoretical perspective? So they comment in this paper that for these larger stock returns under Democratic leadership to persist based on something like Democratic policy initiatives, which is what somebody might want to attribute it to but for that to be the case, you had to explain this difference. The market would need to be consistently underestimating the positive economic benefits of whatever Democratic policies because if the market expects them and their policies do as well as expected then it shouldn't boost returns.

Ben Felix: So they said it's pretty unlikely that the market is consistently mispricing the benefits of democratic policy, but they do come up with a pretty cool explanation that aligns with sort of efficient markets and rational pricing and all that stuff. They say that it's not, and I'll talk more about how they came to this conclusion in a sec, but they said that it's not the Democratic policy that results in positive, excess returns, it's the timing of when Democrats tend to get elected. Now this starts to get pretty mind blowing, I'm just going to keep going though. So they developed a model of political cycles driven by time varying risk aversion. 

In their model when risk aversion is high, like during an economic crisis, voters are more likely to elect a Democratic president because they demand more social insurance at that time. When risk aversion is low, voters are more likely to elect a Republican because they want to take more business risk. And this is a theoretical model, it's not reality yet. So in their model, risk aversion is higher under Democrats resulting in a higher equity risk premium when Democrats are elected. And that leads to the higher expected stock return, the higher equity premium.

Cameron Passmore: Counterintuitive. 

Ben Felix: Yes. So then they take their model and it is able to describe the higher returns that are Democrats, which is cool. Like the modern model has explanatory power over reality, but then they're saying that the higher risk premium earned under Democratic leadership and this is the key here is not caused by the Democratic presidency, the higher risk premium and the Democratic presidency are both caused by higher risk aversion, leading up to the election. 

Cameron Passmore: You spun the whole thing completely around. It keeps going though.

Ben Felix: But it makes sense when you think about it. Okay. 

Cameron Passmore: Risk aversion is driving your presidential choices, as opposed to president of the choice is driving risk premium in the market. 

Ben Felix: Yes. But so then they get into basically, does this suggestion match up with the empirical data on when Democrats tend to get elected? And they dig into that like forget about stock returns, let's look at what the circumstances tend to be when Democrats or left-wing governments tend to get elected. So there's a 2016 paper and these next few papers are all from the paper that we were just talking about. They referenced all of these. So the journal of the 16 paper and the journal of financial economics, titled Time Varying Risk Aversion, the authors there used survey data to show that risk aversion increase a ton after 2008 financial crisis, even among investors who did not experience financial market losses. 

So again, there we go, risk aversion is high. And in 2010 paper titled Partisan Financial Cycles, a guy named J. Lawrence Brass examined bank crises in developed countries and found that left-wing governments are more likely to be elected after financial crashes. And then we got a 2012 paper in the American political science review titled Unemployment and the Democratic Electoral Advantage where John Wright showed that US voters tend to elect Democrats when unemployment is high. So using unemployment as a proxy for risk aversion there. And then if you look at the anecdotal examples of the last two biggest financial crises, so they got in a great depression, November, 1932, the incumbent Republican president, Herbert Hoover lost the election to Democrat Franklin Rosavelt, 2008, Bush lost to Obama, but then they go back further, Kennedy was elected in 1960 during the 1961 recession, Jimmy Carter was elected in 76, just after the 73, 75 recession, Bill Clinton in 92, right after the 91 recession. 

So all of these cases were Democrats. One happened right after crises when risk aversion would have been high. And so the argument in the paper is that this relationship is not a coincidence at all. It fits with their model or their model fits with the data at least. But they're saying it's theoretically so. Theoretically from a financial market perspective, this explains the outcome and they're showing the empirical data to support that risk aversion really does tend to be high before Democrats are elected. So I've got the model based on that, but then they're showing the empirical support for the model. And the model is able to explain the outcome in a way that matches up the financial theory. 

Cameron Passmore: Absolutely fascinating. It's about the public at the time of the election, not the party that's elected.

Ben Felix: Yes. The way they explained it is just the timing. Democrats happened to get elected, or they tend to get elected and we know this empirically could be true. They tend to get elected when risk aversion is high, which leads to higher expected stock returns. It requires a higher risk premium for people to take risks because risk aversion is high and therefore returns have been higher under Democrats, but it has nothing to do with what the Democrats are doing.

Cameron Passmore: Right. 

Ben Felix: It's just the thing that leads to them getting elected is the same thing that leads to high stock returns but the two things are unrelated. 

Cameron Passmore: Yeah. Now, you're not suggesting causality between the democratic policies once they're elected to drive the higher returns. 

Ben Felix: Exactly. Yeah. Well, the way I explained it in my notes is that it's reasonable and theoretically consistent to believe that these differences in stock returns do not result from the political leadership, rather the political leadership results from the same conditions that have led to historically higher stock returns. 

Cameron Passmore: Right.

Ben Felix: Yeah. So I think in the short term, leading up to the election and right after the election, people always worry about what it's going to do to stock returns. If we use the data as a guide, there's historically been no relationship. The papers that we just talked about found that. I found that running my own analysis, just using one year returns. So not something to really worry about, but as much as return seemed to be unaffected, it wouldn't be unreasonable in a title election to see more stock market volatility, just because of economic policy uncertainty and the market trying to price in the quickly changing expectations about how that's all going to play out. 

And the other thing is I don't think that we can use this information to time the market. I don't think if Democrats are elected, you go all in with leverage or something like that. I mean, I guess you could, but I think risk premiums are still... Well, it's kind of like what you said, Cameron, you have to be there to get it. Now we know in the historical data that has tended to happen when Democrats are in power is that going to hold in the future and is the theory that we just talked about good enough to be predictive. I don't know. I mean, it seems like we're making a two step prediction there and those are generally pretty tricky. So I wouldn't use this for any market timing. I think that the bigger takeaways that you mentioned Cameron, there's not causality. So depending on who gets elected, that outcome may have happened due to something that could also lead to higher expected stock returns, but the election outcome itself, there's not causality between that and risk premiums. 

Cameron Passmore: Super interesting deep dive. That was great. 

Ben Felix: Yeah. Like I said before, it was something that as I dug into the research, my mind was blown a few times. First when I saw that the relationship existed and then the second time my mind was blown was when I found that what I thought was a pretty good theoretical explanation, why things have looked the way that they have.

Cameron Passmore: Okay. So for this week's planning topic, we thought we'd have a special internal guest this week. So I want to welcome Jordan Tarasoff to the podcast this week.

Jordan Tarasoff: So excited to be on.

Cameron Passmore: Yeah. So we thought it'd be kind of interesting to have you on to talk about your past experience. You're the newest advisor on our team joined us just as the pandemic was starting, which was another whole separate interesting experience, but I thought it'd be really neat to learn from your past experiences kind of how you met us and how you might contrast kind of old world to the new world. So perhaps, maybe just in general, can you talk about your prior experience, both positive and negative?

Jordan Tarasoff: For sure. So before coming to PWL, I worked at a large mutual fund planning firm, and it was mostly positive. There was lots of good planners that I worked with. I learned a ton and it was a fantastic experience all the way through, but the way I came across PWL and your team was through the content. Because at this institution, we were planning, but it was always with the underlying tone of some sort of sales objectives, whereas I found that Ben's videos and the Rational Reminder content was very planning focused, focusing on client objectives, planning taxes structure, that kind of thing. And there was very little discussion of actual product. And so well, I compare that to what I was working in. Currently, I found that I wanted a bit of a change because even though most of the advisors I worked with were really good, they had their CFPs, they made effort to go through full financial plans with clients. There was a lot going on at the firm as well that was counter to client's objectives and led to not the most ethical behavior while I was working there.

Cameron Passmore: You just mean like the incentives that were in place.

Jordan Tarasoff: Correct. So I found that the incentives tended not to align with the client's outcomes. It was that the firm was a sales organization that was doing financial planning, more so than a financial planning organization. So then the good planners would end up being put in a position where they had to justify that their sales weren't that high because the clients didn't need the solutions that we were being told to sell. And it led to a lot of tension I found throughout the planning teams, because you're trying do the best thing for the clients. You're working on their plans. 

You're telling them to pay off their mortgage, that they don't need insurance anymore, but all those things are hurting your numbers, right? And so when management comes and talks to you, they're not reviewing are our clients happy, are they on track for their goals? What they're reviewing are your sales numbers. Even if you want to do the best thing for your client, that constant noise throughout the day, that constant nagging, "Hey, how many mortgages have you done? Hey, how many policies have you sold?" That constant noise makes it really hard to do the best thing for your clients.

Cameron Passmore: So what are some examples of these conflicts just so that the listeners out there can maybe have a mental checklist of what to look out for?

Jordan Tarasoff: Well, I find the most obvious thing that's mentioned pretty often is the DSC model, so the deferred sales charge. So a DSC is where you put your funds in. They're locked out for a certain period of time. And if you remove them early in that schedule, there's a payment penalty. So the way it worked with us was the first year, it was 5.5% and over seven years it would drop to 0%. So the way we were told to present it was, "Hey, there's two ways to invest your money. There's no load. And there's DSC." If you do DSC because it's longterm funds, yes, the money's locked in, but you get a discount on your management fees.

So over time you end up ahead because you're paying a lower MER throughout the entire lifetime of the product. And so that makes sense when you're first starting out. But when I looked into it, we had funds that costs 2.6 to a little bit over 3% and that DSC discount would turn out to be like one to three basis points. So less than 1%. And also with the whole sales organization side of this, if you took a client's funds, you put them into no load, you would get a certain amount of sales points and those sales points were for like an office or trips or something like that. If those funds were put into a DSC model, you would get five times as much. So if you bring on a $100,000 account say, if that goes no load, it's not a big deal at all. No one cares versus if that money is locked in, you get accolades. It's pretty good. So what ended up happening was advisors would constantly be looking for ways to justify DSC, right? 

Because you get five times the sales points and I think it was, you get upfront compensation as well. So with the NOAA model, you get the client pays ongoing fee, you get ongoing trailer, there's incentive to work with the client and help them, right? Because if they leave, you don't get paid anymore, whereas in the DSC model, you get your whole trailer upfront and they're stuck with the institution.

Cameron Passmore: Yeah. Now, that's exactly why we left the DSC model back in the '90s. Because you get this big load of commission upfront, but you're expected to serve the client for a long period of time. There's a complete mismatch of compensation with a service level. So that's why maybe two years into it we said, "This just isn't right. There's something wrong here." But this model is now going away though in your former world, correct? 

Jordan Tarasoff: Correct.

Cameron Passmore: There can't be much DSC being written these days.

Jordan Tarasoff: So in the end of 2016, the DSC model was eliminated. So we couldn't do it anymore at that time. But the existing DSCs were still in place. So everything that was done up to that point had seven years to mature. And I found that very often I would run into clients whose registered education savings plans had had DSC contributions when the beneficiary was 16, 15 years old, which means you're going to pull that money out for school and pay fees on it, right?

Cameron Passmore: Because every single purchase into that fund starts a new DSC schedule on that purchase. So that's a takeaway for people to look out for.

Jordan Tarasoff: Correct. And you'd even run into things like the DSC matures and then it gets moved over to no load to get more sales points on it. And the client ends up living out the DSC schedule, getting the discounted MER but then moved over to no load anyways, where there's a higher MER.

Cameron Passmore: That I remember. That was the 10% free units every year where people would flip from the DSC to the no load debt. Yep. I remember that all that. What do we call that Ben? We had a word for that. I can't remember. 

Ben Felix: I can't remember either.

Cameron Passmore: Back in the old days.

Ben Felix: I remember all this though. The sales points and the getting more stuff. Not necessarily financial, like cash compensation, but getting points towards conferences and awards and all that stuff.

Jordan Tarasoff: Yeah. Office with more square footage. And there were some rules like you couldn't input more than a million dollars at one time into a schedule. But there were certain funds that could only be in a DSC model. So very often if an advisor was bringing in a million dollars, they would find a way to justify using those funds, which had a deferred sales charge on it. So what you have is compensation models informing the investment portfolio.

Cameron Passmore: So DSC goes away, what happens? How does that change the incentives in terms of the product people are recommending?

Jordan Tarasoff: Once DSC was gone, that was kind of the big ticket. Like way to make money was through DSC. I found what happened was there was a migration towards using insurance products at that point because everything was no load. The trailer comes just as usual, but people had that almost addiction to getting the big sales bonuses and the big compensation upfront rather than slow build. And once DSC had been taken care of with a CRM too, the disclosures around compensation there, there was a quite a migration advisors moving to insurance licensed only or mostly dealing in insurance products because the regulation on the insurance side is a lot different than the mutual fund side. There's a lot less transparency on the compensation side for that.

Cameron Passmore: So again, these products can be great products, but you have to have an awareness around what the compensation, what the potential conflicts are and what your costs are?

Jordan Tarasoff: Mm-hmm (affirmative). So very often segregated funds had a very specific purpose in a client's portfolio. And they have lots of benefits to them as an insurance product. But occasionally there'll be these blanket statements that all clients should be in segregated funds because they're like mutual funds with a life jacket, right? You have this downside protection, but upside potential, but it's not disclosed that the money's locked up or that, that comes at a much higher MER across the board.

Ben Felix: Hold on, hold on. But both of you guys, Cameron, you said that these can be great products, but you have to know what your cost structure is and stuff like that. Jordan, you said there're good things about segregated funds. I got to ask because I wouldn't, would you guys recommend segregated funds to anybody? 

Cameron Passmore: If someone has a huge issue with liability perhaps, or the guarantee is worth something perhaps, but it's about that cost benefit trade off. 

Ben Felix: Yeah. It's tricky though, because the fees are like you can get into the three and a half percent MER for the SEG funds.

Jordan Tarasoff: But there's a discussion too if you were to take more equity risk in a SEG fund because of the downside protection, does that compensate you for the higher MER and you can go after that all day and try to figure that out, but there was a large migration of clients moving to, or just giving up their MFDA license and saying, "I'll just do insurance because it's better." And so there were segregated funds, but then also the big one that popped up a lot more was a permanent insurance. So if a client brought in $10,000, just as a contribution, you would get 10,000 sales points whereas if a client start to put $10,000 towards insurance, you would get 250,000 sales points, right? And compensation followed accordingly. It was one of the best paid products that we could possibly sell.

And so I got to see it on both sides, right? Like it's recommended for very specific purposes but most of my interactions when I got them from clients use advisors that left, I've been figuring out like, how do we keep paying for this? Or does it make sense to cancel this right now? And Cameron, you and I talked about this before and we said, no one ever regrets having a fully paid up permanent insurance policy but there's a bit of us. Well, not very many people do, but the thing is, there's been a survivor bias there, right?

Cameron Passmore: Absolutely.

Jordan Tarasoff: A lot of people don't make it to the end. A lot of people end up canceling the first five, six years and basically all the money you put into it is gone, right? And so just seeing people who dealt with like the permanent insurance guys, the guys that did a lot of permanent insurance very often it was, here's a product I like to sell, how can I manipulate the plan that we're working on to include this as opposed to here's a liability that we know we're going to have to cover in the future, permanent insurance makes sense. It was product centric to justify the planning.

Cameron Passmore: And you wonder how much of that permanent insurance would be sold if people knew the size of the commissions. I'm guessing a lot of advisors that may be shy to even display what that might be, but a lot of clients might be shocked to know the amount. 

Ben Felix: I think when I was in the commission world, we were strongly encouraged to disclose compensation, but there was no requirement to do so.

Cameron Passmore: I didn't know that you were strongly encouraged to. Interesting.

Ben Felix: We were encouraged to be upfront about exactly how we were being paid and how much we were being paid.

Jordan Tarasoff: That was not the case where I was working. And I was always curious to see how much insurance would be sold if you got to pay the same between if the money went to insurance or if the money went to a pre-authorized contribution.

Cameron Passmore: That'd be a fascinating exercise to see.

Jordan Tarasoff: Yeah. So many policies will get canceled early on in the maturity of the whole policy.

Cameron Passmore: We still see it now where somebody... It often happens with young physicians for some reason, maybe because they're a target for people that are selling permanent policies, but I've had many conversations with young physicians that come in with a permanent policy they've been paying into for two or three years. And they've already put thousands of dollars into this policy. And it's always a difficult conversation and a difficult decision to make like, what do you do with this thing? What do you do with this thing now? You've already put however many thousand dollars into it. Now what?

Ben Felix: And past two years there's no charge backs, right?

Cameron Passmore: For the agent, maybe the agent is going to keep their commission.

Ben Felix: You're paying their commission.

Cameron Passmore: Yeah. As long as the client owns the policy and pays into it for two years, the agent keeps their commission. That's an important piece too in terms of the incentives.

Jordan Tarasoff: Well, and this is kind of funny note, but we used to be able to buy back a year to save age. So say it was 2020, you could act like the policy started in 2019 to save a year on the client's age. So if all seems a little bit cheaper and then you could pay for two years, you back pay for one and pay for the next one and then you're guaranteed no charge back on the whole thing because you've already paid for two years.

Ben Felix: I didn't know that. 

Cameron Passmore: Interesting. I didn't know that either.

Jordan Tarasoff: Yeah. So we used to be able to do things like that. It's just kind of sketchy, right? And no one could really articulate exactly what's going to happen inside the policy moving forward. So you create these illustrations and you show all these fantastic rates of return. It grows into this huge amount. And then in the future, you can take it out of your corporation tax preferred or tax free, but very few clients made it to 20 years to actually get to that point and start taking it out. And very few advisors I worked with could actually articulate how it was going to come out, what's a realistic rate of return. It was more of these promises of fantastic tax free money down the line. And most of the time it was clients were stretched very thin on their budgets. I have 40,000 a year to save, let's put 36 towards this policy. And like Ben said, even at PWL we have new clients coming in and the question is like, how do we get rid of this without it hurting too much, as opposed to, is this a good product? 

Cameron Passmore: And to be fair like you mentioned earlier, Jordan, that there are cases from a planning perspective where it does make sense and we still see those sometimes, but they're not very common. It's a small handful of people where we would actually recommend doing this. It's a very specific situation and a very specific planning needs. So it's not like it's a bad product all around, but I agree that at least based on what I see from people coming from elsewhere and becoming our clients, it seems to be based on that experience oversold where a lot of people who don't fit that very specific set of circumstances end up with these policies and then end up putting a huge amount of their available monthly savings amount into insurance.

Jordan Tarasoff: And there's virtually no flexibility in the early years of the policy. So rather than saying like, how much can you save for a month they're saying, how much can you save for a month and never have any ability to change it for the next 20 years? And people end up getting stuck in these policies.

Cameron Passmore: So backend load, insurance policies, what else do they look out for? What else did you have in your experience set?

Jordan Tarasoff: One of the ways I ended up working there was there tends to be a lot of mass hiring in that area where they'll try to hire 30 advisors in a year and hope that two good ones survive, right? So you'll come in, not really know what's going on and they'll say, "Make sure you book 10 meetings a week." If you book 10 meetings a week, you'll be fine. And so 10 meetings a week is my buddy, my parents, my grandparents, you don't really know what you're doing. And so what ends up happening is you end up using your friends and family's financial lives as training tools for you to see if you can make it in the business. And so it's really like, they give you some guidance, but a lot of it is, "Hey, hit the phones. If you have a big meeting, then let me know."

Jordan Tarasoff: And so you're kind of on the spin cycle trying to get clients. And then you finally book a meeting with somebody, ask them what they want for their financial future and then go try to figure it out behind the scenes, right? It's not really planning or engagement. There's no senior junior model. It's let's hire a lot of people, the good ones will rise to the top. And what used to happen before we got rid of the deferred sales charge was you bring on your family, they go into a DSC model, you fail and then a senior advisor takes your parents and works with them for seven years and tries to keep the business. It wasn't all bad, right? Like that experience going through that, it helps you build a thick skin and I never would have approached you guys and asked to work together had I not gone through that hole, doing trade shows, getting rejected at seminars, that kind of thing. But it's not best way to introduce somebody to the industry, right?

Cameron Passmore: When you got in touch the first time, I think credentials are important. I think we've talked about this on the podcast in the past, and you had lots of them. You'd clearly been working hard to get professional designations specific to the type of planning work that you would ideally be doing in a non sales situation and that you were doing anyway just the incentives weren't there, but is that typical? Like do a lot of advisors go there to sort of push the envelope in terms of the amount of education that they're getting in excessive, a licensed to sell just insurance or mutual funds or whatever?

Jordan Tarasoff: It's not typical. I found that where I was working, we had to have the CFP. So everyone got the CFP, but it was not very often, I would say, I'm working on these courses and the feedback I would get, "Well, why don't you just make more calls?" No one's going to pay you to get that course done, but you will get paid if you meet more people, right? And part of the reason why I did so many courses was I was tied to selling funds that had a 2.6% all end fee. I better be a really good planner for 2.6%, right? So I felt kind of stuck at the firm I was working at. I better work really, really hard to be a good planner to justify that high fee. There was support there, we did get discounts through the bodies that provide those designations, but it wasn't typical. It was if you had more than one, if had more than a CFP, that was very atypical where I was working.

Cameron Passmore: Now I know we still have listeners because we actually just got a very nice letter from some of them who are still, or were very recently working with an advisor, selling mutual funds on the model that we're talking about. So as much as we probably tend to think that this is going away and it's dying, or at least I sometimes get caught thinking that, but it's really not. And even people that are listening to this podcast, which is a hugely biased sample towards people that want to educate themselves but even people that are listening are still in these types of relationships. Is there anything else, Jordan, that you think people who are still in that situation as the client that they should be looking out for?

Jordan Tarasoff: It's not all bad, right? You said that it's kind of dying out, but it tends to be dying out in the high network space, right? There's not a lot of people with a certain level of assets who are willing to pay what ends up being 15, $20,000 a year for uneducated lackluster advice and product positioning. But there is still that space in the market that does need service, right? And so one of the good things about that model is you don't have to come in and pay $2,000 as a check to get advice. If you're a younger family who has some assets, has a small insurance need, you can get connected with an advisor who it's worth their time to work on your account, right? And you're not paying an egregious amount of money as a percentage of your assets based on that model. 

Now that DSC is gone, if your advisor is not positioning permanent insurance, then it ends up being quite a good fit. But I found that there was a lot of advisors, especially like the older guard. There was a lot of people who worked in the industry who started in 1985, right? It seems like they did their CFP in the '90s and then refused to learn another thing since then. I inherited a block of assets and not a single client had a tax free savings account because the old adviser just didn't get it. 

But there's this idea that you don't have to do actual financial planning, you don't have to learn these things because 20 years ago, all you had to do is pick the best mutual fund, right? So even if your advisor has some level of education, some experience in that regard, it might be that you want to check and see if it's that ongoing education, that new things brought up every meeting because tax legislation comes out all the time. It is a full time job keeping up with it. I found that a lot of advisors spent 70% of their time out of the office or on vacation, right? And there was an expectation to learn to keep on growing.

Cameron Passmore: And then what do you think now being on both sides of the fence, I guess if we can split it up by a fence but you've been over there on the commission mutual fund model and now you're working with our team, which is a fee-based portfolio manager. But even within that, we're I think a little bit unique in our industry, what are the main things you've noticed that we're doing in our own bias point of view including yours that we're doing better or differently at least?

Jordan Tarasoff: Obviously, I like it that life has changed. One of the biggest things is that there is no sales targets. Like if a client pays off their house, that's great, right? If a client becomes self-insured, that's fantastic. The only objective is client outcomes and we're also a team, Whereas at the last firm I worked at, if someone brought in a big deal, you be happy for them, but also semi resentful because they ranked higher than you on the leaderboard. Whereas here, if someone needs help with something, I'll help them, they'll help me. It's all kind of sharing knowledge because client objectives are put at the forefront and I don't even know what my numbers are or any of those things. It's almost like a weight lifted off your shoulders that you can actually focus on the vocation you wanted rather than focus on your sales numbers and try to squeeze in financial planning when you can.

Cameron Passmore: That's a great description. It's been a great discussion, Jordan, and it's great to have you on the team.

Jordan Tarasoff: That's great. Great to be on the team. Thanks for having me on.

Cameron Passmore: Super. So now we'll move on to bad advice of the week. So for bad advice of the week, and remember if we use the story you share with us, we'll send you your own Rational Reminder hoodie, just send me your idea, send the link to your idea to cpassmore@pwlcapital.com. And this week's idea came from our friends, Marcus Edmonton and Jason in Toronto who both sent the same idea in. It was via chat in Twitter. So this one comes from a forbes.com article on August 29th of this year titled These Popular ETS Will Ruin Your Retirement Buy These 7.5% Dividends Instead. The opening line in the article goes, "I hate to see folks buying into the hype and snapping up popular ETFs, like the Vanguard S&P 500 ETF." It's like, here we go. 

Ben Felix: I mean, to be fair, I did do a video on why people shouldn't buy S&P 500 index funds.

Cameron Passmore: Well, we'll see if the theory being proposed here is the same as your theory in your video. And the article continues, "Not only are they denying themselves a proper dividend with V00s, the Vanguard S&P 500 ETF, with VOO, you'd need a $3 million nested to generate a livable $40,000 income stream! They're missing out on gains too" So it couldn't get any worse. Article continues, "That's because this is no longer in market you can simply ride with a passive index fund. We're now entering a new investment world that requires two things, active management and more income. Active management because the pandemic has sharply split the markets into winners and losers and more income because with the volatility we've lived through, I think you'll agree that a high cash stream like say the 7% dividends you get from an actively managed closed end fund provides a lot more safety than here today gone tomorrow paper gains. Diversified mix of close end funds will hand you a yield of 7.5% or more, which will let you retire with that 40,000 of income on just over $530,000."

Ben Felix: The old 7.5% safe withdrawal rate. 

Cameron Passmore: And did you know that it continues? It gets worse. "ETFs and flexible algorithms simply can't cope with this split, therefore it's time to swap out of your index funds for higher yielding closed end funds." And the argument is here, and I don't think you've dug into this enough. It might be a subject for you on a future deep dive. "US retail sales, for example, rose in July to US pre pandemic level, spending was shifting to different consumption. As an example, if pork prices fall, people will be eating more pork chops or McDonald's will release the McRib." 

Ben Felix: I don't know the old MARC Arbitrage. Probably heard about that too. 

Cameron Passmore: Yeah. So maybe you're looking at the MARC Arbitrage in the future. I'm sorry. Anyways, "So people who shied away from clear losers in a pandemic had been crushing those who're as simply on an index fund. Typical passive investor has no chance to exploit this." And it continues, "So for the next few months to really win in a post lockdown global economy, you can't just buy index funds anymore. The days of easy pass investing are over. Now, it's time to be tactical in doing so. Through high yield closed end fund is your best option."

Ben Felix: It's pretty bad advice. Anything else to add?

Cameron Passmore: No. I think people know how we'd respond to this anyways. Once again, thanks for listening.

Books From this Episode:

Open —  https://amzn.to/3jIwjBd

Succession Planning for Financial Advisors: Building an Enduring Business —https://amzn.to/3d5UUxv

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

Cameron on Twitter — https://twitter.com/CameronPassmore

'Mortgage Consumer Survey' —  https://www.cmhc-schl.gc.ca/en/data-and-research/consumer-surveys/mortgage-consumer-survey-2019

'IPO Market Parties Like It’s 1999' —  https://www.wsj.com/articles/ipo-market-parties-like-its-1999-11601052419

'Political climate, optimism, and investment decisions' — Political climate, optimism, and investment decisions - ScienceDirect

'With Greater Uncertainty Comes Greater Volatility' — https://jii.pm-research.com/content/early/2019/10/25/jii.2019.1.077

'The Presidential Puzzle' —  https://www.jstor.org/stable/3648176

'Political Cycles and Stock Returns' —  https://www.nber.org/papers/w23184

'Time varying risk aversion' —  https://www.sciencedirect.com/science/article/abs/pii/S0304405X18300461

'Partisan Financial Cycles' —  https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1900125

'These Popular ETFs Will Ruin Your Retirement. Buy These 7.5% Dividends Instead' —  https://www.forbes.com/sites/michaelfoster/2020/08/29/these-popular-etfs-will-ruin-your-retirement-buy-these-75-dividends-instead/#49b5d6723d27