In this episode, we start by learning about the complex relationship between recessions and stock returns before welcoming Huston Loke and Jordan Solway from the Financial Services Regulatory Authority (FSRA) to discuss protecting consumers in the financial investment space. Huston is the Executive Vice President of Market Conduct, and Jordan is the Executive Vice President of Legal and Enforcement at FSRA. The FSRA supervises insurance companies, mortgage brokers, credit unions, pensions and other non-securities areas of the financial services sector. We discuss the objectives of the FSRA, their approach to protecting consumers, enforcement strategies, upcoming regulations, and more. Then, we welcome back Mark McGrath to learn about the Passive Investment Grind (PIG) concept for this week's Mark to Market segment, and we take a look back at a previous episode with Ted Seides of Capital Allocators. Finally, we are joined by author Tim Hale to discuss the new edition of his book Smarter Investing before closing off with our usual after-show roundup. Tune in now!
Key Points From This Episode:
(0:03:22) The relationship between recessions and stock returns, the definition of a technical recession, and the role of media in shaping perceptions.
(0:09:33) Why bad economic conditions don't necessarily warrant changes to investment strategies and why attempts to time the market based on recession news should be avoided.
(0:13:42) Introducing Huston Loke and Jordan Solway and background about the Financial Services Regulatory Authority of Ontario (FSRA).
(0:15:34) Objectives of the FSRA and the principle of putting the client’s interest first.
(0:18:55) What aspects of financial advisory services FSRA regard as the most important.
(0:20:30) Unpacking the “Take-All-Comers” rule in Ontario and how it protects consumers.
(0:25:32) How successful the title protection rule has been in Ontario and how it differentiates between the title of financial advisor and financial planner.
(0:29:21) Concerns about the rollout of the title protection rule and the disparity across various designations.
(0:33:26) Advice for identifying a suitable financial advisor or planner and how the FSRA is helping cross-check credentials.
(0:37:19) FSRA's findings in a review of tiered recruitment model life insurance MGAs and the enforcement action taken.
(0:44:47) Insights into commission-based compensation structures for financial products and upcoming commission disclosure rules.
(0:49:09) Additional steps consumers can take to avoid bad financial advice and services.
(0:50:49) Recommendations for budding financial planners or advisors to ensure they get the correct training.
(0:53:23) Discover the infinite banking concept and what future initiatives Huston and Jordan are most excited about.
(0:59:35) Mark explains the passive investment grind concept in our Mark to Market segment.
(1:09:21) Recapping essential takeaways from a previous episode with Ted Seides.
(1:12:02) Tim Hale discusses his book Smarter Investing, his motivation for writing it, his intended audience, and its main takeaways.
(1:20:09) How the financial landscape has changed since the first edition of his book and his shift toward systematic investing.
(1:25:25) Tim shares what he thinks are the biggest mistakes investors make and behavioural biases that influence investors’ decisions.
(1:27:58) Final words of wisdom Tim has for listeners and how his approach applies to markets outside of the UK.
(1:29:45) Aftershow roundup, listener reviews, book recommendations, and more!
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 are hosted by me, Benjamin Felix, and Cameron Passmore, portfolio managers at PWL Capital.
Cameron Passmore: Welcome to episode 279. Great to be back to normal, Ben, our regular cadence and regular episodes. Well, still a bit rusty, I think. Anyways, this week you dive in with a really interesting topic about looking at recessions and stock returns based on a recent Globe and Mail article that you contributed to. We then welcome a couple of special guests from the Financial Services Regulatory Authority of Ontario, where we get a chance to ask some pretty interesting questions. Also, Mark McGrath will join us with a topic called ‘Taming the Pig’ for this week's Mark to Market.
We'll look back at episode 61 when Ted Seides of Capital Allocators joined us, and also take a look at the book Smarter Investing: Simple Decisions for Better Results and the author Tim Hale will join us. This is a book that we were able to – an endorsement at the front end of the book. It's the fourth edition of the book and it's excellent. Tim will join us. Of course, there is the after show.
Ben Felix: Yup. That all sounds pretty good. I will say that this episode has a bit of a Canadian tilt. My recession discussion has a Canadian tilt. FSRA is an Ontario Financial Services Regulator, so their thoughts and comments are broadly applicable, I think, but it's definitely got to focus on regulation in a province in Canada. Mark's topic is pretty Canada-specific. Great topic. Super interesting, regardless of where you reside, but practically relevant to people in Canada. Then Tim at the end, that's a book from the UK. It’s a bit of an international episode, I guess. Kind of cool.
Cameron Passmore: Yeah, and the book is broadly applicable around the world. But yes, there's a Canadian-UK flavour this week.
Ben Felix: I do want to mention, we've got a couple of upcoming webinars on Tuesday, November 21st at noon, Eastern Time. We've got a webinar for business owners titled, Paying It Forward to Yourself: Compensation Strategies for Canadian Business Owners. It's going to be a good talk. We may talk about a Canadian tilt. It's a very Canadian-focused webinar, but that content is going to be incredibly useful for people who do have corporations in Canada. Yeah, it's going to be a good one. Our advanced planning calculator, as we lovingly call it internally, which is, it is a very advanced piece of software that Braden built to model some pretty difficult to model financial planning decisions for people with corporations like, should you take salary, or dividends to pay yourself, which is what this talk is about. Anyway, so that's going to be a good talk, and that's going to be delivered by Brady Plunkett, Louis Beebe, and Braden Warwick.
Then we've got another one on November 29th at noon, Eastern Time. This is just an investing 101 for Financial Literacy Month, and that one's delivered by Phil Briggs and Melissa Larson. That'll also be a great talk.
Cameron Passmore: Fellow courses on the podcast two weeks ago, so it'll be awesome. Okay, anything else?
Ben Felix: Don't think so. Let's go ahead to the episode.
Cameron Passmore: All right, let's roll with episode 279.
***
Cameron Passmore: All right, episode 279. Let's get going. Ben, you've got some great new content?
Ben Felix: Yeah, I wrote a little piece on recessions and stock returns for the Globe and Mail, so I thought I would just talk a little bit about the notes there, because it is something that is coming up, where there's talk of a recession, or that we may have technically entered a recession, which is a whole interesting topic on its own that I will touch on.
Cameron Passmore: This has been going on for, it seems like forever.
Ben Felix: Yeah. I mean, it is always being talked about. What I want to talk about is the relationship between recessions and stock returns with a focus on Canada, but I think it's broadly applicable. I will talk about some non-Canadian data as well. What really had people buzzing recently is that we entered a technical recession. Now, as I understand it, a technical recession is something that is mostly an idea that gets picked up on in the media. It's not a technical definition in the sense that it's legal, or anybody – there's not consensus that this is an actual recession, but it's a technical recession is when there's a drop in real GDP in at least two consecutive quarters. That has happened in Canada, and lots of people are excited about it. The media is reporting on it fairly extensively, and what does this mean and all that stuff?
Now, the first thing I want to touch on is this is separate from the stock returns piece, which is the focus. I do just want to mention that recession dating is not as simple as two quarters of drop in real GDP. In both Canada and the US, and I haven't done the research, but I would presume other countries and economic regions, there are groups of economists that determine as a committee, or as a council, whenever a session has happened. Then they do that based on both subjective and objective data.
It's not as simple as what the data say. It's also, there's an interpretation component of that. In Canada, we have the C.D. Howe Institute Business Cycle Council. They act as the arbiter of business cycle dates in Canada. It is a council of economists, who get together and make this decision on when there was a recession, when it started and when it ended. The definition is a pronounced, pervasive and persistent decline in aggregate economic activity, typically resulting in a cumulative decline over adjacent quarters.
There is the decline over a couple quarters. That's in there, but it's not the only thing that's in there. People get all excited about having entered a recession, but it's a technical recession, which is different from an actual recession. All of that aside, that's not actually what I wanted to talk about, but I do think it's interesting. What I actually want to talk about is that whenever investors hear the word recession, they get worried. What I want to argue is that that worry, or that concern that investors feel is probably overstated, though it's not completely unfounded. I'm not going to argue that. I'll touch on both sides of that.
It is true that some historical recessions have been associated with major declines in the stock market. That is true. But not all recessions have had negative stock returns, or poor stock returns. In fact, in some cases, they've actually had really strong stock returns during the recessionary period. More generally, that relationship between economic data and stock returns is just really messy. I think people imagine, or expect that the economy and the stock market are going to move in lockstep, and the bad economic news is going to mean bad stock market returns. The reason that they don't move in lockstep is pretty simple, but it's often either missed completely, or forgotten. The reason is that the stock market prices assets throughout the trading day based on expectations about the future. But news about the economy, economic data, are always backward looking.
Whenever we get GDP numbers telling us what happened in the past, but the stock market is always looking ahead to the future. We get this really disconnected relationship between stock returns and economic data. If we look at past Canadian recessions, I have data going back to 1957, and that's constrained by my stock market data, not the recession data. I have recessions going back further. Of the seven economic recessions going back to 1957 in Canada, three of them had negative TSX, Canadian stock market returns during the recession, while the remaining four had positive returns during the recession.
That's important because even if I could tell you the exact dates of the next recession, which I can't, but even if I could, you could not reliably use that information to trade profitably, to get in and out of stocks, to miss bad returns, or whatever. I think that's important.
Now, another really important piece for long-term investors, which most people in stocks should be, the three and five-year returns following economic peaks. If I go and look at those recession dates and take the date of the economic peak, so the economy only declined after that. In some of those cases, there were negative stock returns. In some cases, there were positive stock returns. But if I look from that economic peak three years out and five years out, in both cases, stock returns following economic peaks have been meaningfully positive at the three and five-year horizons. That's not even that long of a time. We talk about long-term investors, it's like, hopefully, a 10, or longer year horizon. Any thoughts so far?
Cameron Passmore: No. It's encouraging.
Ben Felix: Yeah, I think so. Even in the cases where there were stock market declines during recessions, the stock market came back pretty quickly. I think that's all encouraging news. The other piece, as I was going through these Canadian data, in the back of my mind the whole time when I was putting the Canadian numbers together, I'm thinking, this is just Canadian stock market data. I'm looking at Canadian recessions and Canadian stocks, but we advocate international diversification and presumably, other stock markets were not necessarily declining when Canadian stock market was.
I looked at that just for the S&P 500. In two of the three historical recessions where the TSX did drop during the recession, the S&P 500 had positive returns. One recession where they were both down was COVID, which everything was down, because everyone around the world at the same time was hit with the same shock.
Cameron Passmore: And everything came back quickly.
Ben Felix: In that case, everything came back really quickly and really aggressively. I think that while it's tempting when we hear about recessions and we hear bad economic news, it's tempting to try and time the stock market. But that has been historically far from a slam-dunk. You've probably been more likely to miss out on positive returns than to avoid negative ones, even if you knew the recession dates. You don't, of course. It's tricky.
Now, there is a paper from Fama and French who looked at this from the perspective of a US investor investing in global stocks. They used yield curve inversions, which are pretty good, actually, at forecasting economic activity with some reliability. If people want to hear more about that, I think it was Cam Harvey that discovered that relationship and wrote a paper about it. He talked about that research when he was on as a guest. I know he talked about that. I'm pretty sure it was him that came up with that idea. Yield curve inversions do forecast economic activity with some reliability.
Fama and French asked, given that, can we use yield curve inversions to time the stock market? They built a market timing strategy that shifts out of stocks and into treasuries when yield curve is inverted. Based on their analysis, they conclude that they find no evidence that yield curve inversions can help investors avoid poor stock returns. Not particularly surprising based on what I just talked about, but even the most successful economic forecasts, which is what the yield curve inversions are, they don't reliably predict stock returns in a way that can be used to trade.
Again, it makes sense, because the forecasts, the yield curve inversions, the information contained in a yield curve inversion is also reflected in current stock prices. It just doesn't make sense that we would be able to use that to trade. Big shifts in prices are going to tend to happen when the market's prior expectations turn out to be materially different from reality. If yield curve inversions are forecasting bad economic activity and we get bad economic activity, or deteriorating economic data, that's not necessarily going to cause a big drop in prices because the market already expected it.
We need to have something much different from current expectations to see big shifts in prices. I mean, COVID is the classic example of that, where everybody's model of reality and of the future changed very, very quickly. And so, we saw big shifts in –
Cameron Passmore: In risk.
Ben Felix: And discount rates for sure. Now, of course, there's no way to reliably predict future information. We talked about yield curve inversions have some forecasting power over economic activity, but it's still pretty imprecise. We especially don't have any reliable way to predict how future information will match up with current expectations. That's the thing that matters. Even if you could predict the future, you've got to be able to predict how the future relates to what the market currently expects to happen.
It's hard, and it's extra hard because the market is a complex adaptive system. If you could predict the future and you traded on it, that would put that future state into prices, which would affect future returns.
Cameron Passmore: Which is what happened every day, all day, already.
Ben Felix: That's exactly what happens. Yeah. It's a complex adaptive system. By understanding it, you change the system. If you could predict the future, it would change the future path of returns. Anyway, so the result of all that relationship is this really messy relationship between the economy and the stock market. It leaves us with, I think, a pretty important takeaway for investors, which is that bad economic conditions don't necessarily mean that you should change course with your investments. When we hear news about Canada being in a recession, or wherever being in a recession, it does not mean you should go and make your portfolio more conservative, or go to cash, or something like that.
Cameron Passmore: Love it. It comes up often with clients. Often, the last people, do you think you're the only one that's thought about a possible recession? Of course, many, many people have that opinion, and it has to be priced in those trades already. Let's carry on with our interview with the good folks from the Financial Services Regulatory Authority of Ontario.
***
Ben Felix: All right. we're joined today by two representatives of the FSRA, which is a Financial Services Regulatory Authority of Ontario, an independent regulatory agency that's been created to improve consumer and pension plan beneficiary protections in Ontario. They've got a big job. It's an important organization. We have, I think, some pretty good, but intentionally tough and not in the sense that they knew what we wanted to ask. We're not surprising them with our questions. But based on their role and what they're regulating by nature of that, I think some of these questions are tough and charged.
The FSRA supervises insurance companies, mortgage brokers, credit unions, pensions, and other non-securities area of the financial services sector. Sectors also include auto insurance, life and health insurance, property and casualty insurance, financial planners, and advisors, which are newly regulated titles, relatively recently regulated titles in Ontario. That's one of the things that we're going to talk to them about.
We are joined by Huston Loke. He's an Executive Vice President of Market Conduct. Jordan Solway, who's Vice President, Legal and Enforcement. Huston Loke and Jordan Solway, welcome to the Rational Reminder Podcast.
Huston Loke: It's great to be here.
Jordan Solway: Thank you for having us. I'm an avid listener.
Ben Felix: Awesome. That's very cool to hear. I want to kick it off with a big question. What are FSRA's objectives?
Huston Loke: I think that we can start by just saying, what does FSRA cover? I think that it's fair to say that almost everyone in this province of Ontario would have products, or services, or an interest in areas that are regulated by FSRA. If you get a mortgage, if you buy life insurance, if you have a car, if you have a house that requires insurance, if you've got an account with a credit union, if you have a pension, all that's covered by FSRA's regulation.
Jordan Solway: Our vision as an organization is financial safety, fairness, and choice for Ontarians. The mission is really how we achieve that vision is through public service, through dynamic principles-based and outcomes-focused regulation, which I'm happy to explain in more detail. We're an independent foreign government regulator, which was new when it was set up in Ontario. Now the Securities Commission has the same corporate structure, but it allows us to achieve our mission a little bit differently.
Ben Felix: Can you talk about what FSRA does not have purview over?
Jordan Solway: It's capital markets. Where basically, everything that's a financial services that isn’t capital markets. there is a slight overlap which Huston can speak to in the mortgage-brokering sector between the two agencies. We're talking about auto insurance, mortgages, mortgage brokers, life insurance, loan and trust, credit unions, and registered pension plans, of course.
Cameron Passmore: How does FSRA supervise a principle of putting clients' interests first?
Huston Loke: Well, I think there are a number of examples we can provide as our vision set by our CEO is safety, fairness and choice. What does that usually mean? What I find when you speak to people that call a complaint, for example, the expectation is you put the interest of the client first. We embed that where possible in many different areas. For example, we have title protection.
Until last year, anyone could use the title of financial advisor, financial planner. No proficiency, no educational requirements and no accountability. We introduced new requirements so that you have to have minimum standards. One of those standards would require that whoever is providing the credential has to have a code of conduct that has the client's interest in priority. We are then taking steps to supervise and we're saying to those credentialing bodies, “What are you doing? What do you do when you get a complaint? How are you handling that and how are you resolving that to put clients' interest first?”
Another example of where we're taking steps here is when we look at insurance distribution. We're currently reviewing conduct standards for the sale of surrogated funds. We're saying to ourselves, what conduct requirements should be in there? What should advisors have to do in terms of know your client, know your product, product suitability, and we're developing guidance that will, we think, really help clients in terms of getting the kinds of products that they need, well, that will provide real solutions for them.
Jordan Solway: Coming back to when I referenced principal base. What we're really focused on, regimes, regulatory regimes are often based on, in some cases, prescriptive rules. You have to have a license. You have to have insurance. Our focus is really on consumer outcomes. We identify through high-level principles, if you look at our constituent constituting act, which is that FSRA talks about a bunch of statutory objects, things like promoting high standards of business conduct, promoting transparency, and protecting consumers.
What we're really interested in is how the individuals and businesses we regulate achieve those outcomes. Our job as a regulator is to facilitate those outcomes, to create the right incentives for those outcomes, and to make sure there's data to demonstrate the outcomes are being achieved.
Ben Felix: Can you talk about in FSRA's view, what the most valued aspect of financial planning and financial advisory services are?
Huston Loke: We think that advice to consumers is really important. You have experts out there who understand products, who understand tax consequences, who can help with estate planning, who can provide advice on asset allocation and simple things like budgeting and so on. That all adds value. Ultimately, it's a good thing if consumers have access to financial services, products, and advice.
Just having advice, research will say that that leads to better outcomes. How can we do that? I mentioned title protection and the requirement to have certain levels of proficiency, continued education and accountability. Part of it also is about access. I'm going to speak about access in terms of financial planning and advice, but then also, maybe a tap on Jordan to talk about advice and other ways. When you have advice, you have the foundation for being able to access all those services that are needed down the road.
It's for a goal. It's for retirement. It's for a child's education. It's for a legacy. I think on those aspects, people need to have that plan shown to them. That's why the Title Protection Act is important, and that's why the work on site funds is important. That's why some of the other work that we're doing in insurance conduct is also important.
Access is something that doesn't just affect financial advice. Access is also important in other areas that we regulate, such as auto insurance. Is it okay if maybe Jordan speaks about a project we did on “Take-All-Comers”, which helps supply that access to all the people in Ontario that have cars and require auto insurance?
Jordan Solway: Thanks, Huston. Auto insurance is obviously a mandatory product. You have a car and you want to operate it. You have to be insured. There is a requirement that we refer to called “Take-All-Comers.” What basically says, insurance companies that do business in Ontario, they have to file their rates, so how they're going to rate you and determine your premium, but they also have to file and/or can get what are called underwriting rules approved.
You think about what's relevant to assessing an insurance premium for auto, it's your driving history, it's your age, it's where you live, it's the type of vehicle you're driving, whether you're using it for business use, or for just personal use. Insurers are required to provide rates in accordance with their filed rules and their filed rates. That seems pretty straightforward. Maybe 10 years ago, you'd go to an insurance broker, go to an advisory phone application, they would mail it off. The process could take from beginning to end, it could take days, sometimes weeks.
Fast forward to today, a lot of this can be done through websites. Put your information on and get a quote in milliseconds. What we had identified really before is we started and during COVID was that not all insurers were actually providing quotes in a timely way. You go on and instead of getting a quote, you'd say, you have to call the insurance company, or there'd be a system error.
Effectively, we determined through supervised review that was led by Huston's team, was that they weren't many instances, where insurers weren't following their filed rules and the consumer had no idea, because how would that as a consumer? You don't look at the rules. You would go on to another insurer to get a quote. Some of this was done through advisors, through brokers, and some of it was done directly through agents. Through this process, we identified that there was essentially, systemic non-compliance. Our response was to get the industry to clean this up themselves. We went to them and said, “There is a problem in the sector, consumers are not being served. You need to fix this to our satisfaction and we want it validated for your audit functions.”
All of this was culminated in what's called a thematic review report that we released in August and we've also done it in the life sector as well. Whereas, the regulator were saying, “Here's the problem we identified. Here's what we did about it. Here are the policy implications and here's what consumers need to think about.” Huston's earlier comment about advice, like an informed consumer is a better consumer and more empowered consumer, but they have to know their rights and they have to understand how the products are sold and when to ask questions to make sure they're being treated fairly, and from our perspective, that the right outcome is being achieved.
Cameron Passmore: You're saying, there is something going on with a website when people would go in and submit their application for coverage that may have an implicit decline embedded in there?
Jordan Solway: Yeah. They were using, Cameron, they were using filters. I'll give you an easy example. Their rules would say, they have to write anybody in Ontario. If they didn't want to write in certain FSA's forward sorting addresses, they could put a filter in. When Cameron puts in his request, you get a quote in seconds. But Jordan puts in his quote, there might be a delay. It might say, ‘contact the insurer to get more information’, or I might get a system error. Using a filter in a way that actually delayed, or frustrated consumer’s ability to access the insurer.
Cameron Passmore: What if there's a different risk profile? Like, if I've had more accidents than Ben, for example, is that still permitted?
Jordan Solway: Yeah. It isn't to say that they can't ask questions. Sometimes what happens is people put in an address, where they have – insurers will sometimes get third-party data. Your driver's license will show your address is Ottawa, but you're having bills sent to Toronto. That's a legitimate question where they can say, “We can quote you. We need to validate that,” because they could be potential questions of either incorrect information, or in extreme cases, there might be fraud. People are lying about their circumstances to get a lower quote.
That's permitted. You can do that, but you have to have a reasonable basis. You can't put a blanket filter in and say, “We're not going to write anybody who listens to the Rational Reminder,” right? They were effectively because it's a price-controlled product. If they were getting risks that they didn't feel where it's probably, they can push those risks back in the market with the result that other carriers were picking them up. Then they were doing the same thing. It was a domino.
It took us about three years, but it's a great example of you have a systemic problem and you can pick the sector of any financial services. As the regulator, you're grappling with, you immediately start bringing enforcement action, which is time consuming, there's delays. That's not fixing the consumer interest in the short term. What we try to do is get the market through our supervisory powers and through persuasion to get them to fix it themselves, because it undermines consumer confidence. If you don't have consumer confidence, then that's not good for the sector. That results sometimes in extreme responses.
Cameron Passmore: I want to jump back to title protection. How successful do you think title protection for the titles of financial advisor and financial planner have been in Ontario so far?
Huston Loke: There are all kinds of clients and investors in Ontario. There are those who are well-advised, very high net worth. They’ve got an army of people coming after them to say, “Please, use my services.” Then there are many other people that don't have good access to advice. They don't have the advisor yet. Interesting, we did a survey before all this rolled out. We found that the majority of Ontario consumers actually already believed that there was regulation of these titles, a financial advisor in particular. At that time, there wasn't. Anyone could have called themselves financial advisors. You could be out there and looking at a, let's say, a high-risk mortgage product. The website says, “Speak to a financial advisor.” You can be out there looking at an insurance product. The website would say, “Speak to a financial advisor.”
As far as we're aware, some of those individuals were only licensed to sell, let's say, life products. We said to ourselves, “We need to actually do better for the consumer. What does that look like?” We've now introduced those new requirements. Our understanding is that people are taking steps to get the additional proficiency and have the additional work done to validate their experience and their ability to serve clients well. We are still in a transition period. Once the transition period ends, we will start reaching out to employers, to financial advisors, to financial planners to make sure that they're aware that these standards apply.
What will happen down the road is you're going to have consumers, when they deal with someone who holds themselves out to be a financial advisor, or financial planner, they're going to know what they're getting.
Ben Felix: Can you talk about how title protection in Ontario differentiates between financial advisor and financial planner?
Huston Loke: The financial planner is essentially, a higher standard. It requires additional proficiency because they are expected to be able to develop integrated financial plans for clients. They've got to be able to include a holistic analysis of the client's financial circumstances and the financial planners are expected to be proficient in all core personal finance areas, including estate planning, tax, retirement planning, investments, and insurance and risk management.
Whereas a financial advisor would only be expected to have technical knowledge in at least one common investment product. We think it was necessary to have this distinction, because when you go in and see a planner, there are tax consequences for liquidating your investments. There are very important estate planning elements that must be followed if you want to manage your own tax bill and if you want to leave the legacy to your family. At the same time, we were conscious of the fact that this has to be something that works for regular consumers, because if you set the bar so that, for example, only the independent advisors are wrapped in, that is going to mean that the vast majority of consumers that are looking for some help with their savings just would never be able to seek out that advisor. That advisor might not have an interest in serving that customer. We wanted to set two levels, one for financial advisor, one for financial planners that really identified key requirements, but also at the end of it, met investor needs.
Ben Felix: I've got a bit of a prickly question. I think it's prickly. I don't know. We'll see what you guys think. This is just something that in the communities that I'm involved in, I guess, is the best way to describe it that is an issue with the way the title protection has been rolled out. What do you think about the fact that there is a pretty significant disparity across many of the designations that allow people to use the protected titles? Like a CFP on one hand, and I don't know one of the other easier-to-obtain designations allow people to use the same title. Well, what are your thoughts on that?
Huston Loke: I think that the objective was to provide consistency to the customer, so the investor needs to know, “I'm dealing with a professional.” Minimum proficiency, continuing education, accountability. If you met that threshold, if you met that standard, a credentialing body could apply to us and receive that status and could then confer the titles. We wanted to leverage what was already out there. We wanted to leverage professional bodies, like FP Canada, and so on, that already had programs in place, or that already were education providers.
We know that some of those standards, they're not all the same. It is up to different credentialing bodies to say, “You know what? I want to offer more.” I'm going to increase the focus I put, let's say, on client discovery, because it's not just whether I know about my products. How do I get that information out of the client to make sure that I'm helping the client meet their needs? That's a good thing from our perspective.
If someone doesn't do that, we don't say to ourselves, “Okay, then you can't be a credentialing body.” We let different credentialing bodies make the call from a business perspective of the value they want to add. Our standard has been published and is transparent. If you meet it, then you can qualify. Certainly, there will be some cases where certain credentialing bodies have elevated requirements. It could be in terms of either the content, or experience.
Jordan Solway: Can I just add, because it is a minimum standard, the consumer should still be asking questions of the individual that they are proposing to work with. What the individual's financial services education background, or training is, how long are they providing the services that they're offering, what credentialing licenses, or what credentials, or licenses do they have? To Huston’s point, what is the issuing credentialing licensing body? Are they bound by a code of conduct?
The point of the framework is to provide minimum standards, but leave it to the advisors as well to make sure that they're explaining and be able to distinguish their expertise relative to the client's needs.
Ben Felix: Yeah, makes sense. FSRA is basically saying, this is the baseline and credentialing bodies can still provide education above and beyond that and market themselves as doing such.
Huston Loke: That's right. We know that this is an area where there is an expectation that things continue to evolve. It's a tougher environment. Think of interest rates, inflation, and uncertainty with the economy. Actually, we're planning to launch a consultation on revisions to the title protection framework. We're going to be asking questions of stakeholders as to whether they think any elements of our title protection framework need to be updated.
Jordan Solway: That speaks to really our culture as a regulator. You can't just put a regime in place and put it in the back shelf and not worry about it. You constantly have to adapt it. You have to adjust it. You have to make sure it's still relevant. People don't usually use the word dynamic and regulation in the same sentence, but there's a happy dynamic as a regulator, because particularly in financial services, right? The products are changing so quickly. Distribution models are changing. And so, we want to make sure that we're not letting things get antiquated, or out of touch, and we're able to adjust them to better satisfy consumer need.
Ben Felix: That's great to hear. It's incredible to have seen Ontario put title protection in place. That's something that we, I guess, complained about for a long time. It's great to see and also great to hear that it's going to be a dynamic process.
Jordan Solway: The sad part about it is that there were people that we're dealing with, and I'll take the mortgage world, because it's one that we regulated along with USC. But we have seen cases where you've got high-risk mortgage products that are being sold to individuals. The website will say, “Speak to our financial advisors.”
There is a certain connotation of that term financial advisor that is attached. What we're doing is making sure that there are at least minimum thresholds that must be in met. Otherwise, you can't use it.
Cameron Passmore: I want to go back to what you were saying, Jordan, about what to look for. What should consumers be looking for in a financial advisor, or a financial planner?
Jordan Solway: Asking really good questions. I mean, start to make sure, it's used as identified that there's a – they're using a credential appropriately and also, understanding what their education background is. Do they have an MBA? Do they have a CFA? What training do they have? What background do they have? Are they new to advising? Have they been in it their entire career? How long have they been offering the specific services that they're proposing to offer the consumer? They may have the right title, but what other licenses, or accreditations do they have? Who are the licensing bodies? Who are they regulated by, I think is a really good question. Are they subject to a code of conduct? If so, what is it? Is it voluntary or is it mandatory? There's a whole bunch of things.
I think, ultimately, from my own experience, also get references. Make sure you're doing your diligence because there's a wide array of qualifications and background and experiences. You want to make sure the person that's advising you is right for your needs.
Huston Loke: I'll also add that the code of conduct, let's say, someone has a credential by a financing body and there's a code of conduct and there's a complaint. Well, FSRA as part of our supervision of credentialing bodies is in the process right now of following up with a number of them to say, “Tell us what the complaints you received. How were they resolved? What were the nature of those complaints?” We want to see that credentialing bodies hold their members to account.
If there's an issue, the client, obviously there's a process and there are two sides to every story. But as the supervisor of this regime, we want to see that the users of these titles are actually bound by the code of conduct, not just in words, but in terms of the outcome. We're digging into that right now for a number of the credentialing bodies.
Ben Felix: That's really interesting. It's not enough to have a code of conduct, there has to be accountability behind it.
Jordan Solway: I'd also add that a consumer's life cycle means they're going to change and the type of advice they're going to need is going to evolve. You may have the right advisor at a certain point in time, but you may outgrow that advisor, or you may have different needs that require a different advisor, or multiple advisors, depending upon what you're trying to do. I think there's always, as you do with anything, there's always an opportunity to pause, assess and just reality check and make sure that you're getting the right advice for your needs.
Huston Loke: I'll also add one more element that we're working on. Over the next number of months, we're going to be launching a registry that will have everyone who uses the title of financial advisor, or financial planner listed along with the credentials that allow that person to use those titles. If there are any disciplinary sanctions that have been levied against such an individual, you'd actually be able to access that. That'll be a first. It'll cross anyone who use that title, you'll be able to type in that person's name and see, okay, well, this person is credentialed by one, or two, or three bodies and this one, or not, which is really important because ultimately, I think investors are entitled to know that. More importantly, their entitled be able to check that in an easy-to-use manner. It shouldn't be so difficult for them to check in the background to see if someone's been disciplined.
Ben Felix: Yeah, it makes sense. Is it like the insecurities we have, the are they registered search? You can go see if an advisor's registered and what registration and all that stuff? Is it the same idea?
Huston Loke: That's the same idea. It'll be searchable. What you'll get here is it'll be integrated. It doesn't matter what you're selling. It might not be securities. It might be insurance, might be something else, but you'll be on this registry if you use the titles financial advisor, financial planner.
Ben Felix: Yeah, that's an incredible resource for consumers. I want to move on to some recent enforcement that was pretty incredible to see really from our perspective in the industry. Can you talk about what FSRA uncovered in the recent review of tiered recruitment model life insurance MGAs? Maybe listeners may not know what that means. Maybe if you can give a little bit of background on what that is.
Huston Loke: Many people are familiar, of course, with the concept of just not buying insurance and are well aware that you can get different products. When we looked at the way insurance was being sold, we discovered that there were some business models that involved not only selling insurance, but at the same time, then recruiting the people that you're selling insurance to as an agent who would then recruit other agents as well and sell insurance, and who would then recruit other agents as well and sell insurance.
As a business model, that's not a prohibited business model. But what we discovered as we dug into that was that in some of these cases, the training materials were misleading. The training materials would indicate that this is how you're supposed to sell. This is the way the product works and say this, or don't say that. As a new individual selling insurance, imagine what that feels like. You just signed up. This is what the training says. Of course, that's what you're going to do. That's what the training manual said.
We found that there were instances where this was just not appropriate. We took enforcement action in the cases of two intermediaries, managed general agents. We also dug deeper and we said, “Okay, who's doing the selling? Do we need to be concerned about that?” Looking at the same managed and general agents where we had concerns about this recruiting model, we had taken enforcement action in connection with about half of them. So, 50% of the agents that we sampled and reviewed required regulatory action. We were very disappointed.
Think of how many hundreds, or thousands of clients that represents where the regulator felt we needed to take action for half of the agents involved. We did that and we're continuing to follow up, and I suspect it's going to be more in common. Then we said, “Okay, what are they selling? Because it's a multi-sided equation, right? What are they selling?” We found that in some cases, they were selling products that were permanent products, complex products. We recently published something on universal life.
Many of your listeners will be aware of what universal life is like, but it involves elements that are quite complicated. It's not suitable for everyone. There are certain individuals where it's a great product. There are other individuals where you'd question why this is being sold. I'll give you some examples.
We sampled, they got the same managed general agents, same population. We sampled the products that were being sold. We found instances where there was no evidence that there were any registered accounts being held by the customers. Many of the customers had very modest incomes, $50,000, $60,000 a year. Many of the customers didn't appear that they'd gone through a needs-based analysis where the agent had said, “Tell me about your life. Tell me about what your other responsibilities are. Tell me about your beneficiaries and your whole situation.” When we saw that combination, we felt we had to say something. We found there our issues in terms of the training materials for these MGA's, the products being sold, as well as agent conduct, and all of that is deeply disappointing.
Jordan Solway: I would add that as Huston alluded to, this is ongoing. Huston's team does the supervision when they're doing supervisory reviews as they did here. If they identify consumer harm, it gets escalated to my group, which is in enforcement. We're continuing to work on this. The other thing we're doing, we're in the process of doing to be released shortly for consultation, is that this is going to inform how we actually determine suitability for licensing. How you determine suitability isn't just based on your education and qualifications. There is a wide array of factors that we can look at to determine whether or not you should have the privilege, because it is a privilege of having a license, not a right. We want to make sure that consumers are better protected at the front end, not having to go in and find these issues.
Ben Felix: I just want to recap for a second for listeners. There was a multi-level marketing aspect that was involved in recruiting agents. There was training material that was teaching maybe unsuitable information. Then there were products being sold. I don't know if everybody, if listeners will completely understand the registered account piece. Registered accounts let you invest in a very tax-efficient way. They have, in many cases, other benefits.
Typically, you wouldn't buy a permanent insurance product, until you'd maximize those. In some cases, there was advice being given where people were being sold in insurance, but did not have money in their registered accounts, which is just incredible, not in a good way.
Huston Loke: I think that the regulator, in this case, so FSRA has taken enforcement action for two of these men and gentle agents. In one of the cases, and it’s public, it's on our website, we required that they essentially, have a new look at the training materials and for that they were compliant with the applicable law. Taking a step back, the sad part is that clients are being harmed. When someone without registered accounts, or someone where there is no demonstrated need to have this insurance, that is something that is quite sad. It's multiplied by the thousands of agents that were part of the network and that continued to be part of the network for these three MGAs.
Jordan Solway: I would just add, the lapse rate for the product sold was also very high. The consumers who were buying these products clearly couldn't afford them with the result that they were losing the benefit, because they couldn't continue to make the premium payments. They're a clear consumer harm.
Ben Felix: Wow. Are those lapse data in the report?
Huston Loke: They are.
Ben Felix: Okay, yeah. That's just crazy. Just for the benefit of listeners, when you fund a permanent universal life insurance product, a lot of the initial premiums usually go to fees and costs. If that policy lapses, if you have a universal life insurance policy forever, they can actually be okay if it's done properly. But if you cancel it, or if it lapses relatively early on the policy, it's extremely expensive. It's a mess.
Huston Loke: That's correct. I think we have to also, let's be clear, this is not to say that all universal life policies are bad, or that all life insurance is bad. Not at all. There are certainly very important benefits that are conferred. These products, they have to be appropriate for the customer. If a customer has a need, that need is being satisfied. The training and the illustrations being provided are appropriate and matched to client circumstances and the agent knows enough with the client to provide that recommendation, then there's nothing to worry about. The client now has a solution for their life.
I think what really disappointed us was the fact that you had this combination of very, frankly, scaling up of the distribution through recruiting, combined with complex products where we did not see satisfactory evidence of the need, plus agents that in many cases, were not fulfilling regulatory requirements, or best practices. That combination results in consumer harm.
Ben Felix: Wow, yeah. It's a multifaceted and very large significant issue, and it's really impressive to see the supervision and enforcement that you guys did on that. The report that you made public was also really useful.
Jordan Solway: We're not done there as well.
Ben Felix: Yeah, which is great to hear. Yeah, I love to hear that. How important do you think the commission-based compensation structure in life insurance was to all of those issues that you uncovered?
Huston Loke: Commission-based compensation is standard for financial products. There's something that's always paid, and that is often the price of advice. In fact, we know most customers pay that, and that's how they prefer to do it. Many customers don't say, “Listen, I'm going to work with a financial planner. I'm going to give you $5,000, $10,000, $15,000, and I'm not going to tie that to products.” We know that's realistic, and we know that's how most investors pay for advice.
However, we have done work to make sure that we address some of the biggest concerns we've seen. The best example of that is a recent ban that's been implemented in connection with different sales charges on segregated funds. In the past, you could have a sale of a segregated fund, where the agent would receive a commission upfront, but not only would there be a commission, but if the investor wanted to sell, let's say, the entire position, one, two, three years down the road, the investor would have to pay a fee. Sometimes a fairly steep fee to get access to their own money.
We felt that there were two pieces of that. One, there's the commission, and two, there is having the need to pay a fee to access your own money. We felt that that was not going to lead to good consumer outcomes. There are times when people need access to their own money. There are times when it's going to be quite challenging for them to carry on their life. They might need a renovation. They might need – there might be a health emergency. Three or four years down the road, one, two, three, four years down the road, no one can remember the conversation with the agent to double check and confirm, okay, did you know that there might be a fee applicable?
The decision was made to ban the use of deferred sales charges in connection with segregated funds. I'll add that that was, and that was also consistent with the decision made a number of years earlier on the mutual fund side of things. What that does, we believe, is it makes sure consumers have access to their own money, without being required to pay fees.
Jordan Solway: I would just add that I think it really doesn't matter what the financial service product is. I think, consumers have to be cognizant that in some cases, the compensation structure can motivate and incentivize behaviour, that product may be sold, that may not necessarily be appropriate for the consumer, or in their best interests. It's really important for there to be transparency. A consumer asks one of the questions you had asked earlier is what consumers should be asking about when they look at the advisor’s mentioned plan, which is how they're compensated as well. I think it's important to understand that.
That's not to say that anybody who's to make commission is bad, it's just that you have to make sure, as a consumer, you're understanding how that potentially could incentivize the sale of certain products over others. I remember anecdotally, the first time I bought a permanent insurance product, I asked the agent what the commission was, and you would have thought, I asked to see his underwear. I think he wasn't used to being asked that direct question and got a little bit flustered, but I wanted to understand it. I want to understand what the commission structure was for the product he was referring me to, relative to the others that have been considered.
Cameron Passmore: Will there be commission disclosure rules coming, do you think?
Huston Loke: We're working on the segregated fund space in connection with our partners on the security side so that in a few years’ time, there will be consolidated statements that describe the total cost of holding an investment fund, or a segregated fund. It would be consistent across all platforms. For example, if you hold a certain seg fund, then it'll say, “This was your return for this calendar year, and this is how much in dollars you paid in fees to hold this fund.” Whether you have a segregated fund or an investment fund, you will receive that with the same basis of computation. That's a project that we're currently working on with our regulatory partners across Canada.
Cameron Passmore: What about for a permanent policy? Because I would argue that most people would be stunned if they knew the full content advice we're getting on permanent policies that were being written. Like, the total comp, the overrides and everything that go along with it.
Huston Loke: At this point, we're focusing the project on seg funds and investment funds. We've got other projects on the way in terms of other areas. Right now, those are the areas of focus for insurance.
Cameron Passmore: What else can consumers do to better protect themselves from these examples of less-than-great financial advice?
Huston Loke: Jordan pointed out a few very helpful points. I would just add that it's necessary for people to read and to keep up with all the documents. I know that it can be a challenge. Sometimes the regime that we have in place relies on proficiency, and accountability in the part of the agent who's doing the selling. Consumers also, they should take note of the disclosures that are being supplied. They should be asking questions, and they should be evaluating options. We mentioned, we talked about registered accounts previously. The government provides certain savings vehicles and tax-advantaged structures for a reason. I think that the products that are generally being sold by the financial services industry can work well with those structures. We've just encouraged people to evaluate their options there. They have a sense of where they're going. To use that, to evaluate the device they're getting.
Jordan Solway: Reading is important, but so is listening. Just by way of example, and this is an unpaid plug. This podcast is excellent. One of the sessions you did on permanent insurance, on just insurance generally, I think was one of the best educational mechanisms I've ever seen to explain things, very complex things in basic terms, so that people can understand and ask the right questions. I think, there's so many sources today of getting information. I think podcasts are really an excellent one as well.
Ben Felix: Wow. Thanks for the kind words on that. That was a fun episode to dig into. We talked earlier about the MLM type recruiting and the maybe, unsuitable training materials that were being provided to agents. Forgetting about consumers for a second, how can a new financial advisor be sure that they're not being trained in a way that's not going to be beneficial to the end consumer?
Huston Loke: It's so important. There are licensing regimes and there are credentialing requirements to practice. Anyone new should spend time and put in the effort, study the materials. It's not just about passing the exam, but that individual is responsible for advice that's being given to dozens, hundreds of clients for the future. Make ethics and client-centricity a priority, because it should all be about the client to make sure that that product is suitable and makes sense for their life.
I would also add that agents need to familiarize themselves with regulatory guidelines and requirements. It is not acceptable to just say, “You know what? I didn't know. I didn't read it.” You are subject to the provisions of the Insurance Act and the regulations and anyone who's a professional in this area should be keeping up with that as well as guidelines that are published by the regulator.
Jordan Solway: In extreme cases, we also, one of the things that we introduced in 2022 was the lower protection in all of our sectors. It came out of that project we did in auto insurance, but it applies across the board. If you're seeing things and we just have one in one of the sectors where it actually is a company that was having business produced on its behalf and it thought the business was too good to be true. It started doing, asking some questions, making some inquiries, and they have identified potential fraud.
Our whistle-blower protection allows people to report to us anonymously. It allows them to be protected against reprisal. It's another way in which we can actually monitor and people can come forward in a safe way to let us know, because as a regulator, you can't be everywhere all the time. We have finite resources and we try to do best of what we have. Like, if we can get an early indication of this potential problem, we can get in quicker and avoid consumer harm.
Ben Felix: All right, keeping on the theme of insurance, something that listeners know, because I've mentioned it a few times in the podcast, I spent a lot of time reading about the infinite banking concept, which is I would call it an insurance sales strategy. Somebody who promotes it would call it something else probably. One of the things that it does is encourage people to use participating whole life policies in lieu of registered accounts, like RRSPs and TFSAs, which is a practice we talked about earlier with universal life insurance. Is FSRA aware of the infinite banking concept?
Jordan Solway: I'll let Huston answer, but just before he does, just no relation to Michael Lewis’s going into then about crypto, I'm assuming. The Infinite's going to get a bad name.
Ben Felix: Yeah, different kind of infinite, but this gives it a bad name for a different reason.
Huston Loke: I think that we have to be careful when looking to a particular product to solve all of our needs. We've talked about financial planners, for example. I would really encourage anyone who's looking into something where they're putting that much stake into a single product to consult with a qualified financial planner and be transparent. These are my needs. What are the services and practices I need to consider in order to meet my needs? They may come up with something where you can use the proceeds of your policy, your life insurance policies to borrow against, and so on. But when someone is only licensed to sell one product, then there is a limitation, because there might be other solutions and other verticals that might meet those needs better. A financial planner is probably the right professional to help an investor in those situations.
I would also say that it's important for an individual to consider, okay, what is the next best option? Let's say that an advisor comes and says, “This is what you should do.” The investor would say, “You know what? I'm not that comfortable with this piece. If I change that up, what would be the next best option?” Why? Because it really spurs on the discussion and it starts to introduce frankly and just options as to what you might do, and other conversations that might import when you evaluate whether that strategy is appropriate for you. Ultimately, people are going to be responsible for their own financial well-being. But again, I'd recommend that they go see a financial planner.
Cameron Passmore: Final question for you guys. What initiatives looking forward are you currently most excited about?
Huston Loke: There's so many. There's such a breath of financial services that we look at. We do try to make sure that we're looking out for the consumer. I've mentioned the work we're doing on segregated funds, on cost disclosure, and on conduct standards. I'll mention something that we haven't talked about yet, which is mortgages. Mortgages, if you open the front page to the newspaper, every day, there's something on affordability and enterprise interest rates and what happens with all these low-rate mortgages reset.
In the coming weeks, we're going to be publishing something on mortgage suitability, because we want to make sure that people know what they're getting into. Agents are going to have to have a conversation with their clients in the beginning of mortgage, or certain mortgage brokers, mortgage agents who have to explain how this is suitable for them. We think that's important. We're also doing work on poll owners. We're speaking to insurance companies and gathering data to see how claims are being handled. Because ultimately, that's where the rubber hits the road. You make your payments for years and years and years. Once in a while, some customers will have to make a claim. Ultimately, we want to make sure that they're being treated fairly.
I mentioned the registry where someone will be able to go online and say, “This person told me that their financial advisor, what are their credentials and what, if anything, do I need to worry about in terms of their past?” Those are some of the big initiatives that I could think of. Jordan, anything on your end?
Jordan Solway: Yeah. I would just say, just to put it in context, we started up in 2019. We started as a new regulator with a new mandate. Not even a year into it, we were hit with COVID, which presented a whole bunch of real challenges, particularly in financial services. We've come out from that successfully and effectively. We're at the point, I think, as a regulator hitting our fifth year, really pausing and looking at what we've done, lessons learned, seeing how financial services are evolving.
I was at a conference last week where one of the speakers was talking about the focus now on decumulation products and how whether Canadians are being properly served as they head towards the final chapter of life, and they have to start spending all that money they've ideally accumulated over their lifetime. The one thing I'll tell you is that this is never dull. You're constantly dealing with very complex problems every day. As financial services evolve, we have to evolve with it, look at distribution, look at products, and actually facilitate innovation. I know, innovation sometimes is taken as a bad word, and it can be, but innovation can reduce cost to the consumer. It can give consumer better choice, and it can result in better outcomes.
I think we're constantly looking at how the products are evolving and how the models are evolving to better serve the end users. I think, and also, making sure we have an office of the consumer as well, making sure that we are in a position to empower consumers, because as you know, and it’s Financial Literacy Month. It's really important for people to get the right information to make these decisions. These are pretty significant decisions for consumers. Buying a house, buying permanent insurance, saving for retirement. As we're seeing, less and less people are going to have defined benefit pensions, and so it makes this the need for proper advice and proper product selection absolutely critical.
Cameron Passmore: Couldn't agree more. I mean, FSRA touches so many aspects of our day-to-day lives, and the work is so important. It was great to have you on Jordan, Huston. Thanks so much.
Jordan Solway: Thank you for having us.
Huston Loke: Thank you. It's great to be here.
Ben Felix: Really great to hear from you guys. We've been critical, I guess, of regulation in many cases and seeing title protection come into place. Even if we could still criticize some aspects, like the disparity in credentials and stuff like that, it's really good to see stuff like this happening. I think it really helps to professionalize financial services, which is something that I think is badly needed. I think you guys are doing good work. I liked your comment earlier, Jordan, that it's a dynamic process, which you guys are doing. That's really good to hear.
Jordan Solway: I would say that sometimes, you can't let perfect be the enemy of good. You get, the changes are slow and it may not be the ideal ones you need, but it's a beginning, and you can build on it. I think that you have to develop that patient and that perspective. But as a regulator, we're open to constructive feedback. It allows us to do our job better, frankly, particularly for people who are in the area that are respected and by the right things. It helps us be better.
Huston Loke: I'd say that, Daph, on my team, I've actually forwarded me materials that you took that you produced. I think you certainly have an audience with us. As Jordan mentioned, Jordan introduced me to you folks. But I realized that my staff have been sending materials to me already. Thank you.
Jordan Solway: They're trying to get Huston to wear the hoodie to work, but it's just been a – he’s a super-tie kind of guy.
Ben Felix: I love it. All right. Thanks. Thanks, guys.
Jordan Solway: Thanks very much. Have a great weekend.
Huston Loke: Okay. Really appreciate it. Thank you.
Cameron Passmore: Thanks, guys.
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Ben Felix: All right, we're going to kick off our Mark to Market segment with Mark McGrath. It's a bit of a niche topic. Mark asked if it was too niche, but you know what? It is. I want to be clear about that upfront. Less than half our audience is Canadian, and even within Canada, this is somewhat of a niche topic. It's talking about investing in a corporation and some of the nuance around that. If that's not relevant to you, feel free to skip this segment. However, even if it's not directly applicable to you, I think it is really interesting. Stick around. Plus, Mark's great at talking about stuff.
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Mark McGrath: Yeah. I've heard from some non-Canadian advisors that have listened to this segment, and they still enjoy it for whatever reason, just to learn some of the nuances, the difference between planning in Canada and the US. Who knows, to your point, it is a little bit niche, but fascinating, kind of technical. I'll try to keep it at a relatively high level, because there's a lot of nuance to this topic that I think is just too much for a podcast. Yeah, so we'll keep it high-level. I'll just try to explain this.
What I'm going to talk about is something called the passive investment grind. I don't think that's an official name. I don't know that there's an official name, but I was writing about this last year, or maybe earlier this year. As I started writing it, I realized the acronym for passive investment grind is PIG. I wrote this article called like, how to tame the PIG, or don't wrestle with the PIG, or something like that. I was really proud of myself for it. The article I wrote had a bit of a wrestling the pig theme and how it might best you.
Anyway, so the PIG, the passive investment grind. This is specifically applicable to Canadians that are shareholders of a small business. A Canadian-controlled private corporation. Small businesses, a lot of professionals, like physicians and dentists who have professional corporations, this is going to apply to them as well. This is a relatively recent change in tax legislation. I want to say this came about in late 2017, maybe it was 2018, but it's in the past five or six years this came about. What it is is, or the way it works rather is every province and the federal government has something called a small business limit. For almost every province, with the exception of Saskatchewan and partially Ontario, that limit is $500,000.
What that means is if you have a corporation earning revenue or profits, and those profits are less than $500,000 in those provinces, your business is taxed at a very low rate. That income is taxed at a really low rate. In BC, it's 11%. In Ontario, I think it's 12 in a bit, I want to say, 12.2, something like that. Twelve and a half. Yeah. Every province has their own applicable rate. For the sake of the example, I'm in BC, so we'll say it's 11%. That's income on the first $500,000 that the corporation earns.
Income above that is taxed at what they call the general rate. It's taxed at a higher rate. In BC, that's 27%. Again, that's going to differ by province. Saskatchewan is the only outlier here. Their small business limit is 600,000. In Ontario, there's a difference between how the federal government applied it and how the provincial government applied it, but we don't need to get too much into that. High level concept, first half a million, low tax rate, everything above that, higher tax rate.
What the government did is they introduced changes to dissuade companies from having too much investment income in the corporation. I work with a lot of physicians. This is a very common issue. They have a bunch of retained earnings in their medical corporation. They create a corporate investment portfolio. They invest that in a, let's just say, a diversified index fund. Now that portfolio is generating passive investment income. Passive investment income in a corporation is taxed much differently than active business income, or the income that is derived from operating the business.
The government made changes to try to dissuade people from holding too many investment assets, or too high of a portfolio value. What they did is if you have adjusted income, or aggregate adjusted investment income in your corporation that is higher than $50,000 per year, they start to grind down that small business limit. Let's say, you've got a portfolio, let's just – we'll throw out some numbers. Let's say, you've got a 2-million-dollar portfolio. The income that portfolio generates in the form of interest and dividends and foreign dividends and capital gains is say, 3%. 2-million-dollar portfolio, that's $60,000 in passive income.
Well, it's above 50,000, which is where this test starts. What happens is you've got $10,000 of income, investment income above this threshold. What they do is they grind your small business limit, which is that $500,000 limit, they grind it down by $5 for every dollar of investment income over the $50,000 limit.
I'm not sure that this is really necessary. It's a very complicated rule that they've added here. I don't know if it had the intended purpose, but at the end of the day, it's very, very complex. For small business owners, it's quite difficult to understand. Here's the impact of that. With $10,000 of additional income over the threshold, they're going to grind it at $5 per every dollar investment income. Meaning $50,000, your small business limit, is reduced by $50,000 in this case. What's the impact?
That means, instead of the first $500,000 being taxed at a low rate, now only the first $450,000 is taxed at the low rate. Everything above that now is taxed at the general rate. That's the issue and it caused quite an uproar. People think about this as a tax punishment or a tax cost. I'm going to explain a little bit about why that's not necessarily the case, why this isn't really a big deal in a lot of cases, and some things you can do to try to minimize the impact of this.
When you have income at those small business tax rates, so in our example here, that first $450,000, when you pay yourself a dividend out of your corporation to yourself and you stick it in your jeans, it's taxed as an ineligible dividend. Okay, we won't get into the numbers, but that's called an ineligible dividend. Anything that comes out of your corporation that was taxed at the higher general rate, so in our example, any income from the corporation that was taxed, any income over $450,000, when that comes out, it's an eligible dividend.
Because that income was taxed at a higher rate in the corporation, when you get the eligible dividend, you get basically, a tax break. It's taxed lower. The idea here is that by the time the money hits your back pocket, it should all be taxed the same way, regardless. That's the whole theme of our tax system. It's called integration.
The issue becomes if you have all this income, it's taxed at these higher rates and it stays in the corporation. You've paid a penalty. You've paid more tax than you would have prior to these rules coming into existence. If you just take the money out and dividend out to yourself and stick in your jeans, it offsets. It's not a big deal. Over the long run, this can become a problem. What can you do about it? I guess, there's a few things you can do about it.
You can pay salary out of the corporation because salary is deductible to the corporation. In our example, if they had $500,000 of income, paid a $200,000 salary to themselves, now the corporate income is $300,000. You get to deduct it from the corporation. That makes it harder to hit those small business limits. That's one option. Consider the tax efficiency of the portfolio. Different types of income are taxed differently. Some types of income are more efficient than others. Capital gains, and deferred capital gains are more efficient than interest income, for example. Reducing the amount of investment income that you're getting, so that you don't meet these thresholds.
Or reducing the amount of capital that's in the corporation that is generating income in the first place. You can do that by, in some cases, opening an individual pension plan for yourself, which lets you get money out of the corporation and into a pension plan. If it's relevant and necessary, you could use permanent insurance, which is owned by the corporation, which puts money into a tax-sheltered insurance policy.
There's a few ways to get around it, but all of those ways costs and complexity. The idea here is don't bend over backwards trying to get away from this, from the PIG. You don't need to necessarily try to wrestle the PIG. It might beat you in the end anyway. Maybe you should just accept it and move on. Because at the end of the day, because you get the tax break on the eligible dividends when they come out, it's awash at the end of the day. The real punishment is if you have this income tax at a higher rate, you leave it in the corporation for a really long time, yes, you've prepaid too much in tax. You'll get it back in the form of a tax credit on the eligible dividend.
High level, it's complex. Work with accountants, obviously, when thinking about these things. Don't worry too, too much about it. If you can avoid it in a reasonable way, and there's a reason to implement other planning that has the benefit of reducing this problem for you as well, take a look at it.
Ben Felix: I think one of the things you said near the end there is really important. This was framed by a lot of people when this change was coming into place as an additional tax that people of corporations are going to pay. It was a change in the ability to defer tax. You don't end up paying more tax overall. You just lose some of your ability to defer tax.
Then the other thing is that Ontario and New Brunswick at the provincial level, didn't fully adopt the changes, which caused this funny break in integration. You can actually end up slightly better off by paying more tax upfront and then being able to pay yourself an eligible dividend because the provincial integration is imperfect there.
I remember when this came, you, of course, do too, Mark. When this change was coming, there was a huge uproar. People were really panicking about it. When it all came through, I don't think it ended up being that big of a deal.
Mark McGrath: I remember panicking about it, too, and then rushing out to my clients' accountants, and the accountants were like, “It's not a big deal.” To your point, it's a loss of the deferral. It's not a pure tax cost. I was like, “Oh.” I wanted to be angrier about this, and the accountants talked me off the ledge and were like, “Calm down, guys. It's complicated.” It's additional complexity that I wish our clients didn't have to deal with. At the end of the day, it's not the difference between a client meeting their goals or not, or totally overpaying their tax bills. Not a huge deal. But you will find a lot of information online when you look at this that I think maybe creates a little bit of fear around it. I just want to dispel the myth that this is really something that everybody needs to be worried about.
Ben Felix: Nice. Good, important topic for Canadians with corporations.
Cameron Passmore: All right. Let's go to one episode, 60 seconds, where we give newer listeners a chance to hear some of our favourite episodes that have happened over the past five years. I thought this week, we talk about an interesting one that you and I got to do early on in the podcast with someone who is relatively high profile, which is cool. Ted Seides is someone who I had been listening to for years and enjoyed his interviews on his podcast at Capital Allocators.
Then I learned that we shared the same producer. Still do. I used that as a bridge and an email to Ted to see if he would come on our podcast. He said, he listened to a few episodes and said yes, he's coming on, which is pretty cool. With that short backstory, let's jump into the quick review.
In episode 61, we had the chance to speak with Ted Seides. Yes, the guy who famously lost the bet to Warren Buffett, the one between the S&P 500 and the collection of hedge funds. Ted is the host of the popular podcast, Capital Allocators. He also worked with David Swenson at Yale for many years. With this background, Ben, I think it's safe to say we knew that we were in for a chance to learn and Ted sure delivered.
He described the environment at Yale and gave some insights on how they performed so well for so many years, the beliefs they held, the criteria they use and making decisions and the structure to implement. He also said things are very different today with the proliferation of products that did not exist during his time at Yale. We also asked him about when Charlie Ellis was on the board at the Yale Endowment and what dissidents there may have been. Ted agrees that markets are very hard to beat and only a handful might be able to do it long term. The majority of retail investors should not try to beat the markets.
After interviewing Ted, I felt he gave very solid arguments about a framework that possibly could improve over an index. We appreciated. I remember we commented about this afterwards, Ben, we appreciated his nuanced views on active management.
Lastly, he does share his thoughts on the bet with Buffett. I'll leave it to you to go listen to that interview. I thought his take on that bet was quite interesting and quite thought-provoking. That was Ted Seides, episode 61.
Ben Felix: Yeah, that was a great conversation. Like you said, it was thought provoking. It's easy to look at something like the Buffett bet and be like, “Ah, active management, stupid. That guy lost the bet with Buffett.” But then you hear somebody who's actually in it and who actually knows what they're talking about, talk about it. It really does change your perspective.
Cameron Passmore: Absolutely. I mean, and it's often the passive camp uses that to really hammer Ted, which I don't think is fair. He said, both sides knew there was a range of outcomes. Him and Warren Buffett talked about that. It's quite fascinating, actually. I think it's not fair just to dump all over Ted on that.
Ben Felix: Yeah. I agree.
Cameron Passmore: All right, let's go to a quick book review this week. Last year, Ben, Tim Hale reached out to us. Must be about a year or so ago. He had a publishing his fourth edition of the book, Smarter Investing: Simple Decisions for Better Results. He reached out to see if we would do an endorsement of the book, which we agreed to do. That's actually when you see the book now being published, it's cool to be in there alongside people like, Professor Elroy Dimson and Larry Swedroe, Mark Hebner, and also John Bogle and Charlie Ellis, who praised previous editions. Also, our friend and past guest, Robin Wigglesworth wrote the foreword. Given all that, I think we knew it was going to be a pretty solid book.
Tim graduated from the University of Oxford with a degree in Zoology and also holds an MBA from Cranfield School of Management. After a few years with Standard Chartered in Hong Kong, he spent almost a decade at Chase Asset Management in London, Hong Kong, and New York. He saw difficulties that many investors faced in trying to invest sensibly. He set up Albion Strategic Consulting in 2001 to help financial planning firms build out their investment propositions.
He wrote Smarter Investing to provide investors with a framework to improve their chances of experiencing a successful investment experience. He lives in Exeter, UK, where he and his Albion team are based. This book is a 350-page resource. I'm holding it up here now. I highly recommend it to anyone, especially people in the UK where Tim is from. I thought, instead of us reviewing the book, it'd be cool to have Tim join us. With that, let's go to our discussion with Tim Hale.
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Cameron Passmore: Tim Hale, welcome to the Rational Reminder Podcast.
Tim Hale: Thank you. It's great to be here.
Cameron Passmore: It's great to have you. Thanks for sharing your book and inviting us to be part of – a little part of it, but part of it, nonetheless. Congrats on the book. It's a great book.
Tim Hale: Thank you. I appreciate that.
Cameron Passmore: What drove you to write the first edition of Smarter Investing back in, I think it was 2006?
Tim Hale: That's right. Yeah. It was frustration, I think. Frustration is seeing how badly some people were investing. I started off working in the active management world. I was at Chase Manhattan, and then the JP Morgan Chase, which is now, I guess, JP Morgan Asset Management. It was just, I quickly just saw the randomness of who was outperforming as fund managers and who wasn't and throwing a whole load of costs. It just seemed like, that didn't seem a very palatable way to go.
I had this sense that there was a better way to do things. I was in New York, working in New York for a few years, around the time of the dotcom, so late 90s, and going into the local diner in Manhattan and the way to telling you of all the great day trading he was doing, all the money he was making. A few months later, he didn't had the shirt on his back. It just didn't seem right and absolutely crazy.
Then when I got back to the UK, I was wedded and scored in the US theory and investment theory and the approach to investing. I got back to the UK and it was just – it was anti-diluvian. It was still commission-based people just putting together portfolios of stuff they'd sold people. It was just horrible. It was that frustration that gets, people really deserved better. I wanted to write something that allowed people to, guess, have a bit more of an insight into maybe better ways of doing things. It was a bit of anger that got me going and yeah, forced me to write the book.
Ben Felix: Who was your intended audience for the book?
Tim Hale: Well, at first, it was really just anybody, I mean, who had a positive, active interest in trying to do things better and is a small subset of all the people who need to do things better, now that we don't have DB pension plans and everybody's investing their own money. I felt there was this group, people who were interested, people like my friends and colleagues and stuff who – and actually, what I found was, yeah, there was a reasonable audience in there.
Also, I found the financial planning community was really very receptive at that time. We would just, I think Dimensional had just come into the UK. People were beginning to think, “Gosh, maybe there is a better way of doing things.” Actually, I found that a lot of financial planners picked up on the book and spread the word around. That was great. It was nice to see that happening, that there was a positive influence in the planning community to try and do things in a better way.
Cameron Passmore: In a nutshell, how would you describe the key messages in the book?
Tim Hale: The key thing for me is to start with the evidence. If you're ever going to do anything, start with the evidence. People don’t like evidence anymore, it seems, and truths. I think, if you start there, then it allows you to have a real sense of what you should be doing and where you should be going with this stuff.
Good investing is only about doing a few really small things sensibly and doing them exceptionally well over time. I think the key message for me was for people reading, but if you understand that the market does a pretty good job of incorporating information into prices, and for most of us, it's going to be a pretty tough ask to try and beat the market. Then suddenly, you get this clarity in what you do. You get a clarity in the choices you face and the decisions you need to make. If that's the one message I can get over in the book, that's got to be the starting point.
From there, you can get more sophisticated about it. I love the quote from Eugene Fama that he came up with in a webinar we saw, which was, “You've got to be able to talk your way out of the market portfolio.” I think if you can keep that in your mind, that's a really great starting point. Should I really be doing this, or should I just go back to the market? If I don't know, go back to the market. That for me was really great.
Then the simple messages around getting your asset allocation right, diversifying, keeping your costs, financially, emotional low, and rebalancing. Those are the key messages. If there's one key piece for me, it's just throw your hands up and accept that the market works pretty well. From there, life gets so much easier.
Ben Felix: How's the book structured?
Tim Hale: Well, my wife said, why didn't I write a shorter book? There's a few pages. What I tried to do was, again, it was this balance between being a bit too thin. For me, it's about conviction. If you really read the evidence and you buy into it, then you got that conviction and down the line, you're going to be able to hold firm when markets get tough. That conviction is really important. That meant there needed to be a bit of content in there.
Cameron Passmore: Yeah, there's content, 347 pages. If you want content, you've got content.
Tim Hale: What I wanted to do was have a section up front, which is, look, if you can't face reading the whole book in one sitting or whatever, here are some 20 tips of how to get through this stuff and the things you should be thinking about and the things you should be doing. Then I tried to break up the rest of it into, we used a little acronym PACE, which was how to quickly get through making these sorts of decisions.
The P was for put in place a proven philosophy. That's the first chunk of the book. The second is A, asset allocation. Get that right. Understand the risk that you may want to take in investing and maybe some of the risks that you don't want to take. How do you decipher between the two and then how do you mix it all together into a portfolio, where you're taking sensible risk, the flip side of which should be reasonable expected returns? That was the A. The C was for clear choices. That was really about implementing in terms of how do you go about choosing which funds you want to populate the slices of the pie with.
Then the E was for excellent execution. There's lots of stuff. The little stuff that you do at that bit can be really important. In the UK, we have to pay for administration custody. That's maybe 15, 20 bits. Well, don't overpay for that. Make sure you're on the right platform. Use your tax breaks, your pensions, and your tax-free wrappers. Use your spouse’s allowances. All those little bits of admin. Just organize yourself to do them well. That was it really.
Then the back bit of the book, we try to take out some of the details around the asset classes and then also, put in some resources. I think we mentioned you in there. Great resources for people, the Monevator website in the UK, books that we love, Jack Bogle and Charlie Ellis and all those sorts of things. You can dip in and out of it in the structure, but it is a tone, but I hope there's some depth in there for those who really want to try and build that conviction.
Cameron Passmore: What do you think has changed the most over the 16 years since you wrote the first edition?
Tim Hale: Certainly, in the UK, I mean, it's around, first of all, the opportunity set. I mean, when I first started talking about this stuff in the UK, I went to an industry conference month where I pitched as the passive guy against the active guys. There was about 300 people in the audience. When I looked out there and I was talking, I could see people look at me as though I'd landed from Mars. This was such a new story to them.
I mean, when you've got a commission-based industry, you can't sell passive products, because there was no trail. There was a lot of resistance to that. Dimensional had just come into the marketplace. Vanguard was nowhere to be seen. BlackRock wasn't around. We had one UK fund that had a 100 basis point charge on it. I mean, it was just awful. Platforms are really clunky and expensive. From that perspective, from the execution perspective, a lot has changed.
Also, when I was writing the book, I was reflecting on it, thinking, well, what has changed in my viewpoint? I thought, well, actually, the tenants of good investing have always being around. They haven't changed very much. Certainly, within me, the thing that really has changed overall these years, working with financial planning firms, building their portfolios is my conviction that markets really do work pretty well. They do such a good job of incorporating information into prices. That gives you, not only as we were talking about earlier, that this clarity and simplicity of the choices you face, but also, that ability to using Fama’s phrase, again, you've got to talk your way out of the market portfolio.
It gives you the facility to do that. Because again, if there's information in prices, you can begin to think about, think terms of value and size and no profitability. Suddenly, you have these tools to say, “Look, if I'm going to push away from the market portfolio, I can do it in an evidence-based manner with a lot of conviction.” Yeah, I think for me, that was the wonderful thing that conviction just grew and grew and grew over time.
Ben Felix: You talked earlier about how you worked in active management. Did you have a light bulb moment in your career that pushed you toward this type of systematic investing?
Tim Hale: I did, really. Yeah. It came really, really early on, which was this. I mean, I lasted a decade. I mean, tyranny of functional, getting well-paid and having fun and living in Hong Kong and London and New York and things. It was great. One of the first jobs I was given, this was in about 1991. I just finished my MBA and I got this job at Chemical Bank, which then became Chase and Chase became blah, blah, blah. They said, look, at the interview, they was talking about their fantastic performance track record. When I got in, I asked, could I see the track record? There was a bit of shuffling and silence.
I was given the task of pulling together a compliant performance track record. I searched and computers in those days were only just new on our desk. There wasn't any nice database with all the data on. I went through all the filing cabinets. I couldn't find it anywhere. I looked at everything. It was terrible. I just couldn't work it out. Somebody said, “Look, go and find the pension report for this pension funds we manage and look in that. That's where the performance you'll see.”
I was looking at and there was our performance and there was the peer group and there was the market. This fund manager, cynical fund manager, a great friend of mine shuffled over and he said, “The only way you'll find outperformance in this outfit,” he just turned up the chart upside down. I was like, “Gosh, what's going on here?” Then I got into the randomness of returns and being in meetings with the fund managers and when the markets went up, it was all due to their great stock picks or whatever it was. When they went down, it was all external factors, the Fed, or the economy, or something it was doing it.
Then one of the senior managers in New York, sent me Charlie Ellis's book, Winning the Loser’s Game. At that point, I was just blew me away and I thought, this is just fantastic. As I said, the tyranny of function, it took me another seven or eight years to get out of the game. I was ready by the end of it. Also, I mean, that just I used to do these, draw polls of the fund manager and say, “Well, how much of your money is in your own funds, or other people's active funds, or in index funds?” They all should sheepishly say, “Well, quite a lot in index funds.” Those were the active managers. Hey, if you've been paid a million dollars a year to manage money, you've got to keep up there. There's a lot of cognitive dissonance going on.
Ben Felix: Okay, so you read Charlie Ellis's book, and then you stuck around for seven or eight more years. Did you second guess the index investing approach during that time? Were there periods where you thought, “You know what? Maybe active does work?”
Tim Hale: That active does work. No, I gave up on that one. I became quite a passive advocate within the organization. I was called Mr. Passive at one point because I used to go on about it so much. I just got to a point eventually, where you just can't drag yourself into work if you don't believe in this stuff. I had to leave the nice apartment in the West Village and head home to London.
Cameron Passmore: This, I'm very curious, did others in your organization ridicule you? Or did they behind the scenes say, “Yeah, we agree with you, but we have a day job here?”
Tim Hale: Yeah, I think more of the latter. There were a few diehards. You know what it's like in that industry. There's a lot of big egos and lots of big salaries and things. There were some difficult characters who the egos got the better of them, but most people understood. Most people knew. I think it was a pretty well accepted that it was going to be a pretty tough thing to beat, because they were getting beaten by the index a lot of the time. Why not just own it?
Cameron Passmore: What do you think are the two biggest mistakes that investors can make?
Tim Hale: I think it goes back to philosophy. That's my starting point. You see a lot of philosophy-free investing going chasing after stuff, whether it's Bitcoin, or whether it's meme stocks, or whether it's just simply taking big macro puns and things. People just don't seem to – there's a whole swathe of investors, I think, who have never really sat down and said, “How does this stuff really work? What can I do that's going to give me a good chance of a successful outcome?” If you haven't been through that process, you're always going to be in this philosophy-free environment, where you're going to be shaken in and out of things. Living in that philosophy-free world and not accepting, my second bit would be not accepting the markets actually work pretty well. 99.9% of the world's population just believe in the market.
Ben Felix: What do you think is the biggest behavioural bias that affects most investors?
Tim Hale: Certainly, from our experience, I think it's recency bias. Sometimes the questions that we get from our financial planning firms that we work with, or their clients are asking why are we in REITs? Why are you in REITs? Well, why we’re still an emerging market is I’ve done a thing for 10 or 15 years. Why don't we have – I mean, you get into this reductionist argument of, why aren't we in mainly in the US? Well, we are mainly in the US, because we've got a global market cap weight portfolio. Why aren't we more in growth stocks, not value stocks? You can reduce it down to why aren't we in the best seven stocks?
I mean, and that is just endemic, isn't it? The people chase returns, they chase what's been doing well and they get despondent about other things. I think it was, was it Taleb who said, you can't judge a portfolio by its performance. You can only judge it by the alternative histories that didn't happen? We live today, don't we? Our portfolio needs to reflect all those risks that are facing us and coming at us and market events that we don't know about. We just need to build a really robust all seasons portfolio to get through that stuff, because we don't know which of those.
Sometimes we’ll be here, and sometimes we won't be. It doesn't mean it's a bad portfolio. I think that's the most important thing. You'd have to keep on to get over that recency bias, we have to keep on taking clients back and saying, “Hey, you know what? In the noughties, the US market went nowhere for 10 years.” You would have been delighted to be in emerging markets and international stocks. It's been the other way arounds in the last 10 years. There have been times coming out of the dotcom crash when it was fantastic to be a value investor. We've been through a time when it isn't so fantastic.
At the end of the day, if you've got conviction, and again, that comes down to why the book's not a pamphlet, was if you've got that conviction, then you've got a greater chance of staying through these tough times, which you guys talk a lot about, obviously, in your podcast.
Cameron Passmore: I view your book as a great resource. At 350 pages, it covers so many topics. You can dive in with many one-off questions. What do you think is the one thing a reader could come away with from your book, Smarter Investing?
Tim Hale: I think it comes back again to that, just have the courage to believe that the market return is actually a really great return, as Bogle would have said. Accept that the market works well. If it does, you're going to make your life so much easier. You've got to be convinced, because if you're not convinced, you're going to be sucked out of it, and you're going to do something different as and when you go through those tough times, as all investors do. You just got to have the conviction to stay with it.
Ben Felix: Now, you're based in the UK. We do have a UK contingent, but also Canada, Australia, the US, all over the place. How applicable do you think your book is for people living outside the UK?
Tim Hale: Well, for me, the tenants of good investing are universal, and the evidence that we base what we do is global. I think from that perspective, it's highly applicable. Even down at the product level, some of the criteria for how you'd select a fund, and actually a lot of the funds we're talking about Dimensional, Vanguard, iShares, all the big players, they're global firms, and you've probably just got a GBT share class of a US dollar-based fund. Yeah, absolutely applicable. I think that's the key is that it doesn't really matter where you are doing things in a sensible, smarter way a universal.
Cameron Passmore: The book is Smarter Investing, fourth edition. Simple Decisions for Better Results. Tim, it's great to have you on. Phenomenal book, and congratulations once again.
Tim Hale: Thank you. It's been a pleasure, gents.
Ben Felix: Thanks, Tim.
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Ben Felix: All right. Welcome to the aftershow for the estimated three people that listen to the end.
Cameron Passmore: I got to kick it off with the content that Lisa and I discovered lately. It's called Life on Our Planet on Netflix. Have you seen it?
Ben Felix: No.
Cameron Passmore: You should show it to your kids. It's phenomenal. It's an eight-episode series, I think, roughly an hour each. It looks back over 500 million years of life on the planet, and all the times that species went extinct. It is crazy. Well done. Morgan Freeman is the narrator. It's very, very good. The computer-generated graphics of dinosaurs are pretty cool. Highly recommended.
Also, want to mention the people that Morgan Housel is on the Tim Ferriss podcast last week, or two weeks ago. He has a new book called Same as Ever, that was just released this week. Morgan will be a guest on our podcast in New Year, but his interview with Tim Ferriss is excellent. Very, very good interview.
Also, want to mention our good friend, Hal Hershfield has a new podcast called The Behavioral Divide, which just came out this week, I think. His first guest is Professor Scott Rick, an academic, and someone who will be joining us as well in the New Year. He has a new book that just came out called Tightwads and Spend Thrifts: Navigating the Money Minefield and Real Relationships. That's a topic of his conversation on Hal's new podcast that just came out.
Lastly, I want to mention that Gerard O’Reilly, the co-CEO and CIO of Dimensional Funds was a guest on Bloomberg's Odd Lots. Again, Gerard’s one of our excellent interviews we had recently, and this interview is a really good one on Odd Lots. Anything you want to add to that list, Ben?
Ben Felix: No. I don't have any recent content to talk about. Been doing a lot of research on building out our financial planning framework, but that's not really content.
Cameron Passmore: I have so many books I got to read. I don't know about you, but I'm buried. People have been sending me books to review and read. Gets a little overwhelming at times.
Ben Felix: That's the thing that happens. People send us books and wants us to read them. I do have a pile, a literal pile of books people have sent me sitting in my desk.
Cameron Passmore: Oh, I do too. Little on the Kindle's just backing up, because I hear about a new book that's coming out. For example, Morgan's new book, and I ordered it months ago, and it shows up on my Kindle. The Kindle just keeps getting fuller and fuller all the time. Anyways, you want to take a crack at the reviews?
Ben Felix: Yup. We've got Kosanovich from the United States, says, “The single most valuable podcast about investing. This podcast literally changed my life. Best there is.” That's about as good as it gets for a review, I would say.
Cameron Passmore: Yup.
Ben Felix: Roll tide from the United States, “Financial guidance at its best. Ben and Cameron do a remarkable job at facilitating financial planning and investment theory discussions from beginner to advanced levels. I've listened to every episode and can honestly say, their advice has completely changed the way I view so many financial theories and investment strategies. The snippets and takeaways I have been able to share with my family, from parents entering retirement, to siblings setting up their first 401k/Roth IRAs have made a tremendous positive impact on their future financial stability. Thank you for working tirelessly, which we certainly do to gather such diverse perspectives and topics from which everyone can learn.”
The last one, we've got Doc KK, Ottawa, from Canada. “Great podcast for thoughtful discussions on personal finance. Great discussions. Enjoy the addition of Mark. Great storyteller. Maybe his segment should be called Mark my Words, given we like his stories.” We did consider that.
Cameron Passmore: That's pretty good.
Ben Felix: I also think, one of the final contenders along with Mark to Market.
Cameron Passmore: On LinkedIn, I heard from Oliver. He reached out from Maple Ridge, BC, saying, “I wanted to reach out to you and Ben. Thank you for all the work you do with the podcast. It's been one of the few podcasts I listen to frequently. The passive approach and evidence-based strategies you both preach is the main reason I switched firms.” He's an advisor to get away from the high MER active funds.
Coming up next week, Shane Parrish will be here, who has a new book out called Clear Thinking. Excellent book. That was an excellent conversation. In three weeks, James Grubman is here, who wrote Strangers in Paradise and also, Wealth 3.0. Two phenomenal books. As always, you can find both of us on X, on LinkedIn.
Ben Felix: I feel like, to be on the platform, you're actively engaged in answering comments and stuff like that. From that perspective, I don't know if I'm on any platforms right now. Still posting stuff in various places, though. I did want to mention that, so when this comes out, 279, episode 278 with Juhani Linnainmaa, that was an incredible episode on financial advisors and whether and what extent they're useful and what they're useful for, for part of it, and then part of it on the cross-section of returns.
I'm only mentioning it, because when we launched the episode, the title was wrong. Then it was late getting posted to YouTube. I don't know if it's because of that, but I've seen almost no interaction and comments on the content in the episode. It was a very, very thought-provoking. Whether you want to hear about financial advisors, or the cross-section of returns, which are two topics that either one of those two, most of our audience would be very interested in. I think it was a great episode. Hopefully, if people missed it because of the funny launch that it had, I hope they'll go back and check it out, because it was a great episode.
Cameron Passmore: Absolutely. Anything else this week, Ben?
Ben Felix: I don't think so. That's good.
Cameron Passmore: All right, everybody. Once again, thanks for listening.
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Books From Today’s Episode:
Wealth 3.0 — https://www.amazon.com/Wealth-3-0-Future-Family-Advising/dp/B0C9SHFSGM
Tightwads and Spendthrifts — https://www.amazon.com/Tightwads-Spendthrifts-Navigating-Minefield-Relationships/dp/1250280079
Clear Thinking — https://www.amazon.com/Clear-Thinking-Turning-Ordinary-Extraordinary/dp/0593086112
Strangers in Paradise — https://www.amazon.com/Strangers-Paradise-Families-Wealth-Generations/dp/0615894356/
Same as Ever — https://www.amazon.com/Same-Ever-Guide-Never-Changes/dp/0593332709/
Smarter Investing — https://www.amazon.com/Smarter-Investing-Simpler-Decisions-Results/dp/0273722077
Winning the Loser's Game – https://www.amazon.com/Winning-Losers-Game-Seventh-Strategies/dp/1259838048
Links From Today’s Episode:
‘Should my investment strategy change during a recession?’ — https://www.theglobeandmail.com/investing/personal-finance/household-finances/article-investing-strategy-during-a-recession/
C.D. Howe Institute Business Cycle Council — https://www.cdhowe.org/council/business-cycle-council
Episode 171: Prof. Campbell R. Harvey — https://rationalreminder.ca/podcast/171
Huston Loke — https://www.fsrao.ca/about-fsra/leadership/huston-loke
Huston Loke on LinkedIn — https://www.linkedin.com/in/hloke/
Jordan Solway — https://www.fsrao.ca/about-fsra/leadership/jordan-solway
Jordan Solway on LinkedIn — https://www.linkedin.com/in/jordan-solway-4a261314/
Financial Services Regulatory Authority of Ontario (FSRA) — https://www.fsrao.ca/
Mark McGrath on LinkedIn — https://www.linkedin.com/in/markmcgrathcfp/
Mark McGrath on X — https://twitter.com/MarkMcGrathCFP
Mark McGrath on Calendly — https://calendly.com/mark_mcgrath/
Episode 61: Ted Seides — https://rationalreminder.ca/podcast/61
Ted Seides on LinkedIn — https://www.linkedin.com/in/tedseides
Ted Seides on Twitter — https://twitter.com/tseides
Capital Allocators — https://www.capitalallocators.com/
Tim Hale on LinkedIn — https://www.linkedin.com/in/tim-hale-4b67ba24/
Albion Strategic Consulting — https://albionstrategic.com/
The Behavioral Divide Podcast — https://podcasts.apple.com/us/podcast/the-behavioral-divide-with-hal-hershfield/id1713168854
Episode 278: Juhani Linnainmaa — https://rationalreminder.ca/podcast/278
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
Rational Reminder Website — https://rationalreminder.ca/
Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/
Rational Reminder on X — https://twitter.com/RationalRemind
Rational Reminder on YouTube — https://www.youtube.com/channel/
Rational Reminder Email — info@rationalreminder.ca
Benjamin Felix — https://www.pwlcapital.com/author/benjamin-felix/
Benjamin on X — https://twitter.com/benjaminwfelix
Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/
Cameron Passmore — https://www.pwlcapital.com/profile/cameron-passmore/
Cameron on X — https://twitter.com/CameronPassmore
Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/
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