Our focus for today's episode is the topic of structured products and we welcome two expert guests to weigh in with their research and insight on the subject. Felix Fattinger is an Assistant Professor of Finance at the Vienna Graduate School of Finance whose research focuses on complexity from a number of perspectives. Petra Vokata is an Assistant Professor of Finance at Ohio State University, currently working in areas of household finance, financial innovation, and consumer financial protection. Both Felix and Petra offer some amazing takeaways for retail investors, deftly balancing the data with their ability to read it and implement the lessons we should learn about structured products. We then welcome Jill Schlesinger back to the show to talk about her new book, The Great Money Reset. We hear from her about the process of writing the book, her aims for its publications, and the main questions it can help individuals answer. 

Felix Fattinger thanks his co-authors Marc Chesney, Jonathan Krakow (both University of Zurich) and Simon Straumann (WHU – Otto Beisheim School of Management).

Key Points From This Episode:

• Felix talks about his interest in complexity and how to understand the three different types of structured products. (0:07:23)

• The definition of headline rates and their relationship to expected returns. (0:18:23)

• Laying out the biggest lessons from Felix's research; price competition regulation, expected returns, and simulating portfolios. (0:32:21)

• Petra shares her reasons for researching structured products and what she focuses on. (0:40:36)

• The doubts Petra has about YEPs, the evolution of their fee structure, and estimating their expected returns. (0:49:02)

• The YEP index and how it can help investors mitigate certain issues. (1:02:42)

• Actions by banks that increase headline rates of return and how this relates to expected returns. (1:06:56)

• Unpacking the biggest lesson from Petra's research about understanding fees and payoff. (1:10:12)

• A 60-second recap of Jill Schlesinger's previous episode with us. (1:14:53)

• Explaining the idea of the 'great money reset' and why Jill's latest book was so much easier to write than her first one. (1:17:22)

• Jill shares the five steps to go through before a reset and expands on the important considerations. (1:21:33)

• Tips for negotiating with your boss and final thoughts on approaching a financial reset. (1:32:04)

• Today's after-show; recent time off, listener reviews, community and event updates, and a song from RootHub. (1:41:22)

Read the Transcript:

Ben Felix: This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision-making from two Canadians. We're hosted by me, Benjamin Felix and Cameron Passmore, portfolio managers at PWL Capital.

Cameron Passmore: This is Episode 261, and even though it's a weekly reality check, our reality is that we don't record every week and we do that in bursts. Some weeks are busy, some weeks are not and we've actually just had a three-week hiatus from recording. Boy, came out rusty. I don't know about you, Ben, but just the mechanics behind it, when you get out of sync, because we recorded a lot before we took a bit of a vacation. But now we're back and you had two fantastic finds for today's episode. Maybe you want to queue that up.

Ben Felix: Yeah, sure. I mean, it all stems from I did a Twitter thread. We'll introduce this more when we get to that section, but there was a Twitter thread that I did on structured products and wrote an article on it. We did an episode on it. It's an interesting topic to cover. But when I did that Twitter thread, a couple of the people whose papers I had referenced jumped into the thread and were participating in the discussion. I thought that was pretty cool. I asked both of them if they would come on the podcast to talk about the research, which they both agreed to. That was Felix Fattinger and Petra Vokata.

Cameron Passmore: Then, we also welcome back to this episode, Jill Schlesinger. She recently released her book, The Great Money Reset, which is a fascinating book and it's a situation that applies to lots of people, so I had a great conversation with her and then we'll also do a quick review of her episode when she was on Episode 67 back in 2019, if you can believe it. Then at the end of the after show, for those who are interested, you'll actually hear an original song about a conversation Ben and I had on another podcast. We'll play it, at the end.

Ben Felix: Yup. Sounds good. There was a Reddit thread that I saw today, where someone who listens to the podcast and likes PWL and likes us wanted to go and look for a financial advisor, but they weren't going to get in touch with us because of our million-dollar minimum. I jumped in and clarified that we've eliminated our minimum, which of course we've mentioned on the podcast a couple times, but clearly that message has not gotten out there as far as the needs to. To reiterate, we no longer have an investable asset minimum. We did for a long time. We no longer do.

We are still assessing client fit, but we're doing it case by case. It's that singular criteria, you have to have X amount of assets to talk to us, that's no longer there. If anyone's thinking about hiring a financial advisor, or making a change to a new one, my suggestion is that you get in touch through our website. Talk to one of our financial planners and they'll tell you if they think it could be a fit, or if not, they'll point you in the right direction for other options. Cameron and I are also available to have those conversations, if that's helpful.

We've got a couple of upcoming events. We're hosting a women and wealth conversation circle on July 20th. It's a Zoom event. There's only nine spots available for that one. The last ones of these that we've run have gotten really, really good feedback.

Cameron Passmore: Indeed.

Ben Felix: You can sign up to that through the PWL website. We've also got a webinar on finding and funding a good life, presented by one of our financial planners on July 26th, which you can also sign up for on our website.

Awesome. With that, let's get to the episode.

Cameron Passmore: Okay, welcome to episode 261.

Ben Felix: All right, so slightly repetitive, because I said this in the introduction. We covered structured products recently in an episode that started as a Twitter thread that I just did on a whim. I think I read a paper and I was like, “Oh, this is really interesting,” and then decided to find if there were more papers and I found a handful of them, so I made a Twitter thread. Whatever, no big deal, but a lot of people liked it and engaged with it. A couple of the authors of the papers that I had linked to jumped into the conversation, added some context. One of them gave me an updated version of their paper and actually, one of them, Petra Vokata, had a second paper on that topic, so that was all cool.

We thought it'd be interesting, since this is a really nuanced topic to have them on for an episode, like what we did with Paul Calluzo after we talked about covered calls. We've got these two guest segments. Both of them have really cool papers on structured products, on yield enhancement products specifically, which as it turns out are products that behave somewhat like covered calls. It's a specific type of structured product, which we get into in our conversations with them.

The two guests are Felix Fattinger, who's Assistant Professor of Finance at VU Vienna and Vienna Graduate School of Finance. He has a research interest in complexity, both at the aggregate market level and from a retail investor's perspective. Then the other guest that we have is Petra Vokata. She is an Assistant Professor of Finance at Ohio State University, with research interests including household finance, financial innovation, and consumer financial protection. 

We'll go ahead to our conversation with Felix Fattinger first. After that, we'll follow up with our conversation with Petra Vokata.

Ben Felix: Felix Fattinger, welcome to the Rational Reminder Podcast.

Felix Fattinger: Hi, Ben. Thanks for having me.

Ben Felix: Felix, what makes you interested in complexity from the retail investor's perspective as an area of research?

Felix Fattinger: Well, I think it's fair to say that complexity is ubiquitous to real-world decision-making and in financial markets in particular, right? We have investors who are constantly updating their beliefs based on an expanding set of information. I think in this context, at least two things are interesting about retail investors. First, when you think about it, they represent the ultimate investor base, right? Eventually, all the capital that's invested is owned by retail investors. Second, when you compare them to the other participants in the market, so the intermediaries, the institution, the professional investors, they're a naturally arising information asymmetries, because these institution investors, they have access to usually a different subset of information that's not available to retail investors. They have access to additional technology and resources, which allows them in certain cases, to up their beliefs differently.

This creates naturally these information asymmetries, which come, because there are these complexities. The problems are so complex. I think this is super fascinating. If you then in particular think about retail investment products, it's just super interesting to think about, okay, in this setting, because we usually have the demand side that tries to invest in these products. The retail investors say, they usually have inferior information and we have the sell sides that provides these products, hopefully, in the best interest of the retail investors. Because of these informational asymmetries that arise, because of these very different levels of complexity, we have in different types of complexities, so we'll talk about the very specific one today. I think it's just a very fascinating topic, and to study how the level of complexity also changes endogenously over time is super fascinating, I think.

Ben Felix: Yeah. It is interesting, but it's also super important for retail investors to understand, because of the asymmetries that you're just talking about.

Felix Fattinger: Essentially, you say more the ultimate investor base, their decisions really matter. In the aggregate, what they do is important for society at large. I think that's what's important point we forget.

Ben Felix: Yeah. The paper that we're talking about focuses on yield enhancement products, or YEPs. What are those?

Felix Fattinger: Okay. YEPs. In the most basic way, you can think of them as consisting of two components. Usually, they have a fixed coupon, which is guaranteed by issuer. you will get it no matter what. The only case you won't get it is if issuer actually defaults. The second component is the part that actually finances this coupon. It's an exposure to downside risk that comes from an underlying. Think of an underlying stock. Now let me be a bit more precise and actually make an example. Think of the following product. You can invest, let's say, a thousand dollars for one year and you get a coupon of 10%. It's really a seismic coupon, a $100, which is guaranteed after the end of the year.

Now the product is on an equity, let's say Microsoft. Now the way this works is if the Microsoft share price remains stable, or even rises over this one year, you will actually get at the end of the year, your notion investment back and forth. You will get 1,000 plus a 100. 1,100, 10% return. That sounds pretty good. Now, the other case is essentially if the Microsoft stock price falls, or falls significantly. Let's assume over the year it falls by 30%. Now in that case, you start participating in the losses, which means you will lose 30% on your notional, meaning that you will get back 700 worth of Microsoft shares. Last share price is close to 350. That's roughly two Microsoft shares, and the coupon you always get back. You will get 800 back, which is a loss of 20% on your investment. This is how they work.

Some of them also have the security buffer, which means that you only start participating in the losses if the underlying falls at least by let's say, 25%. If you want to have it really the technical definition, essentially what it is, it's a fixed coupon bond together with a short put option on one underlying, like in the example I just mentioned, or as we will get to later, could also be several underlying. Several underlyings.

Cameron Passmore: Do you think your findings generalize to other types of structured products?

Felix Fattinger: That's a good question. What we do in this paper, we focus on the European market, in particular on Switzerland, which is I think an interesting market. You can consider it as the birthplace of structured products. They have been around since the early '90s. In Europe, what's interesting is the products are more standardized than in North America. When you talk about investment products, they usually involve the industry and the regulators, they're distinguished between three types. You have yield enhancement, right? You have also capital protection and participation.

Capital protection is less risky, because they're usually, your investment is protected. But on the other hand, your upside is very limited. You only participate in a limited amount if the underlying goes up. On the other hand, you have participation, which is the more riskier version. You only have some products there, you actually participate more than one to one, but you have no security buffer, whatsoever, so they are riskier.

Now, what is interesting is that these yield enhancement product, which we study are the ones that have been growing the most during this period of low interest rates, we have seen recently. Across the major European markets, the outstanding volume amounted to roughly, or a bit more than 110 billion euros in the first quarter of 2023. Now in the US or in North America, it's harder to get aggregate data. What recent evidence suggests is that also there, these yield enhancement products have been the most important and fastest-growing product type among structured investment products.

Now, when it comes to our finding of how low interest rates have created demand for yield enhancement products in particular, this is probably specific to this very type of structured product. However, when we talk about the other aspect of our paper, the rising level of complexity, I think this, or I believe is generalizable to the other types of structured products as well. Yes.

Ben Felix: I was just thinking, when you described the payoff profile, so there's a fixed coupon bond, plus a short put, does that end up being like a covered call payoff?

Felix Fattinger: Covered call is right. You have the underlying and you write a call option. In a sense, it's similar-ish, right? In the sense that if the upside is really big, you won't participate, right? Because then, the buyer of the call will just get the underlying. You're also exposed to the underlying risks. In that sense, when you think about the payoff structure, there are definitely similarities, because in a sense, what you're promised, with a yield enhancement product is this coupon. With a covered call, it's similar, because essentially, what you lock in is the premium of the option, which you can't lose. But essentially, you're giving up a huge part of the off side. I think the overall structures are definitely comparable. Yes.

Ben Felix: Yeah. Interesting. You still have the downside exposure.

Felix Fattinger: You have the downside exposure for sure. Yeah.

Ben Felix: Yeah. Yeah. We talked about covered calls recently in another episode, but we've seen a ton of recent interest in those as well. It's probably for similar reasons. Just the yield enhancement idea.

Felix Fattinger: Is this idea that you get this fixed income, which is usually quite sizeable, right? Then you hope that things don't go bad. I think, probably different with these yield enhancement products that we see in Europe, they have the security buffer, right? You only start participating if the losses are really substantial, which is a twist that issuers have used to argue, well, look, they're fairly risk-less, right? Because things have to go really bad, until you start participating in these losses.

Ben Felix: Hmm. That's interesting. You probably pay for that in the cost of the product.

Felix Fattinger: Yeah. Well, yes, we'll get to the markups in a few moments.

Ben Felix: In the research, how do you measure complexity?

Felix Fattinger: That's a very good question. Obviously, you can try to come up with different measures. What we do, we essentially take a look at what has happened in a market that we study. We see a very strong shift from products, or YEPs that have been issued, which are just a one underlying stock, so think of Microsoft, to a world where most of these YEPs, so think 80% or more, are actually issued on multiple securities.

Now, this is where it gets tricky. The way it works with multiple securities, it's a worth of payoff structure. The one underlying that becomes payoff relevant will be the one, just by security, by security design, that has performed the worst. It's the opposite of what we usually think of when we talk about diversification. The more underlyings you have, the riskier it becomes. When you think about this, technically, this essentially means that with each underlying you add, you have an additional layer, or an additional potential payoff dependency, right? It could be a different product, which could potentially become payoff relevant.

What happens, the number of contingencies in the security design increases. What we do is we just simply count the number of underlyings, and we argue the more underlyings a YEP has, the more complex it becomes. Because when you think about it from an investor's perspective, what they have to do is they not only have to assess the future evolution of one stock, of Microsoft. But let's say, also, I don't know, Apple, or Meta, or Netflix, or whatever. Also don't forget, they have to think about the correlations, all the pairwise correlations, which make it much harder to evaluate these products. Essentially, the way you have to think about our measure of complexity, the more underlyings, the more complex it gets.

Cameron Passmore: Interesting. How did the low interest rate environment following the financial crisis, say between 2008 and 2017, how did that affect the YEP market?

Felix Fattinger: I think in this regard, the YEP product type is a particularly interesting one in this space of structured products. As already mentioned, right? they have this coupon, which is guaranteed. It's called headline rate. Usually, when you see the prospectus of such a product, it's literally the headline and it's in bold face. Then you have these annual coupons, which can be really sizeable. Think of 10%, 15%, or even 20%. Much more than the risk-free rate.

Now, what has happened is that you've seen issuers that made this pitch to investors. Look, if we're now in an environment where what you earn on your fixed income instrument has gone down, down, and down, what you might be interested in something that is also relatively risk-free, right? You have the security buffer, but still gives you this fixed income, which you can count on. This directly speaks to this phenomenon that's called reaching for yields among retail investors, right? This willingness that has been documented in different studies that if the interest rate environment is low, what happens is that retail investors have this tendency to increase their willingness to accept additional risk.

I think this is what we argue in the paper, one of the reasons why the outstanding volume of these products in Europe has really arisen quite sharply during this period, following the global financial crisis and the low interest rate environment afterwards.

Ben Felix: Can you talk more about, because you've looked at the data on this, on how investor demand for YEPs does change with decreasing rates?

Felix Fattinger: Yes. This is not as straightforward as you might think, right? If you just look at the empirical data, what you can see, there was a consistent rise in the outstanding volume of the market we studied during this time period. You can also do this a bit more sophisticated. What you can do, like empirically, you can take all the instances where there was an unexpected drop in the interest rate, and you can try to test in a clean way, whether this has led to an increase in the volume, and this is what we find.

In order to pin this down more precisely, what we do, one part of the paper, we run an experiment, because in order to really pin this down cleanly, you have to make sure that the endogeneity problem is out of the picture. We know low interest rates, they're not adjusted randomly, right? Central bankers usually lower interest rates, or rise interest rates, depending on their forward-looking assessment of the economy. This will also interact with the demand and supply of these products.

To do this in a clean way, we just run a simple experiment, and in a nutshell, what we find is indeed, yes, what we expected, if interest rates go down, if they approach the zero lower bound, or even our slightly below, which they have been for quite some time in many European countries, then indeed, there is an increase in demand for this yield enhancing product. Now what's important is that this increase in demand, both empirically, as well as experimentally, increases in similar magnitude for all these yield enhancement products. It doesn't make a difference whether you talk less complex, or more complex.

Again, here the intuition is that this coupon, this headline rate, which is already offered, which is usually lower for the less complex product, but this is efficient to make this substitution, right? Because already, these lower coupons are in the real, let's say, 10% or 12% on an annualized basis. In a summary, nutshell, it seems that the low interest rate environment has really spurred demand for these products, but it does not, at least not directly, explain why we have seen a rise in complexity in this segment.

Ben Felix: We're going to dig more into the complexity piece, the change in complexity in a second, but I just want to, on headline rates, you mentioned that a couple of times. Can you just briefly expand on what a headline rate is, and also, if there is a relationship between expected returns and headline rates?

Felix Fattinger: Yes. Okay. The headline rate is really like this coupon, which is guaranteed if you invest in the product. It would be, in the example before, the 10% you get if you invest in one year for this kind of product. One year is the typical maturity that we see across the product that we have studied.

Now in terms of expected return, right? Essentially, it is the conditional expected return, which you get in the good case scenario. If nothing goes bad, you will get your notional back at the end of the lifetime of the product. Let's say, the thousand dollars we assume before, plus the coupon, right? Essentially, in that case, in the most simple scenario, if you abstract any additional costs and fees, this will be your return.

In Europe, it turns out that these coupons, these headline rates are already net of fees. Essentially, what all the – so the distribution, the hedging costs, etc., they are already deducted in the coupon, the headline rate, which investors see is literally what they get in case the good case scenario plays out. However, right, if we fall below the security buffer, if this short option actually is activated, well, then obviously, returns can be quite different. In order to compute expected returns, you also have to include the potential downside risk, which you are encountering when you invest in these products.

Ben Felix: Yeah, it's so tricky. Where the headline return is the best case for turn.

Felix Fattinger: Exactly. It's very salient as well. If you think about an investor, it's hard if you think about a product with this multiple underlying. How likely is it that one of them will lose, let's say, 25%, or even 30%? In that case, what will be its value? Conditional on hitting that barrier. On the other hand, you just have this fixed coupon, which is guaranteed, no matter what. It just makes it very salient, very simple to use this just as a benchmark. I think, that's one of the problems that you have this very salient piece. To understand the full picture, it's much hard to make the actual evaluation. What you have to do, is you want to get at the actual markup, so the true expected return, you will have to rely on option pricing theory to estimate this embedded short put option in order to really get to the true markup, or in other words, the expected return.

Cameron Passmore: Wow. How does product complexity change with growth in the market for YEPs?

Felix Fattinger: Yeah. This is not where it gets interesting. Remember, we think that we demonstrate, or we provide evidence that interest rates have increased demand. But they do not at least directly explain why complexities do change. Now, coming back to what I mentioned before, what we see quite clearly is that there is this shift from YEPs on one underlying to YEPs from multiple underlyings. Complexity goes up, right?

Now, just to be a bit more precise, what essentially happens, we go from a world where less than half of the products have multiple underlyings to a world, at the end of our sample period, where 80%, or even more of these products have multiple underlyings. The median product that you see uses three underlyings with this worst-off payoff structure. There is this increase in the complexity that we can clearly see. What's also interesting when you go to the US, so what we did very recently, we tried to get data for the US as well, which is a bit more tricky, but a very interesting phenomenon has happened there as well. You have this yield enhancement products a couple of years ago, which were mostly on just one underlying security. In the last one or two years, 50% or close to 50% now are also multiple underlying securities. It seems that the US market, or the North American market is headed towards a similar direction compared to what we have been seeing in Europe now for a couple of years.

Ben Felix: Really, really interesting. How do issuer margins vary with complexity?

Felix Fattinger: It's an important question as well to start thinking about more systematically how complexity evolves over time. What do we do? It’s a natural thing to do is we estimate these markups. Now, what you have to do is you have to – the fixed coupon bond is easy to evaluate, right? I mean, you can account for the credit risk of the issuers, but when you just compare less versus more complex, this just cancels out, because they're usually issued by the same issues.

What's really the tricky bit is this embedded put option, in particular, if it's a basket put option on the several underlyings. What we do is we essentially use option pricing theory and get to these markups. I mean, probably you've expected it. What we find is that the markups for more complex products are substantially higher. On average, we find markups of around 5% for what we call these multi-products. These are the YEP’s multiple underlyings, and they're out 2% annualized for the product from just one underlying. There is substantial difference.

What's also important in this context to keep in mind that because of dynamic catching, the issuers, they can lock in, essentially, at the time of issuance a substantial part of this markup. Not everything. There might be additional action costs, etc., which are not yet part of the coupon reduction that they've already applied for the headline rate. But still, our understanding is that a big portion, they can lock in at the issuance and they just hedge all the dynamic immolation of the value of the product over its lifetime. If you follow this reasoning, you could argue that this is an interesting way to get very cheap funding for these banks that issue these products.

Ben Felix: Interesting. Complexity is pretty good business for the issuing institutions.

Felix Fattinger: In this particular market, the YEP's market, yes. Definitely so.

Cameron Passmore: How does complexity vary with the efficiency of the issuer?

Felix Fattinger: Yes. I think now this allows me to complete the picture. What's interesting is if you look at these markups over time and you start with the single market sector; just one underlying asset, you see very robustly that markups actually go down over time, which is in the interest of the investor. If markups are lower, this just means there is more to be earned by the investors. We see that they go down. When we then look at who is actually active in that market, by the end of our sample, it's just a very small number of banks.

If you then dig even deeper and you look, okay, who are these banks? These are actually the banks that have the lowest markups, and these are the banks whose markups decrease the most over our sample period. The way we interpret this is, well, what happens in this more competitive market, only the efficient issuers' banks decide to say, to really serve that market segment. Because only for them, it's still profitable to do so.

We see competition in this market segment at least, right? That's also intuitive. Because if you have just one underlying, it's fairly easy to compare products from different issuers. They just need to have the same one underlying. This is what we think. We see decreasing margins, decreasing markups, and only the efficient ones who are deciding to stay in that segment. Now in contrast, on the other side, if you focus on the segment of these multi-YEPs, so the ones that usually have three underlyings, the picture is very, very different.

There, all of the issuers remain more or less active. Actually, quite active over our entire sample period. If you look at the markups, they don't move as much. Maybe they decrease a little bit, but depending on the specification, this trend is not statistically significant. They seem to be much stickier and much, much more stable in this higher region. Now, how could that be? Well, we think this actually is a symptom of competition that is mitigated, or in certain cases, completely bypassed, because they are actually issuing these more complex products.

Let me explain what we mean by that. We know retail investors only, or like to invest in underlying stocks, which they know, right? They don't like to invest in something they’ve never heard of. For instance, to make it more precise, think of the S&P 500. All S&P 500 member stocks, right? We have 500 stocks to choose from when you structure your multi-YEP with three underlyings. For the structure, so the issuer, this means you have, for any given product, potentially 500 times 499, times 498 underlyings to choose from. Now this gives you 124,251,000 possible combinations. You can restructure your underlyings in a way which you just replace one.

Let's say, you have Microsoft, Apple, and Meta, and then you just kick out Meta and you include Netflix, for instance. Then this already gives you a new product, and you don't have this one-to-one comparability anymore. We also find evidence for this at the product level that in this case, actually, this direct price competition decreases. We think this is the reason why these less efficient banks, well, all the banks, but in particular, the less efficient banks, they issue these multis to really dodge competition. What's in-line with this hypothesis is what we see, the underlyings that are used both for singles and multis are very similar, and they change very slowly over time.

However, as the number of multis that are issued increases, so does the variety of combinations. Essentially, once the market for these multis starts to skyrocket, what you see is what they're actually doing, they're just using different and different combinations of underlyings.

Ben Felix: Why do you think investors are willing to pay for the more complex products, if we know they're getting hosed by a 5%, or whatever margin?

Felix Fattinger: It's a very good question. Again, here, what helps us is the experiment. Because with the experiment, we can observe all the parameters, right? We just let subjects, we elicit their willingness to pay, essentially, for different products of different levels of complexity. What we find quite clearly, the reason why it's possible to extract these higher markups for more complex products is because at least our finance students with whom we run these experiments, they underestimate the degree, how much more risk you're actually taking when you move from a yield enhancement product with one underlying to a yield enhancement product with two or three underlyings.

They are not just stupid. They do understand the direction. They do understand the more underlyings you have, the riskier it gets. They are not fully capable to estimate how much more risky it actually gets. To be fair, this is also really a hard problem, right? The way we can answer this is using numerical option pricing techniques in order to get to the heart of this. To ask the average return investor to make this accurate, this assessment accurately, I think it's a very high ask.

Cameron Passmore: How do the YEPs in your sample generally perform?

Felix Fattinger: Before we get to the actual numbers, I think what's super important for these products is to always keep in mind, more often than not, it actually turns out in the favour of the investor. Meaning, that they actually get back to notional and the coupon. This is just simply by the fact that the underlying has to lose quite a bit before you start participating in the downside. The coupon is guaranteed anyhow.

It's rare, or relatively speaking, in a fewer cases, you actually start participating in the losses. If you do, they're usually substantial. Just to give you an idea, if we look at the year of 2014, which is outside of the global financial crisis, the most extreme in our sample, we find that the average X-plus performance of the single YEPs is minus 7%, and minus 19% for these multi-YEPs. What you can lose is really a lot. This is despite, or including these huge coupons, which can be 10%, 15%, or even 20% for the multi-YEPs.

Ben Felix: You said they have good outcomes on average, but when you lose, you lose a lot, is that – 

Felix Fattinger: Yeah. Well, on average, it's negative. Let me be even more precise. When we look at the X-plus performance over our whole sample period, they're very much aligned. I mean, there should be with our markup estimations, right? Usually, what the issuers make should be more or less what the investors lose, right? That's a zero-sum gain in that sense. This is also what we find. Roughly speaking, because with X-plus, you just get a few number of scenarios that eventually play out. What we find is on average, our investors lose 1% when they invest in single YEPs and they lose 4% when they invest in multi. Here again, it's like, with increasing complexity, the X-plus performance is also lower, which is of course, in-line with higher X ante markups for these more complex YEPs.

To come back to your question. If you just rank all the outcomes and you just count them, more often than not, you actually get your notional back in full, plus the coupon. But if you start participating in the downside, you're usually in a scenario where you lose a lot. These losses are big enough. To make sure that actually on average, overall, you're losing money investing these products and you lose more on average again, when you invest in the multi-yield enhancement products.

Ben Felix: Okay. we've got a negatively skewed distribution, which again, is similar to covered calls.

Felix Fattinger: Yes, which is what you would expect, I guess, to a certain extent when you look at the payoff profile. It's trapped, and the downside eventually can just go to all the way to zero, plus the coupon, which obviously, you will get in any case, as long as the issuer does not be.

Ben Felix: Yeah. Okay. Interesting. When you reflect on this paper and on your research on this topic, what do you think the main lessons for retail investors are?

Felix Fattinger: That's always the interesting question, right? Policy implications, how should we go from here? One thing, which is super interesting, again, in Europe, I think it's also true in the US, but to a lesser extent. This structured product market relative to speaking, just has been smaller in the US than in Europe, particularly in some countries in Europe, such as Switzerland and Germany. In a sense, what has happened, and I think this is a very interesting phenomenon, you have seen these online best execution platforms where brokers can essentially get access to and get a quote for a particular product. You have many of these issuers that are linked to these platforms and they compete directly in terms of the coupon, which they offer.

You have, essentially, perfect competition, perfect price competition. Other research that we're doing indicates that once you go to these platforms, the increase in the coupon, so the improvement in the conditions in the price you get are really substantial. However, we would argue that as long as all retail investors don't have readily access to these platforms, competition won't play out to the degree it should, so that it can actually be to the benefit of investors. What we think, if there is any regulation, it should go into the direction to make sure that this competition can really play out and that you make it harder that by just using strategic authentication, you can dodge, or completely bypass competition if you choose to do so as an issuer.

Another thing, obviously, you can always talk about is investor education, right? As a regulator, you can try to enforce issuers to educate their investor on the risk they're actually taking. I think this has to be done very carefully, because there's many evidence out there that if there is a regulation, which is well intended, just to make sure investors do understand better in what they invest in, well, issuers can work around this, right? You come up with another socially costly obfuscation strategy to get around this.

However, what I think would be helpful, leveraging this standardization, which we've already seen in Europe, which definitely will also be a good thing in the US, I guess, to provide investors with really long-term average performances across all the products within a given time. Now, if you would do this for these YEPs, then investors would really see, okay, in certain years, the average product really has lost a lot. This might help them to really understand the downside risk they're actually taking.

By giving this additional information, it might be true that just using the standardization is enough to get there. Because just with the standardization, but without this long-ranging average perspective, what we've seen, or learned in Europe, the standardization alone doesn't help, right? We still have this difference in markups between less and more complicated structures.

Maybe as a final point, I just think retail investors, when they invest in these products, they need to be aware what they're actually doing, right? If they are investing in something, which the issuer can provide to them, but the conditions to which the issuer can do so are essentially dictated by financial markets as a whole, right? Even if you would assume, so the issuers are completely in favour, or completely supportive of the investors, they don't have any markups, right? They just said, “Okay, we're just going to do this, because you're a valued customer, and we want to provide you with this service.”

In that case, what essentially would happen, you would get something, which is fairly priced in terms of what financial markets and aggregates have come up. Now, in order to really make money with such a product, you would have to be able to find underlying, or in the more complicated case, underlying combinations for which you know, or are relatively sure that financial markets actually overestimate the downside risk for these stocks. Now, if as an investor you feel comfortable to do so, to make the assessment of all these underlyings of correlation, everything, and you're sure that the markets actually overestimate how likely it is that you have a really big downside event, then it's potentially possible to have a positive expected return. If you're not able to do that, then it will be very hard to have a positive expected return across all the scenarios for these particular product types.

Ben Felix: Yeah, interesting. You have to be expressing your view on option pricing, or derivative pricing, or something like that, and then you can earn, if your view is correct, then you earn a positive return.

Felix Fattinger: Right. If you benefit, and okay, I’m sure Microsoft is not going to lose more than 25% over the next year. It happens that you are right, then you make money. Essentially, the premium, or the compensation, the coupon you're getting is by when the issue is actually sell this put to somebody in the market, which likely is not a retail investor. This means, you are right if this counterparty, which most likely can be an institution with more information than you have, actually still, despite that, you are in a better position to make that call. You actually have more information you know, more precisely that, yes, indeed for Microsoft, it's not going to happen. They’re not going to lose. If option markets are more accurate, then it's going to be really hard to beat that pricing in the long term.

Ben Felix: It sounds like, if you believe you can be a successful active manager, maybe this can make sense as a way to express your beliefs. On average, maybe not such a good idea for retail investors.

No. Probably not. There is another, maybe as a final point, another result we have in the paper, which I haven't had the chance to talk about. What you can actually do is you can – when you're just in a simple exercise, you compare the aggregate portfolio that just consists of the simple type with one underlying, and the aggregate portfolio consists of the more complex type with the three underlyings in most cases. Sometimes it's more, but mostly it's three. You can run simulations.

Felix Fattinger: You can go and see, okay, so for all these underlying stocks, what is the expected return, which you would get with a top of the art as the pricing model, right? You can really try the best you can in order to get forward-looking pricing inputs. Then you can just simulate these portfolios. Now, when we do this, what we find is that the portfolio which just consists of the simpler product type, actually first order dominates. The technical term is first order sarcastically dominates the more complicated portfolio.

Now, when you think about this, what this means, this actually means that if as an investor, you have an increasing utility function, just meaning that more money makes you happier, we don't have to make any assumption whether you have to be risk-averse or not. Most retail investors are risk-averse. Even if you're risk-loving, you should never, as an aggregate, invest in this more complicated multi-year enhancement product portfolio. Never. No matter how your utility function looks like.

We think this is a very, very striking result, because we are not comparing the product with its individual components and find this dominance. We're actually comparing the simple portfolio with the complex portfolio and we still get these very strong dominance.

Ben Felix: Yeah, unreal. That's a very interesting finding. Cool. Well, this was great research and we appreciate you coming on to talk about it, in which you did a great job doing.

Felix Fattinger: Thanks for having me. Pleasure was all mine. It's always interesting to talk about this stuff with people who are actually willing to look behind the curtain and try to understand what's really going on.

Cameron Passmore: Awesome. Great to meet you, Felix. Thanks.

Felix Fattinger: Thank you, guys.

Ben Felix: All right. I think that was a great conversation with Felix Fattinger. Cameron, do you agree?

Cameron Passmore: Oh, fantastic. Such great research and such great insights into something that's pretty complicated.

Ben Felix: Yeah, and really well communicated. Some nice takeaways for retail investors, I think. Anyway, so let's go ahead now to our conversation with Petra Vokata.

***

Ben Felix: Petra Vokata, welcome to the Rational Reminder Podcast.

Petra Vokata: Thanks for having me.

Ben Felix: Petra, what motivated you to do this research on structured products?

Petra Vokata: It was to some degree, a coincidence, really. I started to do my PhD back in the day in Finland at Aalto University. A great thing about doing PhD in Nordic on topics related to investor behavior is that you can observe very granular and rich data about all the investors. In Finland, you could see every investor, what stocks they hold, how do they trade. One thing we noticed when we started to look at the data, the more newer addition of the data was that there is a massive increase of the number of investors who buy these severe, exotic security, which we didn't know what they are. We just knew they’re some kind of structured products. This was a large number of investors. We observed hundreds of thousands of investors, which would translate around 10% of households in Finland. That adoption rate we observed over less than a decade, pretty much.

I became interested to understand, okay, what are those securities? How can we get some data on those securities? I started to talk to a company that the business model of the company was to collect data on structured products and then basically, sell the data up to banks. They were so nice to me that they gave me their whole global database, data on structured products. I was like, “Oh, wow. This is really fascinating. There is very little research. We don't really know what these products are. Are they good or bad? There was a lot of controversy. Is it actually benefiting investors?”

Basically, by this coincidence, I started to do research on structured products. Once I got the data, I understood that it doesn't make that much sense to focus just on Finland, because Finland is a small market, 5 million population. But once I had the global data, it became accurate and that it makes sense to focus on other markets, which are easier to study. Most of these days, I focus on the US market.

Cameron Passmore: Incredible. What types of structured products do you look at in your research?

Petra Vokata: Yeah. This is a good question, because structured products is like an umbrella term for very many different types of securities. Overall, you can think of it as a bundle of traditional securities. Most typically, it's going to be a bundle of some derivatives and option and either bank, or equity.

In my research, because it's really important to establish certain characteristics, such as what are the fees of these securities. For me, it's easy to look at the US market, where it's relatively straightforward to calculate what are the embedded fees of the securities, because you have very good data on the said options. Also, it becomes very easier to focus on securities that are listed to equities, that are linked to equities. Because if you look at security banks to commodities, we may run into issues of what are the correct pricing inputs.

Mostly, I focus on products and equities. This is also the largest asset class and the data for more than half of the product are linked to equities anyway. I focus mainly on the US market. In particular, I focus on securities called yield enhancement products in most of my research. The most characteristic feature of the security is that it's going to permit a high coupon, high headline rate, or you can think of it as yield. It's going to be very attractive, take 13% per year. 

Then at the same time, this high coupon rate, it's going to be compensated with the downside risk. It's going to come with an embedded short position and a put option. Basically, the downside is that you may potentially lose all your invested capital.

Ben Felix: You chose these yield enhancement products, or YEPs for what sounds like pretty good reasons. Do you think that the research generalizes to other types of structure products?

Petra Vokata: Yeah. This is something I’m going to be very careful about, because as we are going to continue with this conversation, you will see that some of the results I find are quite extreme and they are not very – they don't paint a very good picture about the benefits of these securities for the investor. I want to be very careful in not generalizing those results to the whole universe of structured products. From a priori theoretical standpoint, you can totally have good structured products that are reasonably priced and they can have good benefits for the investors. I want to be very careful that most of what I’m going to talk about today is going to really apply only to the field enhancement security link to single-name equity issued in the US between 2006 and 2015. I don't want to generalize outside of this market, because I actually honestly believe that many of the securities outside of this market are going to be better priced and more beneficial.

Cameron Passmore: What types of securities tend to underlie the structured products in your sample?

Petra Vokata: In my sample, it's going to be mainly listed stocks. Some of the single name. Some of these securities are going to be linked to investors, but that's a minority. You can think of a typical product, it's going to be linked to the performance of Apple, or Tesla. It's going to be the most typical underlying here.

Ben Felix: How do you go about determining the effective fees charged by these products?

Petra Vokata: Yeah. This is a nice question and I can give you a half an hour lecture about it, but I’m going to try to simplify it, so that you don't lose too many listeners. The first thing is that you need to understand what exactly is the pay off. These securities are very complex and they also are very heterogeneous. They come in in many flavours and many potential pay outs. The first thing you need to do when you analyze data on structured product is to understand what is the payoff formula.

The data I got was semi-structured, semi-preprocessed, so there was a short text to description of what is the payoff of the security, but it was far from perfect. The first step I needed to do is to basically translate this text into a formula, which you can then evaluate what exactly would be the price for this formula. Once you have the formula, what you can do is you bundle the security. Again, if you think about structured product as a bundle of traditional securities, you can go ahead and decompose the payoff.

To give you one example, if you, for example, have very reversed convertible, you can decompose it into a bond component, so a bond linked to the issuer of the security bank A, and then the option component, which is going to be short position and a barrier put option. Once you decompose the security, you can then go ahead and price each of the individual components. The bond is going to be relatively easy. You just need to take into account what is the default risk of bank A.

The option component is going to depend. A very few securities have very simple option components that explain what are options. Most of them are going to have some exotic option, which are going to be a bit more difficult to price. At different ways, how to price those securities, if you want to – you don’t spend too much time, you can make some simplified assumptions. They assume that implied volatility is constant. Go with the good old, factual, constant volatility. Then you may use just close to on format, and it's going to be relatively straightforward. You just need to get data on what are the prices of options for the particular underlying, and you can go ahead and price the security.

If you want to publish in top-time to think journal, most likely the referees are going to push you to do something more sophisticated. I ended up doing local volatility diffusion, very basically calibrate the local volatility diffusion, but the prices of options be observed in the market. Then once you have used local volatility diffusions, you can, for example, use Monte Carlo simulations, or finite difference methods to price the exotic buy-ups.

Once you do the sophisticated option pricing technique to price the two components, you can sum up the price of all the components, the one component, the option component, and compare the price of the components with the price the investors pay. Say, you find out that some of the components, it's $950, and the bank is charging the investor $1,000, then you have embedded markup of $50. You can calculate what this mean in annual terms, what would be the annual fee of the security.

Ben Felix: When you do that in the paper, what level of fees do you find that investors are paying?

Petra Vokata: Yeah. This is one of the more stunning results of the paper. Again, it's just the other hand, when product is only 2006 to 2015, only in the US. That being said, I have more than 28,000 securities in the sample. This is a very large sample study. I find that on average, the margins, so that the difference between the price the investor pays and the price of the component is 3.6%. If you annualize that, because the expected, the maturity of the securities is shorter than one year, if you annualize it, you will have annual fee of 7%. It gets a little bit better if you weight it by the size of the insurance, if you have a volume of weight that you see, then it's going to be 6%. Still a number that is significantly higher than what investors typically pay for, as with index fund. A very expensive product.

Ben Felix: When I asked earlier about whether the results generalize, you mentioned that you think that these YEPs might be worse than other products out there. Why? Why do you think that is?

Petra Vokata: Yeah. I think that's because YEPs tend to have shorter maturity. Particularly, the ones in my sample. I also find that the big determinant of the cost is the maturity of the security. The basic with the embedded fee has a very large component, and it varies a bit with maturity, but not a whole lot. If you charge a 4% margin for a 3-month product, you are effectively charging 10% annual fee. If you charge 4% margin for a 4-year product, you are going to charge 1% annual fee. That's going to have a big impact on how expensive are the securities.

I know that, for example, in Finland, the typical maturity of the securities back in the days in my sample that I studied was around 5 years, and so you would expect that the security would be significantly cheaper than the security firm that I focus on in this paper.

Ben Felix: Okay, got it. Longer maturity is probably better, but still that the fees aren't like index fund level fees.

Petra Vokata: No. From the existing papers we have, there is a one recent paper using Swedish data there, the annual fee was above 1%. Still very far from index fund. I think that's typically the case, also in some research in Switzerland, I would say.

Cameron Passmore: How have the YEP fees evolved over time?

Petra Vokata: Yeah, so that's a good news for investors. For investors, the good news is that the general pattern of the compression that you see in other markets, you can also see this in YEPs in the US. In the year when I observed the high fees that was around 2010, and I [inaudible 0:50:40] of 9%, by 2015, those fees declined to 5%. Okay, that's where my sample ends. Hopefully, by 2023, that some YEP maybe even lower. From the perspective of investors, this would be a good news that you see a decline in fees in the market.

Ben Felix: How do you estimate the expected returns of these products?

Petra Vokata: Yeah, so this is a great question. I think, once you start to think about what do these fees mean for expected returns, I think that's the most important step to play, to understand whether you should be buying those securities or not. Again, calculating expected returns can be very sophisticated, and eventually what I do in the paper is more complex method, but let me try to simplify the logic, so that the listeners understand how should you think about it.

Say you are buying a mutual fund, and say that you assume that the expected equity premium is 5% to 6%, that's typically what academics agree. Now if you would be paying 6% fee for that mutual fund, then in that you wouldn't expect any positive return, right, because the fees are going to buy out all the equity premium. Now something similar basically applies to structured retail products. The difference here is that the beta may not be one. If you are buying index funds into S&P 500 beta is one real straight forward. If you are buying structured product, beta may not be one for two reasons.

One, the underlying may not be index. In my sample, the average beta is higher than one of the underlying, so an average may be one and a half. At the same time, the delta of the security is not equal to one. It may be, in my data, it's less than half, but let's assume that it's half. That's because the upside is kept, so you receive some attractive coupon, but that coupon is kept. At some point, you are not going to participate further in the upside, so as a result, your delta cannot be as high as the delta of investing in the market.

Let's say, that the delta is half, let's say that the beta of the underlying is one and half, that implies that the beta of the product at issuance would be equal to the product of one and half times half. You just multiply the beta of the underlying times delta. So, you wouldn't be having beta of the product 0.75. Now, you multiply that with the expected equity premium, say 6%, your expected gross return on the product is 4%. It's a very simplified calculation, but this is basically how it works.

If you have expected gross return of 4%, and you pay 7% fee, it's really easy to see that you wouldn't expect to get much from the product, right? Now that's exactly what happened. In the paper I use more sophisticated methods, because you can claim that in delta I gave you, it's just the delta that applied at issuance and it's going to change over the horizon of the security, so you can do more sophisticated methods. You can basically, again, take this local up to the diffusion, and that there is some expectation about the expected return on the underlying, and then you can do, again, don't talk about Monte Carlo's simulation, basically project. What would be the payoffs of the security? At the end, take some leverage.

That would be more sophisticated way how to calculate the expected returns, but I don't think investors need to do this. They can just look at the fee, and they see the fee. They can try to do some back of the envelope, very simple calculation, whether you would expect there to be something left after you paid.

Cameron Passmore: How do the expected returns compare to the realized returns?

Petra Vokata: I didn't yet tell you what exactly the expected returns are. Let me give you these few numbers, so that we can then compare it to the realized numbers. If I do the sophisticated calculation, which can be simplified with the simple calculation I gave you, you will get expected return of negative 18 basis points. If you calculate it as a total return of the security, if you annualize it, so in annual terms, you will have minus 1%. This is going to be a little bit depending on the assumption, but it's going to be somewhere there in the ballpark.

If I calculate the actual realized returns over my sample period, I observe average total return minus 3.8%. If I annualize it, then I observe minus 2.6% negative annual return. A very, very natural follow-up question would be, well, you are looking at 2006 to 2015, perhaps all of this is driven by 2007 and 8, we have financial crisis in the data, and so, should be really focused that much on these returns.

One interesting statistic, if you look at one-third of my securities that have the shorted maturity, and therefore, the high fees, I said, maturity translates into high fees, I observed negative average returns in 8 out of the 10 years in my sample. This is not driven by the crisis, this is driven by the high fees security.

Ben Felix: That's crazy. Crazy stuff. We've got some negative returns. Maybe negative expected returns, net of fees, and negative realized returns. How do we know that there isn't some hedging property that some investors are just willing to pay these high fees, or accept these low expected returns in exchange for?

Petra Vokata: It's a good question. It's a typical question from a textbook finance, right, because by textbook finance models, whenever investors pay, are willing to buy something with negative expected returns, oh, it must be that there is some huge hedging benefit. I’m still waiting to meet an investor who would tell me that his, or her investment rational was hedging. I met investors who got very good reasons to buy some of the securities. It could be, for example, for experts, the securities were linked to some underlying that they could and otherwise get access to, or they have some speculative motive. They believed that outcomes are more likely.

I definitely met sophisticated investors who have reasonable investment rationales. These were not related to hedging. But to give you more academic answer, why I believe that hedging really doesn't apply to the US market. One good reason of focusing on the US market is that in the US, investors have a really, really good access to listed options, pay better than in some European market. You can basically compare what would be the additional hedging benefits from yield enhancement products, compared to buying some alternative from constructed from listed options.

One exercise I do in the paper is that I contract the payoff of yield enhancement products to the closest payoffs you can get from a combination of two options. You are buying either one or two options, which you can very easily buy online, and I’m constraining it only to positions for which you don't even need the margin to come. Something really easily accessible to investors, and I find that almost in half of the cases, so 45% of the product, you would get a payoff from listed options that is paid by, say, dominating the payoff of the debts.

Okay, so in any state of the world, independent of the performance of the underlying, say, the stock of Apple, you would always get high return from just selling put option easily to your online broker than from buying yield enhancement products. To rationalize any hedging benefits, you would need to have an investor who is not sophisticated enough to know how to sell a put option, yet sophisticated enough to understand that he, or she should be buying yield enhancement product for some exotic hedging need. This seems really like a stretch. Then on top of that, these securities are positively correlated with the stock market. They are positively correlated with consumption and also, with labour income, so they also do not naturally serve as a hedging instrument rider.

Ben Felix: That's a pretty good argument. How do the auto call features that a lot of these products have, how can they be used to manipulate the attractive annualized returns that often get promoted to investors? This is something, I mean, I’ve seen this in product literature, where you see the – you see these huge annualized return numbers that they're suggesting you can get.

Petra Vokata: Yeah. No, I’m so glad you're asking this question, because it's also a regulatory challenge of this auto call. I see all sorts of regulators across the globe coming up with new disclosure for auto calls, which is using the same manipulated as a return that I describe in my research. This is clearly a very pervasive buy up in displaying returns and fees of auto callable security.

Let me first explain what auto calls are, because not everyone knows what is auto-callables. This is going to be a security, which is going to have an automatic call feature embedded in the payoff. Most typically, it would say, if the price of the underlying stock is above the price at issuance at certain a certain date, then the security is going to be automatically called back and the investor is going to receive some coupon. Oftentimes, this call features they apply as early as three months after issuance. You buy a security and in three months, it can be called back.

Now why does this matter? It matters, because the positive, or negative performance of the securities is going to strongly correlate with the term of the security. Whenever the security is called early, it's usually going to be the positive return, which is going to apply to very, very short horizon. Then when the security is not called and you hold it until maturity, that's exactly this is not going to be the situation when the return may be significantly lower. I think if you just like one example, which may make it easier to understand how exactly is this buyer thing the return. Suppose that you have auto call, which from us is 20% coupon. A nice attractive coupon rate. You buy first, it's going to be called after three months, you are going to receive 5% coupon.

You buy the second time, it's going to be called again after three months, you will receive another 5% coupon. Then you buy a third time and this time it's not going to be called, you are going to hold it until maturity, which is going to be one year. At maturity, you are going to lose 20%. Okay, so if you would want to calculate the total return from this investment strategy, you got 5%, 5%, minus 20%. In total, you lost more than 10% from rolling over this investment. If you calculate the average annualized return, it's going to be 20% for the first investment, 20% for the second one, because then the annualized return, right, the annualized overall year and then minus 20% for the third one. If you calculate average annualized return, you will see a return of more than, it's going to be around 7%, right?

You can see that the actual total return versus the average of annualized returns can be pretty far from each other and this is a mechanical bias. You are going to always see whenever you have a good path dependent maturity and path dependent performance.

Cameron Passmore: How meaningful is that bias in annualized returns?

Petra Vokata: Yeah, so it can be quite dramatic. In my data that I analyzed over 7,500 auto-calls, I see that the average annualized return at 6%, so that looks good, right? That's the nice return potentially, that's using the bias measure, so averages of annualized return. If I look at average total return, it's negative 1%. If I look at term weighted annualized return, I’m seeing negative 2%. These two simple comparisons would give you that the bias is around 8% and it reverts the time, right? Something that looks like positive performance may actually have a negative return. Yeah.

Ben Felix: Those are big numbers.

Petra Vokata: The reason this matters is that usually, this is the most frequently displayed metric for auto-calls. It's usually displayed by market participants who may be conflicted. Okay, so either you know someone who is structuring this security, following this security, or someone who is somehow connected to the market, that's why it matters. But you sometimes keep even in academic papers, so that's not necessarily because of conflict, but really because it's a very natural way how to calculate performance. I have also seen situations where regulators need bias metrics and they are somewhat aware that this is not ideal. But when they hear from you, what is the optimal way, how to calculate the correct measure, which is using some expected term of the security, etc., it gets so complicated that basically, it's just way easier to just take the average.

Ben Felix: When you created the – which was what I was going to ask about next, the indexes of YEPs, is that one of the ways to deal with the issue that we just talked about?

Petra Vokata: Precisely. It's not an easy metric to calculate, because you need to be able to create an index. But I think it's the optimal way, because for investors to understand what index mean, right? Like the time series top performance, it's really easy for them to interpret if it's calculated correctly. If you do that, you will see that auto-calls are not outperforming other YEPs in my data. You will see that in many periods, they do have negative, or around zero returns and it would be exactly the way how to correctly measure the performance. You create an index where you basically roll over the investment on every day when you auto-calls, so that you bait the term of the product correctly and you do not over-bait the securities, which were called only after three months.

Ben Felix: Right. Okay. When you do that, you created that index and then you compared it to a risk appropriate benchmark. Can you talk about what that looked like?

Petra Vokata: Yeah. We will not be surprised that it doesn't look great for the products, right? Given the feedback chart. I chose as a benchmark with evo S&P 500 with the right index, because this is basically index from a hypothetical strategy that sells put options into S&P 500, and so that would be similar to the short position and put option that YEPs in my data are bad. If you compare it to evo put index, you will see an annualized alpha of 8%. Okay, so that would be actually even worse than the average fee to charge.

Cameron Passmore: It's the fees that explain the under-performance?

Petra Vokata: Yeah, so partially. This negative 8%, around 5% of that is explained by fees. There is an additional negative 3% return to underperformance, which is explained by the choice of the underlying. Remember, my products are mainly linked to common stocks, whereas here the benchmark is evo S&P 500 put index. It turns out that it's not just the fees, but also the choice of the underlying that doesn't serve investors that well. This is going to be also something you're not going to be surprised. You're like, what cost, for example, on thematic ETF, right? This pattern that the choice of the underlying may not always work for the investor. This is not unique to structured product.

There is a very nice paper by Neil Pearson, who is a professor at the University of Illinois at Urbana-Champaign. He basically shows that the choice of the underlying in this market is very consistent with catering to investors than demand. We are basically choosing Tesla at a time when investors will value Tesla. As a result, after issuance, you are going to get also negative returns from the performance of the underlying.

Ben Felix: That's unreal. They're paying high fees and they're getting attention-grabbing securities underlying the product. How important are, and maybe you can also explain what headline rates of return are, but how important are headline rates of return to investor demand for these products?

Petra Vokata: Yes. I believe this is one way how to rationalize why we see these securities. By headline rate, in the context of field enhancement product, the coupon would be one headline rate. The rate of the promo coupon that you see very prominently advertised, sometimes even in the name of the security. But if not in the name, you're going to be very [inaudible 1:05:56] and the prospectus, you will see what is the annualized coupon that the security offers. It's not the only very salient rate. Also, the downside is protection, so basically, the threshold until which you are protected from the downside price movement of the underlying. It's also going to be very salient. They're very prominently displayed in the prospective.

If you try to understand what explains the demand for the security, so why some securities attract higher demand and other securities attract lower demand, it seems to be that these rates of these headline rates, so the coupons and the downside barriers, explain actually a lot in the sales volume.

I believe, this is what makes the product look attractive, because on the salient attributes, the salient headline rate, the security do look attractive. Often, 10%, 20% annual coupon, protection up to 30% downside price movement. On its own, if you do not look at all the additional features of the security, that may look very attractive. That may explain why investors find the security attractive.

Cameron Passmore: What do banks do to increase headline rates of return?

Petra Vokata: Yeah. That's an additional piece of evidence that suggests that this may be very important. If you studied the choice of the payoff structure, so you can think of it as a choice of payoff. You can think of it as a choice of complexity. You can think of it as a choice of the embedded exotic features of the security, these are all basically different names for the same phenomena. I find in my data a very robust pattern that the choice of exotic leads to more attractive headline rate. You could structure yield and headline product with a plain vanilla option, but it would not offer, for example, 20% annual coupon, because you couldn't structure it so attractively.

Instead of choosing plain vanilla put option, you may choose a barrier put option, which is going to be way cheaper structure, and it's going to allow you to instead of offering 5% coupon to offer 20% coupon. This is something that I would be more confident saying that this generalizes to other market, because I have seen the same pattern also in outside of US. Also in Europe, I have seen it in Asia, I have also seen it in classes of products called capital-protected securities, which are very different from the enhancement product. I think the choice of exotic features is modulations of the payoff. To make the headline rates look more attractive, I think that's a very, very robust, stylized pattern that applies to structured product.

Ben Felix: Okay. Headline rates return, this is the best-case scenario return kind of thing, and that's what gets marketed. How does the headline rate of return relate to expected returns on the product?

Petra Vokata: Yeah. In theory, it depends. In theory, if you have two exactly identical products, they have the same exotic, higher headline return basically means that the security is better. There is a good reason why investors should be paying attention to these headline returns, because in theory, if everything else is equal, this basically is reasonable type of thing to look at. In practice, because banks are using these exotic features, additional embedded exotic options, that's not always the case, right? Because you can increase the headline return just by manipulating the payoff.

In my research, I show that basically, because headline returns are more related to the exotics than they are related to quality of the security, they do not directly translate to higher expected returns. In fact, a large fraction of them does not translate to higher returns. They translate to lower returns, because the higher is the headline rate, the higher is the yield security. It basically reverts the inflation that I tried to explain at the beginning, that all are equal, this is something you should look at, that applies only if you do not manipulate the exotics. Because there is a lot of this additional exotics in the payoff, it reverts the relationship, the positive relationship, than it is for the negative relationship.

Ben Felix: Yeah, it's super interesting. That's like, if two issuers had the exact same underlying, but one of them got better pricing on the option, I guess, then they would be able to give you a higher coupon, and it would be the same payoff. But in reality, they're doing a bunch of engineering to make the headline rate higher, but they're actually lowering the expected return by doing that.

Petra Vokata: I think you said it way better than I did. Yes, but that's exactly what I was explaining. Yeah.

Cameron Passmore: What do your research findings suggest about who benefits from this financial product innovation?

Petra Vokata: Yeah. In questions like this, I again, want to be very careful not to overly generalize to all structured products, or all financial innovation. I can tell you that in my data, if you consider a natural benchmark for the investors buying options, buying cheap asset funds, or just keeping their money in matrices, hen you can make the claim that investors on average do not benefit from this innovation. You can quantify how much money from the fees goes to the broker, so the advisors' brokers who are recommending the security, they're going to be about half of the fees, so 3.5% goes to the brokers. Clearly, that's a high commission than you would pay for just trading option.

The second part goes to the bank. That's the genesis of the brokers and the bank's benefiting. Obviously, the banks may have additional costs, which I do not observe. They need to set up a structuring debt. They can be all sorts of legal costs, so I cannot make very strong claims about whether the banks benefit. They were also some interesting cases, where banks went way ahead of the product. It's not obvious that it's a hugely beneficial product for the bank. I think my line of work establishes that, especially in some contexts and in some pockets of the market, it's really hard to see that these products will benefit the investors. That doesn't mean that structured products in general cannot benefit investors. That would totally be out of market where the products are cheaper and they work for investors.

Ben Felix: Yeah. You mentioned the embedded commission for advisors. That's one of the counter arguments that I’ve heard when I talk about structured products, is that advisors can access them without embedded commission. In that case, it's going to be that much better for the end investor.

Petra Vokata: Yeah, it's going to make a big difference. Yeah.

Ben Felix: Given all the stuff that we talked about, why do you think retail investors are still buying these products?

Petra Vokata: It's a big question, right? I don't think there's one single explanation. I just also do research on Ponzi schemes, right? That's so you can ask questions, why do investors invest in Ponzi schemes, right? There are probably some reasons they find them attractive. My evidence shows that one reason for – there seems to be an evidence is that they overweight these attractive headline rates, the best case scenarios, and they may not fully understand the cost of the securities. I think that can be one explanation.

Whenever I present this in some academic seminars, there would typically be some professors who says, “Oh, I bought these securities and I’m sure I understood the embedded cost.” I don't want to say that everyone is buying it, because everyone doesn't understand. Really, there are some other reasons. It could be speculative reasons. It could be accessed in some European markets. It could be other reasons. I think there is a good amount of evidence now that one of the reasons is that investors may be overweighting these salient headline rates and underweighting the actual cost of the securities.

Ben Felix: What do you think of the main lessons in your research for retail investors?

Petra Vokata: That's going to be very boring answer, almost like a regulatory answer. Do not buy something you do not understand, right? These are very complex securities. If you are not confident that you fully understand the payoff and what is the fee, you shouldn't be buying those securities. You should make sure that you understand them. I think the same applies to advisors. Every now and then I receive an email from some financial advisor who is recommending it for her clients to buy those securities. They may even very honestly disclose that they have no idea what the fee is. But the security offers 20% coupon and it has 20% protection on the downside, so it does look attractive to them.

That would be my advice even to advisors. If you cannot quantify is what is the fee, if you are not confident what is the cost, which directly translates into the aspect of return, do not recommend this to your investors either.

Ben Felix: If you can't do the – I don't remember the word, the volatility, diffusion, valuation.

Petra Vokata: Volatility. Diffusion. There are simple ways to get them in the back in the back of the envelope. Ballpark.

Ben Felix: Yeah, okay. That's a good answer. Well, Petra, this has been great. Your research on this is fantastic. I think you did a great job describing it to us.

Petra Vokata: Thanks so much for having me. I hope it's going to help to shed light to investors on what this market is about, and what to pay attention to.

Cameron Passmore: Without a doubt. That was great. Thanks, Petra.

Petra Vokata: Thank you.

***

Ben Felix: All right. That's the end of our conversation with Petra Vokata, and that's the end of that segment. I think, I mean, two really, really good conversations. A ton of good insights. Some really great research and lots of interesting tidbits of information and takeaways.

Cameron Passmore: Pretty cool, the data set that she had access to to kick off, in the Finland data set, that she could dig into and then to broaden that to the United States. I think that you spent a career studying this stuff and that that access to information and insights coming out of it is just sensational.

Ben Felix: Yeah. Yeah. Really cool stuff.

Cameron Passmore: Okay, so we're good to move on, Ben?

Ben Felix: Yup.

Cameron Passmore: We're going to do a one episode of 60 seconds, for the time that Jill Schlesinger joined us in episode 67. Then we're going to jump into a conversation I had with her about her book. I think you're away that day, Ben, so I took that one. We first met Jill back in 2019 as she is a very good friend of a friend of ours, Michael in New York City. I met her in New York City when I happened to be there. Went for lunch and this is one wildly engaging powerhouse woman. She's incredible. Conversation at lunch was great. She said, “Sure, I’d love to come on your podcast.” Here's my summary of that conversation. Then I’ll talk about her book after that.

Jill Schlesinger was our special guest on episode 67. That episode was called the pursuit of finances and fun. Jill has a background as a trader on Wall Street and a financial advisor and is now a personal finance personality on CBS News and also has her own podcast, Jill on Money. She also wrote the book, The Dumb Things Smart People Do with Their Money, which of course is what we talked about. Her background, combined with her current career in the media has given her an unbelievable front row seat to so many dumb things, which is exactly what she wrote about. Even with access to so much rational information, we are human, she says, and we make choices that can cause financial damage, caused by things like blind spots and overconfidence.

She also explained the value that she gets from her financial advisor, even though much of the work she could do herself. This then led to a conversation of the kinds of questions you should ask a potential financial advisor and how there's so much more to managing in that job than managing the funds. Now we also talked about the FIRE movement. Anyways, incredible conversation, incredible interview. That was Jill Schlesinger, episode 67.

Jill then released a second book earlier this year called The Great Money Reset: Change Your Work, Change Your Wealth, Change Your Life. It was a really interesting book, very pragmatic book for people who are considering a pretty big shift in the life is exactly what the title suggests. We reached out to Jill and here's our conversation with Jill Schlesinger.

***

Cameron Passmore: Jill, it’s great day to get back on the Rational Reminder Podcast.

Jill Schlesinger: I am delighted to be with you. Thanks for having me.

Cameron Passmore: I’m so happy to have you. I loved your book, The Great Money Reset. Congratulations on your most recent book.

Jill Schlesinger: Thank you. It was a fun book to write, actually. The first one was agony. This one was really great.

Cameron Passmore: Oh, isn't that interesting? Why? Why?

Jill Schlesinger: I had to write that first book. It's like, my take on financial planning 101. As you know, there are about a thousand, million, trillion books written about finance, personal finance 101. I was trying to do it with a little bit of my own imprint on the topic. It's well covered and I felt like it was a real like, eat your vegetables kind of book, which I think is important. This book was born of my decades in the business of financial services. Really, I think, tracks really well with my own progress in terms of being more expansive and thinking about what people really want to hear when they're asking about financial matters. Also, incorporating this crazy, daunting, frightening, and liberating experience called the pandemic.

Cameron Passmore: Wow, what a great setup. What is the great money reset?

Jill Schlesinger: Well, this is a concept that I think many people would be familiar with that at inflection points in your life. It could be a birth, could be a death, it could be an illness, it could be a divorce, that something very dramatic will make you consider, is this really the life I want to live? I think that the pandemic forced us, or many of us collectively to ponder that question. This book is a response to all of the thousands of emails that I was receiving both before, but mostly during the pandemic after those first few months went by, from people who really wanted to consider alternate routes than the routes they were pursuing.

I realized that what I was doing over and over with many of these people was taking them through some guidelines. I thought, the book was an homage to all of those people who asked for help, told their stories and shared them with me and with the Jill on Money audience, and allowed me to articulate and detail the steps you should be considering and the things you should be asking yourself when you are contemplating a reset of your life. It doesn't have to be blowing up your life. It could be a new career, it could be changing a locale, it could be, should I go back to school? 

All these questions are questions to ask and I just think what, again, that experience of living the pandemic and really forced to being with inside yourself watching hundreds of thousands, more than a million Americans die, and people who knew people and were scared, and I think that it was a wake-up call to many of us. This book is hopefully, a way to help you contemplate making changes in your life without a once-in-a-century pandemic forcing you to do so.

Cameron Passmore: That's something you talked about in the book is that many people feel like they lack permission to consider a reset. Was one of your goals to set up a framework to enable permission, or is it more than that?

Jill Schlesinger: Yeah. I think that we're tough on ourselves. I mean, at least the people that I encounter and they'll say things, “Well, I couldn't do that.” Well, why can't you? I think that as somebody who has reset a couple of times in my own life that sometimes there seems to be an obstacle that's in the way. Usually, when I’ve walked through the different scenarios, the obstacle is really you, that you're fearful, I get it. That you are anxious that you don't want to blow up your entire life, that you want to limit downside risk. All those things are really good. That's what makes you a human being is that you can contemplate those things.

I just think that for so many people, the permission structure is let me walk you through the numbers aspect of this. Let me give you some questions. Let me tell you some stories about how people were really imaginative about what their next steps could be and let's see if that helps as many people as possible.

Cameron Passmore: You're a finance person. You're talking about in the book how you must have your financial house in order. Can you talk about the five steps you highlighted that someone must go through before any reset?

Jill Schlesinger: I think that what's important is that although I talk a lot about psychology and emotional issues, I do boil it back down to the numbers. I think that when you are considering a reset, a good place to start is what a financial planner would do, which is what I know you guys do, which is hey, let's talk about what are your resources. If you say, okay, my resources, my assets. Yes, you list all the stuff that you own. But the other part of your resources is what is my job providing me? What is my income? What are the benefits that I receive? What are the things that I get through my workplace that would be expensive, or hard, or if not impossible to replicate outside of my employment?

That's a really interesting exercise, because often, people will go through it and say, “Oh, yeah, yeah. I forgot I had disability insurance. That is expensive.” Or, “Gosh, I’m part of this long-term care group policy. I couldn't get that on my own.” There are things that are available to you. If we're going to talk about your assets, then you're going to force me, because that's the way my mind thinks to talk about your liabilities, and to consider your obligations, your debts. This is important not because you're supposed to have zero debt, because I am not a believer in that. It's just that we need to understand what's out there for you.

A mortgage can be out there, a student loan can be out there, a auto loan can be out there, that's okay. That's fine. We just really want you to look at that. I think considering your housing situation is really important, because when you look at your house, it is often a massive asset for many of us, especially, I mean, even housing prices might have gone down a little bit month over month, but if you look over the last few decades, people have really made quite a bit of money on their homes. Yet, for some reason, we just, I don't know, feel like that’s sacrosanct? Why can't I look at my house? Why can't that be something that is part of my overall game plan? That should be something that I would think about. Also, what about my housing situation has changed perhaps?

I think that during the pandemic, a lot of people said, “Well, I’m really far from my aging parents.” That was scary and that was a big moment where people said, “I don't want to be so far away anymore,” so I think that's important. I think that talking to your partner and really understanding, “Have I made some promise to you? Is there an obligation that I have to fulfill that's not just a financial one?” If Cameron and I, we’re married and we've lived a life a certain way, I’m not just going to blow up my life and make big choices that are to impact a partner, without talking to my partner. These are just some of the things that we start the process with and of course, though everyone's favourite, which is, how much money you're spending? I’m sorry, it sucks. But it really does matter and it does impact many of the choices that you will make down the road.

Cameron Passmore: I’m so glad you mentioned spending, because I think a lot of people question their spending coming out of the pandemic. Is this one of the silver linings of the pandemic and I’d like you to link that to anything you know about the psychology of resetting people spending habits?

Jill Schlesinger: It's so interesting to me, because it's like this wild lesson in how the thing that you have just gone through really does inform you. When you think about this, when you are calculating what you own and what you owe and your income, spending doesn't seem to get a high enough priority to me. Yet, during the pandemic, what did I hear from people? Saving so much money. I mean, the government estimates, the federal reserve estimates that there was 2.7 trillion dollars of excess savings. People are sitting at home. You can't buy that much bounty. You save money.

People would say to me like, “Gosh, I really have prioritized what's important. I get it now.” All those things that I said, I’m living paycheck to paycheck, making you half a million dollars a year. A lot of that paycheck to paycheck was choices you made about your spending patterns. Then we come out of the pandemic. I don't know about you, but I know a lot of people who are spending quite a bit of money, and I understand that. You are entitled in some sense to have a little splurge. But as I speak to you now more than three years from the beginning of that pandemic, where people had to batten down the hatches, where they really understood what their spending habits could be, and now they maybe went a little bit nuts, what I’d love for people to consider is to say, “How might I go back towards my pandemic spending patterns that are more sustainable in the future?” You're not going to not spend money forever. That's just not going to happen.

But are there certain things that you really didn't miss all that much that you can now say, “All right. Yes, I went on an expensive trip. But, am I going to do that every single year? Yes, I wanted my kids to have some “experience.” I don't know if it's a batting coach, if your kid, your daughter's a soccer goalie and you wanted to get her a private coach to get.” Okay, that's past now. Can we recalibrate that and see if you can come to a different place with your spending, where you are more consistent, where you're not – it's almost like, you don't want – you know how everyone hates volatile markets. I feel like the last three years has been such a crazy volatile period for spending, and I’d love to regress to the mean in some respects, to try to say, okay, I’d like to take some of those habits.

For me personally, I just don't spend as much money on clothes anymore. I really don't. I know I have to do it for work. But the funniest story is that, I think it was in 2020. In the beginning of 21, I’m sending all my stuff to my CPA, and he's like, “Ah, did you leave a zero off in your clothing budget?” Because I can deduct my clothes, because it's a work thing, right? I’m like, “Nope.” He's like, “Wait. What?” I said, “Nope.” Yeah, and it was significant.

As much as I was like, people in this business, they're like, “Oh, you can't wear that.” I’m not on the air every day. If I wear the same thing that I wore seven weeks ago, big deal. Honestly, I don't care anymore. Are people paying attention to my content? I think so. Yeah, there's going to be some people who'll be like, “Your hair needs colouring and you wore those shoes three days ago.” Okay, I don't even have to answer that. That's for me the two areas that I felt in our family that we really did shift is we cook way more at home now, and I do not spend as nearly as much as I did on clothes.

Cameron Passmore: Yeah, we're the same. Once someone has dug into the financial situation, understands their adequate spending level, what other general financial advice would you have for someone who decides they want to do a reset?

Jill Schlesinger: Well, I think that when you're considering a reset, I think that you really have to start articulating different pathways forward. I’ll just use my own reset as an example of that. I was in financial services for most of my career. I owned a business for 14 years, a financial planning and investment management firm. I had sold the business. I was finishing a contract, just like a workout to transition to the new ownership. As I came to the end of that, I really thought to myself, “You know what? I’ve been on the radio, I’ve been on TV, I’ve been doing some writing, I wonder if I could do that for real?” For real meant to me like, can I make a living doing that?

I mapped out. I, of course, went through those areas where I could tackle the numbers. To me, that was the easy thing, calculating what I own and what I owe, and the income and how much I was spending and really thinking about all those aspects. But then I went into like, well what are the jobs that are out there, or what could the next reset look like? I looked at it in three scenarios. Plan A, B and C. I always feel like A and C take care of themselves. I’m a little bit of a nervous Nellie, so I always do the downside first. I said, okay. Let's say, I’ve sold my company and I’d have a bunch of money saved and I’m going to give myself a year to figure out where I land next. The worst-case scenario is that if in a year, because it was coming out of the financial crisis. Wasn't sure about the economy, what could I do? I know how to sell. I’ll be able to sell. No matter what, worst-case scenario, people need sales people. I know how to sell. I’ll make a living. Worst-case scenario.

Best-case scenario, I don't know. One of these networks that I’ve been on hires me to do something, or gives me enough money so that I figure out whether or not I like this business called media. The middle case, which is probably the most likely scenario was I’d work in some financial services organization doing some stuff for them, maybe incorporating some writing on the side, maybe doing a little TV on the side, but that I knew that I had value in in what I brought to the table in that world. The most likely scenario, and I spoke to a ton of people in the financial planning world who were like, “You have a place here if you need it.”

In the old world of my old, old world, trading, which was I was stopped out. I had a game plan. I knew that I could pursue one of those three routes and I’d be okay. I didn't know which one was going to be the one that landed in my lap. It just so happens that because of the financial crisis, because we were driving into a recession, I was on television quite a bit as a guest. Someone from CBS News called me and said, “Can we talk to you? We think we have something that you might be interested in.”

It was the beginning of 2009 and I went in and said, “I’m exhausted. I’ve owned my own company. I’ve been working seven days a week for 14 years. I just need a break I’m happy to talk to you, but I’m not ready to do anything till after the summer.” Three weeks later, in the beginning of April of 2009, I signed a contract and I’ve been with CBS News since.

Cameron Passmore: Just makes you the perfect person to write this book. It's a great story. It's inspiration in there, too.

Jill Schlesinger: Yeah. It was pretty cool.

Cameron Passmore: Really practical. Really practical part of your book, you talked about negotiating your compensation. I think you call that – you framed it as bully your boss. You got to talk about that.

Jill Schlesinger: Well, I got to tell you something that when I wrote this book, it was a different time in terms of the labour market. People were like – they're like, “Oh, my God. I am going to kill my boss. I’m going into a negotiation. I know exactly what I have to do, and I’m going to extract my pound of flesh.” Okay, well times change and the labour market is different. But in general, I do believe that we need some better tools to walk into a conversation with our bosses. When I say, button up your ass to be. Okay, so that bully is silly. Let me talk in real terms.

It means that you need to prepare for what you are asking your boss to do. The preparation means that you need to be clear about your worth. It means doing some research. It's understanding, that's the you, the landscape of really what is going on in your company, in your sector, in the economy in general. What is your value? What are you bringing to the table and how do you articulate that?

I also think that people sometimes go into these conversations and it's just money. They cannot be that the only thing you're asking for is money. There may be other areas for so many that I know now, they said, “You know what? I don't want to work five days a week. I’m going to go find a place. I will make less money every year if I don't have to commute for five full days a week.” I want people to be really introspective about finding out what they want, understanding that, understanding what the boss's position is, understanding that the boss has a boss also, or is maybe the owner and has different competing forces, and to practice the ask with somebody who is really going to help you focus your conversation.

For some, like for my nieces and nephews, many times, I will play the boss, the curmudgeonly boss. I always joke that I had an interview once with somebody, and then I was talking afterwards and I said – the person becomes my boss and I said, “You know, this is what you did during the interview.” Did not look at me, did not pay attention, did not do anything. He's like, “I did?” He's like, “I can't believe I did that.” I’m like, “Yeah, you were kind of an asshole. That's really what happened.” I think that it was funny to me that he's like, “I don't remember that at all.” He goes, “I just remember when we were hiring, there was so much going on, and maybe I was distracted.”

Maybe like, yeah. You know what? Your boss is a human being also. If you don't get exactly what you want, or your boss isn't really receptive in that moment, sometimes you don't know what's going on. Sometimes you do. The why is don't yuck it up, which is don't pound the table. Walk away. Hold your head up high. If you really do think this is not the right place for me and you don't like the reaction you got, do not quit on the spot. That is not what you do. Even if you had another offer in hand. I really don't think that's in your best interest. I think it's very much in your best interest to talk to your boss, keep a conversation going and just remember, you have a very major league opportunity to keep that door open, as long as you act with grace and dignity in that moment.

If you act like a petulant child, your boss may be thinking like, “Oh, I just really got pushed into a corner. I gave Jill what she wanted. But then the next time the economy rolls over, maybe it's that Jill who will go out first. Just be careful when you're doing your conversations about negotiating salary and benefits and time off. All those things are really important.

Cameron Passmore: Very pragmatic and solid advice. Someone's thinking about a reset, how far ahead should they be thinking about that?

Jill Schlesinger: Well, oftentimes, what I’m hearing from people, when I’m hearing from people and it's like, “I need to make a decision tomorrow.” I don't think we make the greatest decisions. What I’d like maybe the average worker, mid-cycle worker, right? If you're in your 30s, in your 40s and you're thinking like, “Where am I?” I think reading this book might spur you to consider that maybe the job you're in right now, the career you're in is not the path that you may be wanting to pursue. Is there a way if you start this conversation early enough in your career, so you carve out a few different ideas about what could happen next.

I just spoke to a young man who's 37, 38-years-old, he and his wife are both CPAs. He said, “You know, I don't want to work seven days a week, and I’m doing that whether it's tax season or not. I don't want to do that.” What I realized was that he was saying to me, “I’m willing to do that for a little while, but I need a way out.” We started to consider, well, okay, would it be both of you making that decision? Is it just you?

We started having these conversations and it's really fascinating to me that we're – he could make $50,000, $60,000, $70,000 a year or less and they would be fine. They've been working really hard. Again, talking about that permission, I think that he knows the numbers and he was saying to me, “Do you really think it's going to be okay?” I’m like, “Yeah, it's going to be okay. You got to make some money. You may not make a $150,000 a year at the other side of this, but if you made $75,000, $80,000, or $90,000 and you had a job where you were – it was a more sustainable job for you for a longer period of time and you actually enjoy what you're doing and have a life, oh, my God. Yeah, that's great.

I think that can happen at any time. I think for people who are maybe later in their career, so maybe in your 50s, I’m often a little stunned on my own show where people are like, “I’m 55 and I want to be retired.” Really? That's young. That's 40 years of unemployment, or 30 years of unemployment. Meaning, retirement. Also, what are you going to do? I think that if you're the person who really wants to be engaged, but not at this same pressure point and level, in your 50s is a great time to be thinking, “Well, what's my off-ramp?”

I feel like, sometimes what we do is we talk about retirement as this event, which is you come to the end of the cliff, you jump off, you’re now retired. I think for most people that I know and most of my cohorts who are in their 50s, and even the early 60s, they're seeking a different kind of an existence in the 50s, 60s, and 70s. But it's not necessarily, “I got to move to the Sun Belt and play golf all day long.” They do want to do something. I think that that is what you need to be thinking about. What's my transitional phase? Is it my own business? Is that a side hustle that's a business? Am I a consultant? Do I join up with someone else who's doing something really interesting and I can lend my expertise to that? All these are great options.

Cameron Passmore: Any final pieces of advice for anyone considering a reset?

Jill Schlesinger: Well, listen. I have to be clear that pretty much anybody can do a reset. It's really mostly, your fear that can stand in the way. I don't want you to think that you have to go back and go into in-depth therapy, but I do think that for many people, we will place onto our jobs and our careers a lot of the dissatisfaction in our lives. Without sounding too hokey, I think that when you go through a reset process, what it can do is it can help you prioritize things that are going on in your life and lay out options. The options don't have to be black and white. You don't have to do one, or the other. There can be a middle period where you're not sure. Some people will go through a process and come to the end of it and say, “I’m actually okay where I am. Now that I think about it, given the things I would have to maybe give up, or do differently, maybe I’ll stay where I am.”

I am always struck by the fact that I’m in a business where all I do is I talk about money. What I always come to the conclusion of is that when I’ve talked to people on the air, when I get emails from people, resetting is really not about the money. It is really about your own resilience and giving you choices and opportunities. That's what your money is for. It's not to pile up on a balance sheet. It's there for you to work for you and to make you happier and maybe more content for the longest period of time possible.

Cameron Passmore: Again, the book is The Great Money Reset: Change Your Work, Change Your Wealth, Change Your Life. Jill, it was so great to have you back

Jill Schlesinger: Well, thank you so much for having me. I really appreciate it.

***

Cameron Passmore: Thanks to Jill for joining us again. Then time for the after-show, Ben. How do you feel after three weeks off?

Ben Felix: I’m pretty good. The first week that I was off, I’d been sick. I spent a few days – I’d been sick before the time that I was supposed to be off, so I ended up spending, I think, most of the first week catching up on the stuff that I couldn't do while I was sick. Work-related stuff, so I don't know if I was really off for that first week. Then the second week that I was off, I spent 90% of my waking hours in what used to be the forest in front of my house with a chainsaw. There's no longer a forest in front of my house.

Cameron Passmore: I had a chance to visit Ben's place while he was off. This yard that you created is the ultimate area for adventure for your kids. It is an incredible space.

Ben Felix: It's still a bit of a blank canvas. Not quite a yard, but it's an area that used to have trees on it that no longer does.

Cameron Passmore: It’s what I said, adventure. Adventure space. You can see that you're hanging out there and oh, it's so cool. It's not flat. It's little hilly and tree stumps and trees and it's – a big rock. That massive rock in your yard.

Ben Felix: Two big rocks. Yeah, it's a really, really cool space. Lots of work to go there. But anyway, spend a bunch of time there. Then I got a mountain bike that I ordered about a year ago, because I’m pretty tall, so I can't just go buy a mountain bike. I had to have one made to my size, my measurements. I finally got it. Took a while, because of all the COVID related stuff. I spent a bunch of time riding out in the trails around where I live. Yesterday, actually, I was out in the trails probably at the wrong time, because around dusk and dawn is when bears tend to be out.

Cameron Passmore: Oh, no.

Ben Felix: I was there. They're a little probably too close to dusk, which is usually fine. But I had an encounter with a black bear while I was out in the trail.

Cameron Passmore: How close?

Ben Felix: 15 feet. I had a bear bell on my bike. I was prepared for this situation. The bear bell alerted the bear that I was coming. By the time that I saw it, it was already in the bushes walking away from where I was, but it was very curious, looking back with its ears perked up. Walking away, but looking back at me. I was like, “No, I’m out of here.” I turned around. Went back the way I came. Yup. Anyway, that was my time off. Lots of fun.

Cameron Passmore: Yeah. I had a chance to see Ben's basketball set up in his family room. You and I were talking about – I thought this was so funny talking about, “And what about a dining room table here?” What did you say? “It'll impact my three-point line here.”

Ben Felix: Yeah, I can't put a dining room table. It's going to get in the way of my three-point line.

Cameron Passmore: It's so funny. It's an awesome setup you've got up there. Very, very cool. Got a nice review posted on Apple this week. Do you want to read the review from Martin?

Ben Felix: Yeah. This was a very nice review. They're all very nice. This one was particularly nice. They titled the review, the only podcast I won't miss. A five-star plus podcast. “I came across the Rational Reminder about three years ago when I saw a post on LinkedIn from a respected acquaintance who called it the best finance podcast in Canada. I haven't missed an episode since, and I eagerly anticipate every Thursday morning's release. Ben and Cameron have a wonderful rapport and offer something for everyone from the hardcore finance walk, to the individual who's just trying to figure out what personal finance is all about. They're exceedingly bright and share their knowledge, while remaining open to new ideas and to being persuaded by better information. The definition of being rational in my opinion. They're truly doing a public service. My only regret is that it took me three years to write this review and to express my gratitude. Thank you and keep up tremendous work. Your efforts are truly appreciated. PS, I’d love to see a Rational Reminder baseball/trucker hat in the store.”

Cameron Passmore: We can take a look at that. Yeah, great review. Also, Petra mentioned to us after we finished recording, how she's an active listener and often recommends the podcast to her class.

Ben Felix: Yeah.

Cameron Passmore: Always cool.

Ben Felix: Super cool to hear that from – One of the coolest responses, I think, that we can get when we ask someone if they'd be willing to come on the podcast is, “Sure, I’m a listener.” It's like, wow. That always blows my mind.

Cameron Passmore: Yeah. Here's a cool story. I had a friend of the show. James reached out. He said I could share this story. “Just a quick note, Cameron, my daughter informed me today that she received an excellent grade on her final law paper. She argued in it that Canadian financial advisor should be held to a fiduciary standard. Proud dad moment for me. She listened to the Rational Reminder episode with Harold Geller twice as part of her research. So, thanks.” I guess, she does listen to her dad at the dinner table after all. Anyway, I thought you might find that rewarding to hear.

Ben Felix: That is cool.

Cameron Passmore: Thanks for sharing that, James. I had another LinkedIn story from another friend of the show. “Great to connect. I’ve been a long-time listener and an occasional participant in the community. No other podcast finance or otherwise comes close to the quality of the Rational Reminder. Not only do the podcast helped me realize that I was dissatisfied in my sales role and pushed to make an internal job change in the management, but also recognized that I had many years of human capital ahead of me, and I wanted to push myself into a graduate degree more than I wanted to strive for an early retirement.”

“I’m now halfway through my MBA in sustainable innovation in university, and I’ve cited both the podcast and your guests’ work in multiple assignments, most notably an investment portfolio project where I brought in Alex Edmunds Grow the Pie, Fama and French's five-factor model and Charlie Ellis' comment that only very few truly gifted individuals should engage in active management. Asking first year MBA students to construct an actively managed ESG aligned portfolio was, in my opinion, misguided, but at least I could give it a small cap value tilt. Much appreciation for the work that you, Ben and Angelica put into the podcast. Count me in as one of the three listeners to the after show and keep up the outstanding work. All the best.”

Ben Felix: It's funny that that's a thing. Someone said that to me in real life recently, that they’re one of –

Cameron Passmore: They’re one of three?

Ben Felix: One of the three. There is a comment in the community that somebody left after episode 259. I wanted to just read that quickly as well. It was after we had talked about – you had done your 60-second recap of Brian Portnoy’s episode, and I had said like, we can't overstate how impactful that Brian was on us. Somebody followed up saying – I’ll read it. “I was not aware of the episode where Brian Portnoy was that influential on my life and well-being. During COVID-19 lockdown, I had a rough time being concerned about the future having a three-year-old kid, no savings and going for a PhD. At that time, I first met the FIRE movement and was about to stop living, not literally, in order to save money and shut down that feeling of insecurity.

“It was your podcast and its additional focus on well-being and what makes a good life that helped me get back on track, inspired by the talks you had with guests, especially on non-financial matters, as well as your writings really helped me in a hard time. I do not have the words to tell you how much I appreciate your work and the effort you put into building this community. You make a difference for many people, I think. I know you did for me. Thank you so much. Be proud of this project.” I thought that was pretty nice.

Cameron Passmore: Very nice. Nice, indeed. Thought I’d give a quick update on the 23 and 23 Reading Challenge. We haven't talked about that in a while. Of course, the challenge is still open. This is basically a group of us that have come together to try to nudge each other to read a bit more, and try to meet your own reading objectives for the year. You can visit rationalreminder.ca and click on the 23 and 23 reading challenge button. We're using the app called Beanstack, which is actually pretty cool. All the instructions are on the website. Easy to set up.

In there, I have now 399 friends on Beanstack, and I actually just logged my 31st book this year. I only say that, because that's just an atomic habit. Just daily, you chip away. 31 books already halfway through the year. In the past 30 days, I’ve locked five books. However, Scott is the leader now with 13 books in the past 30 days. Amanda who is always there has done 11. Andy comes in at eight and Roman at six. There's some people cranking out some serious numbers here. Sandrine told me that there's 462 people in this year's challenge. 1,981 books have been read so far this year. 2,357 badges have been awarded and 13 people have completed the challenge. 

So sign up. It’s never too late. I think we'll run it again next year. Any comments about the community, Ben?

Ben Felix: I did want to mention the community. We launched the ability to support the community financially a while ago, because the reality is as cool as the Rational Reminder community is, as a business expense for PWL, because it's expensive, we pay almost $10,000 Canadian a year for the software that it runs on, as a business expense, it's hard to justify, because it's this global community of basically, do-it-yourself investors mostly. Anyway, we rolled out the option for people to support the community financially to take some of that bite off of PWL's plate. A few people signed up. We do have some people supporting.

I talked to somebody who's super engaged in the community and enjoys it, who somehow came up in a conversation and they mentioned that they didn't even know that there was an option to support it financially. I just wanted to mention that there's a support button. I think it's hard to see on mobile, but if you're on a PC, there's a support the community button that you can click. It's relatively inexpensive. You can do three dollars a month, Canadian. But it does help to justify keeping that thing up and running.

Cameron Passmore: This fall, lot's going on. You and I and Angelica will be at Future Proof in Southern California, doing a live recording. Any advisors that are going to that. September 21st in Toronto at the end of the day, we're going to be having a meetup, if you're interested in joining us. We changed from the 20th to the 21st. It will be the Thursday night. You can email info[at]rationalreminder.ca.

Also, if there's any listeners in Salt Lake City, I’m going to be there in late September, and I have a one evening that's free. If there's any interest, we could set something up to get together. Also, we have a store. I haven't mentioned that in a long time. We have a merch store. You can visit rationalreminder.ca and see the store button there. We sell everything pretty close to cost, when you count shipping and then you get a free pair of socks and koozie and we have all kinds of stuff in stock. Our famous hoodies, apparently, the supplier is no longer available with stocks. If you're thinking about getting a hoodie, you might want to grab one. Also, there's just a few decks of Talking Sense Cards left. Apparently, those are being reimagined by the University of Chicago, so we shall see. You want to talk about our – well, what led to our song?

Anyways, for the three that are still left, might be down to two now, but Ben and I were invited to join Shaun Maslyk on his podcast, The Most Hated F-Word. Fall in love with your finances. He invited us on to talk about the genesis of the podcast. Shaun’s the host of this podcast, and he's a financial wellness advocate and podcaster and he lives in Edmonton. He invited us on. As you can imagine, knowing a bit about us, it was rather uncomfortable, I think. Well, it what was for me, anyways, to talk about how this all happened and how we got together and how we started doing this and what are some of the mistakes we made.

I did listen to the episode. Actually, I think it came out, if you're interested, which there's might not be a lot of people interested in that back story, but if you're interested in the back story, I think it came out okay.

Ben Felix: I did not listen to it, for the reason you said. It was uncomfortable to do and it would be probably even more uncomfortable to listen to.

Cameron Passmore: The interesting thing is that while we were recording this conversation, Shaun had a musician listening to the conversation. Through that, wrote a song about the conversation and played us the song at the end of the recording. It was crazy. Anyways, so the song was written by RootHub, who's based in Hawaii. When he joined us on the podcast, looked like he was in the jungle of Hawaii somewhere with this guitar. We're going to play the song at the outro here. But yeah, it's quite the experience. No comment, Ben?

Ben Felix: I’m nodding my head. Sorry. Yeah, I guess people can't hear me nodding.

Cameron Passmore: We now have an audio recording of the story. It goes back to how we met.

Ben Felix: Yeah. No, it's cool. I mean it's cool to the extent that our lives should be documented. I guess, that's a good thing. To the extent that.

Cameron Passmore: Yeah, to the extent. All right, so here's the song from our recording of The Most Hated F-Word with Shaun Maslyk, and this was written by RootHub. Everybody, thanks for listening. Have a great week.

Participate in our Community Discussion about this Episode:

https://community.rationalreminder.ca/t/episode-261-structured-products-with-felix-fattinger-and-petra-vokata-plus-jill-schlesinger/24337

Links From Today’s Episode:

Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
Rational Reminder Website — https://rationalreminder.ca/ 

Felix Fattinger — https://www.wu.ac.at/en/finance/people/faculty/felix-fattinger-1/

Petra Vokata — https://petravokata.com/

Petra Vokata on Twitter — https://twitter.com/vokataa

Jill Schlesinger — https://www.jillonmoney.com/

Jill Schlesinger on Twitter — https://twitter.com/jillonmoney

The Great Money Reset — https://www.amazon.com/Great-Money-Reset-Change-Wealth-ebook/dp/B09Y44ZJXT

Episode 67 with Jill Schlesinger — https://rationalreminder.ca/podcast/67

Jill on Money Podcast — https://www.jillonmoney.com/podcasts

The Dumb Things Smart People Do with Their Money — https://www.amazon.com/Things-Smart-People-Their-Money/dp/0525622179

Neil Pearson — https://giesbusiness.illinois.edu/profile/neil-pearson

Episode 236 with Harold Geller — https://rationalreminder.ca/podcast/236

Episode 102 with Brian Portnoy — https://rationalreminder.ca/podcast/102

Future Proof — https://futureproof.advisorcircle.com/

The Most Hated F-Word Podcast — https://themosthatedfword.com/

RootHub — https://www.roothub.com/

Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/

Rational Reminder on Twitter — https://twitter.com/RationalRemind

Rational Reminder on YouTube — https://www.youtube.com/channel/

Rational Reminder Email — info@rationalreminder.ca

Benjamin on Twitter — https://twitter.com/benjaminwfelix

Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/

Cameron Passmore — https://www.pwlcapital.com/profile/cameron-passmore/

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

Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/