November 15, 2018

Episode 20: The Cost of Financial Advice: Should You Pay For It and If You Do, How Much Should You Pay For It?

November 15, 2018

On today’s episode we are going to roll out our new format for the show. We ended off our previous show format with a series of interviews, and today we are ready to jump into something new! Of course, we definitely don’t plan on doing that perfectly today because we do have a couple of things that we want to talk about before we make it official. The meat of the episode will be focused on discussing the cost of financial advice. Should you pay for it, how should you pay for it, and how much should you pay for it? On top of that, we are going to be discussing the performance of the markets, controlling the things you do have control over, being a DIY investor, and how to strategically choose where you get your investment advice from. It’s genuine and it’s out there, so keep listening to hear more!

Key Points From This Episode:

Performance of the markets – should you invest. [0:03:25.0]
Having control over your asset allocation. [0:05:35.0]
The use of robo advisors. [0:07:21.0]
What should we be paying for advisors. [0:10:40.0]
Service delivery – is the outcome positive for the client and the advisor. [0:13:49.0]
How we use a tier fee structure at PWL. [0:16:17.0]
Benjamin shares about the event he went to last week. [0:17:03.0]
Who should you be getting your advice from – does licensed matter. [0:21:14.0]
Being a DIY investor. [0:23:34.0]
The key takeaway. [0:28:21.0]

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. This is the 20th episode of the Rational Reminder and Cameron and I, I know we've mentioned in past episodes, we were planning on playing around with the format of the show a little bit.

Cameron Passmore: But I think this time the format kind of played around with us.

Ben Felix: Yeah. Things got a little crazy just in terms of, we were very unstructured. And we said in the beginning of the episode, that we're going to focus on one topic, which was pricing and fees and how much you should pay for advice. We talked about it and it was definitely part of the whole show, but I don't know, it wasn't that explicit.

Cameron Passmore: But we had to get some neat things that have been happening in our world on the show, like your experience on Twitter and an event you went to last week. I think it all tied in, but it might be a little bit messier than we had hoped for.

Ben Felix: Just do your best to keep in mind that we're trying to talk about pricing and fees, even though that's not all we talk about, but that's what we were thinking about when we recorded the episode.

Cameron Passmore: But it's genuine and it's out there.

Ben Felix: Yep.

Cameron Passmore: We hope you enjoy. And here's the episode.

Ben Felix: Welcome to episode 20 of the Rational Reminder podcast. We told you a while ago that our plan was to change the format of the episodes a little bit-

Cameron Passmore: But a change is hard.

Ben Felix: We're working on it. But since we announced that change in format, we had a bunch of interviews, we had three interviews, which have been largely the same as the previous format because they're just interviews.

Cameron Passmore: But the interviews were great. We had some fantastic people with Mark and Dan, and then last week, Shane just killed it.

Ben Felix: Shane did kill it. And for him to be featured pretty prominently in the New York times, what the week after he did our interview.

Cameron Passmore: Oh yeah. He was in the New York times yesterday I believe, so less than a week after our interview.

Ben Felix: Yeah, that was pretty cool.

Cameron Passmore: I have to make sure we put that in the show notes for sure.

Ben Felix: Yeah. Pretty amazing of Shane to give us the time based on where he's at in his career and the type of people that he's working with. Very, very gracious of him to do that.

Cameron Passmore: Especially the article talked about the impact he's having on wall street, which I think he was quite surprised by the impact he's having just in the world of speed and technology and IA. It's amazing.

Ben Felix: Yeah. Well, it says in the article that the information's there, everybody has that, what do you do with it?

Cameron Passmore: Yeah.

Ben Felix: And that's where Shane's thinking models come into play and become extremely important if you want to be better than the next guy.

Cameron Passmore: Right. And better than AI, not IA.

Ben Felix: Yeah, better than AI that's right. Today we are going to try and roll out this new format that we plan for. And the idea, if you remember from when we kind of announced it, is that we want to focus more on one topic. Now we're not going to do that perfectly today because we do have a couple of things that we want to talk about before we jump into it. But the meat of the episode will be one thing. And that thing that we want to talk about is the cost of financial advice. Should you pay for it? Should you pay for advice? How should you pay for it? How much should you pay for it? We're going to chat about all those things. But before we get into that, we did want to talk a little bit about a couple of things. One of those is performance.

Cameron Passmore: And the question we get at virtually every meeting is some variants of, aren't the markets kind of high right now? Isn't it kind of choppy? And why would I want to invest now?

Ben Felix: Not anymore right. Now it's a different conversation.

Cameron Passmore: Now people are suffering from recency a month or so ago, they were worried about the markets. Now that the markets have gone down, they're worried even more. I find I get that question at almost every meeting.

Ben Felix: Yeah, me too. And we always brag about how we haven't had any clients call us. That kind of changed. We had a few calls in October.

Cameron Passmore: Not that many, but yes.

Ben Felix: Not many.

Cameron Passmore: Some are asking.

Ben Felix: Yeah.

Cameron Passmore: I mean, even that one question that a client sent in to me by email, let me just get it here, where he was basically commenting that the returns over the past five years are really nothing to brag about. And that 4%, which has been his five-year return does nothing to brag about, but he's got no basis for that. And even though when I explained to him that, well, that's not an unexpected return. He said, "Well, I basically don't really know what to expect." But just isn't what he was hoping for.

Ben Felix: Yeah. What you hope for and what you should expect are very different things.

Cameron Passmore: Right. But it's a totally normal period.

Ben Felix: But we looked at it, right. We looked at the distribution of five-year rolling returns. And this past five years, even with this little dip that we had has been extremely normal.

Cameron Passmore: Absolutely normal.

Ben Felix: Yeah.

Cameron Passmore: So he was happy. And in fact, referred someone else to us in the meantime. So all is fine.

Ben Felix: That's all is fun. I guess that works out well. I did look at the performance of just the DFA Global 60/40 Portfolio, which is something that you and I often use as a sort of benchmark of how things are going. And as of the end of October, it was down just over 3%, 3.04% for the year. And as of Friday, November 9th, it was down 1.79% for the year.

Cameron Passmore: So big bounce back there.

Ben Felix: Big bounce back. And even when there was not the bounce back when it was down 3%, I mean, how bad is that? When we look at O8/09, we're talking about a 25% drop for 60/40. This is in the grand scheme of things. It sucks. People don't like to see their portfolio drop. I don't like to see my portfolio drop either.

Cameron Passmore: Volatility is a price you pay for long-term prosperity.

Ben Felix (0:05:35.0): One of the other things that we want to chat about before we jump into the pricing conversation is the tweet that I had last week that kind of blew up. I said in the tweet, "The important things in life that we can control, and then a little list, diet, exercise, sleep, relationships and asset allocation." I thought it was just kind of funny.

Cameron Passmore: Where did it come from? You have this idea.

Ben Felix: I was thinking about it. I was thinking about, I guess I was thinking of my own life.

Cameron Passmore: And just the things that I try and focus on. So diet, sleep, exercise, relationships. And I was just, my mind was wandering, what else can you do that we have control over.

Ben Felix: Asset allocation, not necessarily thinking about it. Actually, you know what? It is actually really important. And it is something that we can control, but I thought it was kind of funny and I tweeted it and Twitter seemed to think it was quite profound. It had-

Cameron Passmore: By far your most hits ever.

Ben Felix: In terms of tweets and things that are retweets and likes. Yeah. It had 199 retweets and 698 likes as of this morning. That was from last week. But it blew up. I don't know why.

Cameron Passmore: We need to know why, it might've been the asset allocation you twigged into something there, perhaps. Because there are a bunch of lists like this, for example, one that I saw this morning from James Clear, who has a new book that just came out called Atomic Habits. He has a pinned tweet. I don't know if you've seen it or not.

Ben Felix: I saw it in your notes. Yeah.

Cameron Passmore: So sleep eight plus hours each day, lift weights three times a week, go for walks each day, save at least 10% of your income, read every day, drink more water and less of everything else and leave your phone in another room while you work. I think the format is proven and you just struck a great chord there.

Ben Felix: Yeah, it was interesting to see, and it was right, as soon as I tweeted it, it started blowing up. But like I said before, I do think asset allocation is extremely important and that we're going off on a tangent. Old format style, I guess, but one of the other things that I wanted to talk about in terms of asset allocation is with the robo-advisors. One of the things that I've noticed, it's kind of a trend that I've seen just from talking to young people who are using robo-advisors is that they systematically recommend conservative portfolios.

To prove that, I guess is if you can call that proof, I went and did the wealth simple questionnaire, and I filled everything out. I said that I can tolerate large losses. I'm a longterm investor. I've got stable income long-term goals, all these things that you'd expect to push you to be in an aggressive portfolio. But I filled out the questionnaire saying that I had no investment knowledge, 50% equity.

Cameron Passmore: Is that the variable that brought you way down-

Ben Felix: It's got to be it. Well, yeah. It is because I did another trial where I said that I was high knowledge and then it gave me 80% equity.

Cameron Passmore: So 80 would be the most that it will allow you to go on equity then probably.

Ben Felix: You can ask to go higher afterwards.

Cameron Passmore: But it won't let you go there automatically.

Ben Felix: It won't recommend it.

Cameron Passmore: I wonder if they are worried about so many millennials that have never experienced a major downdraft.

Ben Felix: Well, I think they're worried about two things. I think they're worried about compliance because if they go recommending super aggressive portfolios to people who may not know what they're doing, then that would be a compliance nightmare. They have a regulatory requirement to make a suitable recommendation where knowledge is part of the suitability requirements. So if they do recommend an aggressive portfolio to a low knowledge investor that puts them in hot water in terms of their regulatory compliance. And I think the other issue and actually Shane, not on our podcast, but in our conversation post recording, we talked about with Shane, the idea that index investors might panic in a downturn.

Cameron Passmore: And that's an interesting question. What is that population of index investors like and where did they come from? Did they get there because they're knowledgeable? Did they get there because they're young? Did they get there because they're value minded, AKA cheap, what is the motivating factor to get them there?

Ben Felix: And you got to think Wealthsimple dumping all this and other robo-advisors, but Wealthsimple is the most obvious culprit, because they're dumping the most money into marketing, but I'd love to know. I'd love to do a survey of Wealthsimple customers and see how many of them have any idea what they're doing.

Cameron Passmore: I bet you most went there. My guess is because of the cool interface.

Ben Felix: Slick marketing.

Cameron Passmore: Yep.

Ben Felix: Low fees.

Cameron Passmore: High cache.

Ben Felix: And you see it in, if you spend any time in online groups about investing and stuff like that, people talk about how yeah, I tried, Wealthsimple but the performance was terrible. I'm going to do something else. Which, when you think that's obviously the wrong way to think about it. But if you don't know that, then you don't know.

Cameron Passmore: They're looking for kind of cool interfaced alpha, I guess.

Ben Felix: That's a funny term, but yes. Anyway, I think that to tie it back to the asset allocation conversation, I think that part of them recommending conservative portfolios is that they're worried that people will bail on a downmarket, which is a fair worry, but it's also a bit of a knock on their business model. If they have thousands of customers per licensed advisor, which we know they do and markets crash, they're not going to be like, we're here. When people call us, we answer the phone because we have several hundred clients with how many licensed people, 10 licensed people or something like that.

Cameron Passmore: Well, I quickly saw an article this morning from the UK about a robo-advisor in the UK. I forget which one, talking about how they're a great pool of prospects for high service advisors and people will be looking for service. Thought that was kind of interesting.

Ben Felix: It is interesting. And you know what, actually, we said that this was off topic for our main discussion, but this is tying right into the whole pricing conversation. Wealthsimple's charging 40 basis points on the counts of over a $100,000, but you don't get a relationship. You don't get advice. And you know what, if you're paying 40 basis points, but you're in a portfolio that's far too conservative for you because that's all they can handle with the way that they're able to service their clients, your implied cost. That adds what? Between 50/50 and a 100% equity. That's 1.25% in expected return.

Cameron Passmore: 125 basis points of expected return. And this is the argument that's being made online. There's a bit of a bun fight going on between Rick Ferry and Eric Nelson and others about this exact point. What is that value that the advice provides and what would someone be willing to pay for it? And on one side you basically have the argument that says you should be charging clients on a professional basis, like an hourly type basis or menu type basis. The asset management is one thing, value added services are separate on the other side, Eric Nelson's arguing, well, you need a good advisor to keep you in your seat and to get you exposure to the higher expected returns that the factors have. So you kind of weighed in on this, you've been pretty active on Twitter this week.

Ben Felix: Yeah. I think that Rick Ferry's model, I asked him on Twitter within that thread, I asked him what his ideal fee model would look like. And I've heard this before from, even clients and prospects of PWL who've been asking about how we charge for our services. And Rick's idea is it should be a low baseline fee. He says 25 basis points for asset management. So you charge that to manage the assets and it will be tiered. So 25 basis points and declining, but he never replied to my question of when it would decline or if there'd be a cap, I'd be curious to know. Well, we've got Rick on the podcast in what, January, so we can ask him then.

Cameron Passmore: Yes.

Ben Felix: He thinks we should charge a low percentage of assets fee for asset management. And then everything else should be Allah cart. You want to plan, you pay whatever $20,000 for the plan. You want a cashflow analysis, you pay separately for that too. And you get to pick and choose. And I know from listening to the Michael Kitces podcast, there are lots of advisors doing this. And there are even software being built to allow clients to easily, you're booking your meeting with your advisor, you go and select which services you want to pay for you. You and I were talking about this last week and I think it puts it on the client to know what they need and when they need it.

Cameron Passmore: Otherwise you're perceived as selling them upselling services-

Ben Felix: Correct.

Cameron Passmore: All the time. And we know from our clients that work with other professionals that charged by the hour, every time that they reached out to them, they often say, "Oh my gosh, the meter's running again." And they don't like that meter, even though we may be more expensive than the other professionals in totality, it's a different kind of relationship for sure.

Ben Felix: What's better. I mean, what does the client have better experience with? If they're paying Allah cart, that's probably cheaper, maybe depending on what you need, I guess it makes the pricing more customized because you actually explicitly pay for exactly what you need, as opposed to paying for access to whatever you need whenever you want it, even if you don't need it. It is an interesting model, but what does it do to actual service delivery? I'm skeptical that the outcome would be positive on that for both the client and the advisor, because like you said, it puts us in a position where we're selling. Okay, well, we need to update your plan. And the client's like, well, I don't really know if I want to, it's going to be a $1,000. That's tough.

Cameron Passmore: Plus, I mean, it may sound arrogant, but we believe we are the scarce resource. And you kind of saw this at an event you went to last week. There's not many people that share our view on the fact that markets work, costs do matter, global diversification, index funds tilted towards factors. There's not a lot of us in town that have that belief system and have an enterprise with properly trained people, full service and back up in every role. If that's important to you as a consumer, there aren't many options to go to. So in a normal marketplace that would command a premium price, and we try to price ourselves, not necessarily as a premium compared to our peers.

Ben Felix: We know we don't because we participate in a benchmarking survey every year that puts us at the lower end. We know we're not charging a premium.

Cameron Passmore: Correct.

Ben Felix: You could even argue that we're charging, you could argue, and I'm not saying that we're going to raise our fees, but you could argue that we're charging too little.

Cameron Passmore: Right. And we have had some people say that they wonder if we are charging enough to make sure we can deliver the service that they're demanding going forward.

Ben Felix: Yeah. Ben Carlson. This seems to be for whatever reason, it's funny how topics kind of bubble up to the surface and become something everyone's discussing. But Ben Carlson on the Wealth of Common Sense blog, he wrote a bit this last week too. And he quoted a book called Selling the Invisible by Harry Beckwith. And he quotes from the book, "If no one complains about your price, it's too low. If almost everyone complains, it's too high. So if no price resistance is too low and 100% is too high, how much resistance is just right." And Carlson again, quotes back with saying that, but somewhere between 15 and 20% pushback, so 15 to 20% of customers should be pushing back on your pricing. If you're in the right territory for pricing. I'd say we get less pushback than that.

Cameron Passmore: Much less.

Ben Felix: I think since we're talking about this, I think we should probably say what our fees are. Otherwise, people have no frame or reference to know what we're talking about, but we do a tiered fee structure at our team here at PWL. With the first tier starting at 1% on the first half million dropping to 0.76% on the next half a million, 0.62% on the next million. And then above 2 million, it's a big drop down to 0.33%. And there's another drop after 5 million and a couple more drops after that.

Cameron Passmore: Right. And that's separate from any embedded MERs in the investments we use, of course.

Ben Felix: That's a fee for our advice and service only.

Cameron Passmore: Talk about the event you went to last week. And I thought that was pretty comical. You're really active on Twitter. Even on that event, talking about Lisa Food was good or something.

Ben Felix: I said that there are three providers. I don't see any value in naming the companies, but three traditional mutual fund active managers who have gone into the ETF space. And they had three representatives up there. VP of sales type guys who were talking about why it is a necessity to have active management in your fixed income in a rising rate environment on necessity. You need it, whether you're using your passive funds actively. So actively trading, passive bond ETFs, or investing in actively managed bond ETFs. In either case you need to have active management, otherwise you're toast.

Cameron Passmore: And of course they had the evidence to back this up.

Ben Felix: Did not mention the evidence, obviously, because if they did their service offering starts to look pretty terrible.

Cameron Passmore: So they didn't have 40 years of data to show that it was a skill and not luck.

Ben Felix: No, and they didn't talk about the SPIVA reports from the US that showed the under-performance of fixed income, active fixed income funds on average. Yeah, no, none of that was part of the conversation.

Cameron Passmore: Okay, SPIVA.

Ben Felix: The standard ... I don't actually know what SPIVA stands for.

Cameron Passmore: Standard Poor's Index Versus- [crosstalk 00:18:05]

Ben Felix: Index Versus Active, that's it.

Cameron Passmore: That's it.

Ben Felix: That's right. Yeah.

Cameron Passmore: It's a report that comes out every six months, that since I've been looking at them, which has got to be 15 years I would guess, it always comes out that passive [inaudible] active. It's always high. [crosstalk 00:18:20]. It's always the same, never changes, but they're selling what people want to believe. It's a stock pickers market and you got to be active. Unfortunately there is never evidence to back it up.

Ben Felix: One of the things that you talked about earlier, Cameron was the idea that we chatted with Shane about that indexers might bail and harm themselves if markets tank. And I think in the case of Wealthsimple type situations where people genuinely have no idea what they're doing and all they see is the negative number in their account.

Cameron Passmore: Possibly don't know what they're doing.

Ben Felix: Yeah. Right. Well, yeah.

Cameron Passmore: We don't know.

Ben Felix: Yeah. Did I say everyone knows?

Cameron Passmore: Yeah.

Ben Felix: Oh, excuse me.

Cameron Passmore: They may or may not know.

Ben Felix: Yeah, for sure. I'm sure there are lots of educated people, financial educated people using Wealthsimple as well. But I bet, and I'm just speculating here, but I bet most people just because of the way they've done their marketing, most people are relatively low knowledge. But anyway, that's not the point I'm trying to make here. Flows, in your notes, you had the question of, I wonder how indexes will react. Now I have access to Morningstar Direct so I can answer the question pretty quickly, which was kind of fun. I did that right before the show, right before we started recording. Flows into US passive mutual funds. And I use mutual funds as opposed to ETFs, just because the further you start to get back, the smaller ETFs were.

In 2008, active mutual funds in the US passive had positive inflows. Active had negative. Since I have data available, going back to 1993, passive mutual funds in the US have had positive Net-inflows every year from 1993, through 2017. Actives had three years of Net-outflows.

Cameron Passmore: Wow.

Ben Felix: So are passive investors going to bail if we're going, and now we'd have to know who were the passive investors in 2008, because I think it's more about that. It's not about how are they investing it's about who are the investors.

Cameron Passmore: Absolutely.

Ben Felix: Like maybe there were more DIY active fund holders back then, and maybe more of the passive assets were institutional or advised. I don't know. And that's the question.

Cameron Passmore: What you're suggesting is as a whole, they're pretty patient structured strategy-based type people that are following the strategy through-

Ben Felix: Historically that has been-

Cameron Passmore: Market's ups and downs.

Ben Felix: Yeah. The real conversation is what we were just saying. It's who are they? Who were the passive investors and who are they now? That's what it's about. Does indexing mean you're at greater risk of baling at the bottom? I would say no, even if you know nothing, because just based on absolute returns, indexing typically does better than active in bare markets as well.

Cameron Passmore: I got to believe when you look at the data in the US and I saw an article this morning, suggesting that 76% of all ETF flows are going into Vanguard and BlackRock, they're just mopping up now it's less than last year. They're getting less market share but still there the line share or the market share. I would expect that there's a lot of smart people in that bunch too. I think it's a pretty good subset of investors would be my guests. I think it'd be pretty sophisticated people on average. I'm not sure there'd be necessarily a big bailout if the markets really did correct, like they did in 2008.

Ben Felix: Tough to know, and if people do bail, like I was saying, I don't think it will be because they're indexers. That's not going to drive people to pull out of the market. Anyway, you know what that ties in, it's the kind of the whole conversation we're having, but people who have someone to talk to when markets are crashing, maybe they're less likely to bail, maybe. I don't have data to support that, but I would say anecdotally, and just from common sense, it would make sense that if someone has someone who they trust to call to say, should I bail? They're probably less likely to bail than someone that has no one to talk to. And as part of the fee discussion, the should you be paying for advice and how, and how much? One of the other ways that people can pay for advice now and is becoming more and more prolific is fee only.

You can go and pay someone an hourly fee for advice. Now, in most cases, the people giving hourly advice like that are not licensed, there in most cases, I know some are, but in most cases, they're not CFA charter holders. They're not portfolio managers. Can you go and get financial advice? Now we had Rob, Rob Bangin on that podcast a while back, and he does this. He does family planning. Rob is a self-taught, now this is not a knock against Rob at all. He's a self-taught financial person. He's not a portfolio manager. He's working toward the CFP. Can he give good financial advice? Absolutely, without question. Can he give comprehensive portfolio advice? I guess not legally, because he's not licensed. When you're getting that type of advice from people who are maybe personal finance experts, but not portfolio management experts, I think it changes the dynamic a lot in terms of trust because yes, they can help you budget.

Yes. They can help you figure out where to allocate savings and how much when markets are crashing, are they the trusted experts that's going to keep you invested? I don't know.

Cameron Passmore: Don't know.

Ben Felix: I don't know. I know for me, and this is very anecdotal, but the relationships that I have with clients, and I think it's the same thing for you. They trust us completely. And we're as much as we can putting out thought leadership on portfolio management investing. Do people trust us on that topic specifically? Yes. Do they get financial planning advice from us as well? Yes. Now this doesn't mean everyone needs to pay for our service. Like a lot of people don't, a lot of people are happy to.

Cameron Passmore: I listened to podcast yesterday with Daniel Crosby who wrote a new book on behavioral finance. He's also financial advisor somewhere on the East coast, can be Georgia somewhere down there. And he was arguing that yes, you could go do it yourself. Yes, you could save money for sure. But he says the profile of someone who would do it on their own has overconfidence and overconfidence in investing, and that's what Shane talked about last week, it's very dangerous. He thinks those that will do it on their own are more likely to make bad decisions, than those who do work with an advisor just on that one characteristic alone, which I thought was really interesting.

Ben Felix: Well, you remember what Shane said? I asked him, what are the biases that are most harmful to investors? Do you remember what his answer was? Overconfidence and the bias for action.

Cameron Passmore: Yep.

Ben Felix: And exactly what you just said from what Crosby was saying, people who are DIY investors probably have both of those things.

Cameron Passmore: Yeah, and the appeal of people that are willing to say they screwed up.

Ben Felix: I think one of the other things that we see with people who go the DIY route is that it becomes that much easier to buy individual stocks. All of a sudden you're buying ETS, you're comfortable trading, you've got your quest trade account or whatever account you're using. And you decide you want to buy Amazon or Google or whatever, because I don't know. I don't know why people decide to do that, but they do. I was doing some research for an upcoming video on the YouTube series on what is the risk of picking individual stocks actually look like, have you seen this data?

Cameron Passmore: No.

Ben Felix: I found two different papers. One of them was more recent. It was a 2018 paper, but it showed that of the 26,000 stocks that have appeared in the CRSP database. That's the center for research and security prices out of the university of Chicago. I should probably drill into what that is for a sec. It's a comprehensive database of all stocks in the US. Which should capture everything. And there's a lot of work that goes into making sure that it does.

Cameron Passmore: With no survivorship bias.

Ben Felix: Correct. Everything's in there, whether it disappeared at some point or not. Well, within the 26,000 common stocks that have been in that database, yes, many of them have disappeared. And that's part of what this data talks about. So of the 26,000 only 42.6% of them have a lifetime buy and hold return that is greater than T-Bills over the same time period.

Cameron Passmore: Wow.

Ben Felix: Yeah. And it gets even crazier 4% of the stocks in that same data set of the 26 000, 4% are responsible for all of the net positive return of the US market going back to 1926.

Cameron Passmore: Wow.

Ben Felix: The other 96% have returned on average T-Bill rate. You take out the top 4%, that's it. How risky is picking stocks? Well, you've got a very low probability of catching the ones that are driving most of the market return.

Cameron Passmore: And they're now more funds or ETFs than there are stocks available in the world. It's all these active people fighting over these values to try to beat the market, have to pay for this small subset. And there is $400 billion a day of equity trade value.

Ben Felix: Yeah. Unreal.

Cameron Passmore: And someone's going to be to pick which ones are the winners out of that. That data wasn't part of your seminar last week at luncheon.

Ben Felix: No, the active ETF providers did not talk about this paper, probably would not have helped their sales. And it's worth talking about one of their papers that I found doing this research. There's one from JP Morgan, from 2014, it looked at data not going back to 1926. We only had 1980 to 2014 in this paper, but answering a similar question. Looking at the Russell 3000, they took the 13,000 stocks that at some point in time, between 1980 and 2014, the 13,000 stocks that at some point were included in the Russell 3000. And they looked at how many of those stocks, so individual stocks within basically US market. Russell 3000 is another US index, not as comprehensive as the CRSP, but still it's like 98% of the market cap.

Of the 13,000 that made at least an appearance in the Russell 3000, between 1980 and 2014, 40% of them suffered at some point a 70% loss that they did not recover from. 40% of stocks that were at some point in the Russell 3000 index. Now their definition of did not recover from, was it the total loss over the longterm was at least 60%. So 40% of the stocks in the US, basically the US market from 1980 through 2014, you had a pretty good chance of picking a stock that would have declined by 70% and at best recovered to a total loss of 60%.

Cameron Passmore: Unbelievable. And we looked at data for a long time. I've never heard data points like this.

Ben Felix: Oh, it's cool research. It's cool research. And it's, yeah. I was surprised actually, that these papers were so recent because it seems like stuff that people would have looked at a long time ago.

Cameron Passmore: The key takeaway, diversify like crazy, get the expected return on the overall market, globally diversify, keep fees low, tilt towards parts of the market that have higher expected return.

Ben Felix: That's the takeaway for that absolutely.

Cameron Passmore: Same message we've been giving for years.

Ben Felix: And this ties back to our whole conversation about advice and what does advice worth and all that kind of stuff?

Cameron Passmore: What's that worth? Is that worth an hourly rate or is that worth the total fee rate? I guess that's up to the consumer.

Ben Felix: It is up to the consumer.

Cameron Passmore: You look at the example was given to me last week is cars, some people drive expensive cars, some people don't, all these cars go to the same place. Most can get to the same speed. But if you have a different taste in what you want to pay for, that's your choice.

Ben Felix: But even think about like, what will the market bear? And I had a blog post about this a couple of weeks ago, the difference between scaling product and advice. Vanguard can manage another billion of assets without flinching. But for us to manage another billion of assets, we have to bring on people. And those people have to be able to deal with clients in a way that makes clients comfortable and they have to have the knowledge and all those different things. And if you, as the partner here decided, well, I'm going to cut our fees in half. And therefore, Ben, your salary is cutting in half as well.

I could probably leave and find another job somewhere else with a firm that hasn't cut their fees in half. That's paying what I'm making now. It's like as long as people willing to pay for great advice, I don't see how prices can fall. And you have firms like Vanguard trying to do it, trying to charge. What did they say? They said that their plan is to charge index fund level fees for advice. I believe that, but what type of advice are you getting and from who?

Cameron Passmore: And are they accessible? We know we're very accessible. We don't have competitively speaking high client count per advisor. So we know we've got great turnaround time.

Ben Felix: Yep. Anyway, we're getting a bit long in the tooth in the episode here, but I do want to finish just by saying that I'm not saying everyone should have a financial advisor and should pay for advice. I think that our stance has always been, and I mean, our alignment with Canadian Couch Potato speaks to this. If you can do it yourself, well, you should. Because like anything, if I could fix my car, I would do that myself too. I'm not going to take the time to learn how.

For a lot of people, I think its becomes a hobby and something that they're genuinely interested in. If you can do that and do this successfully and spend as much time as we do reading and researching. Fantastic. I'm not saying everyone else should have advice. And a lot of people with simple situations, something like Wealthsimple is fine.

Cameron Passmore: Definitely.

Ben Felix: But I think for a lot of people and we see this every day, a lot of people do want advice and are perfectly happy to pay the kind of fees that we talked about earlier.

Cameron Passmore: Big show next week.

Ben Felix: What's next week.

Cameron Passmore: We have a special guest next week.

Ben Felix: I don't remember.

Cameron Passmore: You don't remember.

Ben Felix: Who's our guests next week?

Cameron Passmore: From Globe and Mail.

Ben Felix: Oh, Carrick yeah. That's going to be awesome.

Cameron Passmore: Rob Carrick is next week, I believe.

Ben Felix: Rob, if you're listening, I am very excited. Cameron caught me off guard there. Yeah. That's going to be a good show.

Cameron Passmore: And we have a lot of great guests lined up in the next couple of months, should be good.

Ben Felix: All right. Anything else?