When robo-advisors first came onto the scene, they were pitched as an easy way to access index funds. These digital platforms provide algorithm-driven financial planning and investment services, with little to no human supervision, and typically use passive investment strategies. But while this technology has revolutionized access, not all robo-advisors are created equal. In today’s episode, Mark, Ben, and Cameron sit down to discuss the role of robo-advisors as passive investors, and the performance disparity in robo-advisor returns, as they investigate different robo-advisors, from Wealthsimple to Wealthfront. Next, in this week’s version of ‘Would you rather?’, we have robo-advisors pairing off against active bank mutual funds, with each of our hosts debating the pros and cons of these two approaches. For our aftershow section, we discuss listener feedback, interesting community discussions, Ben’s addiction to Excel, and much more. Tune in for a deep dive into robo-advisors and how to navigate this technology!

Key Points From This Episode:

(0:04:20) The history of robo-advisors and how they are used today.

(0:08:30) Why there is such a marked dispersion among robo-advisor portfolios; an overview of Wealthsimple’s portfolios and the changes they’ve made over time.

(0:16:00) Wealthsimple's investment returns, fees, and an attribution analysis.

(0:24:19) Why Wealthfront pulled value out of their factor-tilted portfolios in 2022.

(0:26:13) PWL’s investment approach and why no strategy is truly passive.

(0:30:43) What the average investor needs to understand when using a robo-advisor.

(0:32:02) Wealthsimple’s value proposition and why people are drawn to it.

(0:33:33) Our ‘Would You Rather?’ Question: Would you rather put all your money with a robo-advisor or in a big bank actively managed mutual fund?

(0:40:30) The growth of passive investing vs active management in the financial industry.

(0:44:12) AI's impact on financial planning and an update on new calculators we’ve released.

(0:52:38) Aftershow section: listener feedback, community discussions, leasing versus buying vehicles, Ben’s addiction to modelling, 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're hosted by me, Benjamin Felix and Cameron Passmore, portfolio managers at PWL Capital.

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

Cameron Passmore: Well done, Ben. Welcome to Episode 309. We're recording this a bit early because the three of us are actually taken off for a bit of time. None of this ever happen. Obviously, never had for three of us.

Mark McGrath: Not together.

Cameron Passmore: We're not going together. No, we're going three different directions. Next week's, recording this little bit earlier. Anyways, today's main topic, you guys want to talk about a robo-advisors, passive investors. You want to cue it up, Ben?

Ben Felix: Sure, yes. Well, I think robo-advisors were pitched as a really easy way to access index funds. That's my perception, at least. The initial thing was all about that. I don't know if that's what they actually deliver a lot of the time. Basically, there's huge dispersion in robo-advisor returns. If you look at five different robo-advisors in Canada, the returns for say, an aggressive portfolio have been materially different. We're going to talk a little bit about that. We're going to talk about Wealthsimple, specifically, because that's one that I've looked at in quite a bit of detail, just in terms of why the performance has deviated from the market. Then, we're going to talk a little bit about Wealthfront, which has also done some interesting stuff. Anyway, should be all right.

Cameron Passmore: Then, we're going to do this week's version of would you rather, and that links to, what to do? Robo-advisor or active bank mutual fund?

Ben Felix: Yes, I like it.

Cameron Passmore: Yes. Should be interesting to see that discussion. Then. of course, the after show.

Ben Felix: Mark tweeted our fees. He asked like, "Is it cool if I share our fees?" I said, "Yes. I think that's fine." Cameron, you agreed that – what did you say? Your default is transparency or something.

Cameron Passmore: That barely has let me down. So, why not?

Ben Felix: Yes, so do I. Mark post our fees on Twitter, and I think he got a pretty cool reaction, Mark. So, I was hoping you could talk about that.

Mark McGrath: Yes. It's something I've wanted to do in the past, I just kind of forgot. Then, as Ben said, I asked you guys, "It could be cool if I just literally just post our fees? No big runway to some big thread or anything." So, I posted just a screenshot of our –

Cameron Passmore: I think you even said, "That's the tweet." That's it.

Mark McGrath: Yes. I was like, "There are our fees. That's it. That was it." I expected a lot of maybe pushback or other advisors kind of chirping us, but like our fees, I think are very reasonable. I know you guys do a lot of peer analysis around our fees, and they're very, very competitive. But the discussion was really, really interesting, and most people just were like, "Hey, those are like really fair fees, and that's totally reasonable for what you guys do." There were a couple people that thought we were what we would call advice only planners, which is where someone pays like an hourly or one-time rate to receive a product, a financial plan, and not ongoing services.

I had a chance to chat with people about why we do things the way we do, and why we right now don't do any of the advice-only type planning, got a lot of people reaching out saying like, "Can I meet with you to see if we're like a good fit or if PWL is a good fit for you?" So, it was just really fascinating that that kind of unfiltered and unadulterated just transparency like blast, here's the fees. I got a really good response. I think a lot of it is just because people, I think in our business fees, and transparency have not really gone hand in hand for many, many years. At a previous firm, I asked like, "Hey, can I put our fees on our website?" The central compliance for the entire dealer were like, "No, not a chance." I just found that so shocking. I was like, "Don't you want to just come out and say, like, 'Here's what it's going to cost to work with us.' What company wouldn't want to do that."

So, by just blasting the fees in everybody's faces, I think it removed a lot of the uncertainty and maybe fear around that first conversation, and like, "Oh, they're going to lead me down this path, and then hit me with this massive fee at the end." It's like, no, here it is. Take it or leave it. That was it. So, it was really interesting. I posted on LinkedIn as well, and there's some good commentary there too.

Cameron Passmore: Awesome. Good for you and good for the audience.

Mark McGrath: Yes, it was good. Like I said, I was prepared to kind of have to get defensive and it wasn't that at all. It's really quite good.

Cameron Passmore: All right.

Ben Felix: Yes, that's good.

Cameron Passmore: You guys ready to roll?

Ben Felix: Ready to roll.

Cameron Passmore: Okay, let's go. Let's do it.

***

Cameron Passmore: Okay, Episode 309. Which one of you guys? Ben, you take it from here? Mark?

Ben Felix: I'll kick it off, and Mark's got some stuff to say too, I think.

Cameron Passmore: I'm sure we have lots of ideas around this. This is such a hot topic for so long. If you think back to when they first came to market, what? Ten, fifteen years ago?

Ben Felix: Yes, 2015 I think is when – well, that's at least as far back as I can find their portfolio data. I spent a lot of time on the Internet archive for this episode, looking at Wealthsimple's old website and what they used to say. It's changed a lot.

Cameron Passmore: Fascinating.

Ben Felix: I think a lot of the robo-advisors have changed a lot, which is fine. They've got to adapt their business models. We'll talk more about that, I think maybe in the after show just about that whole concept and what people thought of it at the time, how its evolved. But anyway, right now, we're talking about our robo-advisors, passive investors. I kind of mentioned this in the intro. I think like, the pitch was definitely, and you can go and look at, like I said, Internet archive and see what the websites used to say. It used to be all about easy access to low-cost index fund portfolios, because at the time, like in 2015 – and we had Dan Bortolotti on an episode recently, talking about exactly this.

That back then, building a portfolio of index funds was not easy. It's gotten so much easier over time. But in 2015, and even earlier, like in 2010 kind of thing, was not easy to just get a portfolio of index funds or a portfolio of ETFs. That was a hard thing to do. Robo-advisors made it easy, and that was kind of the whole pitch. But Mark, you had a post on Twitter, looking at dispersion in Canadian robo-advisor returns. It's five-year data, the best return over that period was 8.48% annualized, and the worst was 4.7% annualized. Now, that's like, for a service that's kind of supposed to be, yes, passive investing. We'll make it easy for you. Why is there a 4% spread in returns for an aggressive portfolio?

Mark McGrath: Yes. It was actually quite surprising to me. The reason I stumbled upon this, as I'm writing, as we've talked about, I'm kind of Canadianising a book for our friend Dan Solen. There's a chapter in there on fees, and robo-advisors, and that type of thing. So, I was looking up the returns and fees of various robo-advisors, and there was just a MoneySense article that just broke it all down for me already. I was like, "Oh, this is perfect. I don't need to actually go and do the research. They've already done it." But I was quite stunned, as you point out, Ben, like the dispersion in the bottom and the top. And the rest of them are kind of like middle of the pack, but yes, the best performing robo-advisor were five years, was almost 8.5%. From my understanding, that's the purest sort of index funds style robo-advisor that's out there. Then, at the bottom, we had 4.7%, annualized over five years. That's a significant difference. Investing $100,000 over that timeframe is the difference between pretty much 1&25,000 and $150,000 at the end of the period.

I think, to your point, robos came out as an easy way to get a global market cap index fund portfolio, and they've had to deviate from that. And I think, and you're going to talk about this, I know. But I think, the big ETF providers like BMO, and Vanguard, and iShares coming in and just solving this problem with a single ETF, probably. I'm totally speculating here. The robos fairly looked at that, and like, "Okay. Well, now, we need to do something else. We need to go and do something for the fees we're charging, because they can just go and buy this for 20 basis points instead." I'm just guessing, but maybe that's why some of them started deviating from that original kind of pitch of, this is an easy way to buy a market cap portfolio.

Cameron Passmore: But part of the original pitch was also the use of technology, the whole user experience. So, it wasn't just index, and that may have been the investment value prop. But from a totality standpoint, a lot of it was the user experience, the mobile phone-based app, the slick interface, slick onboarding, that was a big part of it too. Which just as an ETF provide, even though they might have a one-decision portfolio, they can't offer the rest of that experience.

Mark McGrath: Yes, that's true.

Cameron Passmore: And they made massive investments, like Wealthsimple, I can only imagine the quantum of their investment in the technology for the client experience.

Ben Felix: It's great. No, it's incredible.

Mark McGrath: It's really good. I don't know if you guys have ever opened a Wealthsimple account, but I opened one for my son just to kind of teach him about markets and volatility. I did it all from my phone in like 10 minutes. I was like, "Oh, boy. This is super, super slick." Not the managed robo-advisor portfolio, like we basically bought XEQT, which is a global equity ETF, but the user experience is very, very impressive.

Cameron Passmore: We've heard that from people saying, they're more focused on that part of the value proposition as opposed to the – maybe they assumed it was the simple index value proposition on the investment side. Therefore, in their mind, that may be equal everywhere. Therefore, I'll go with the one that's got the better UX.

Ben Felix: You're talking about the users?

Cameron Passmore: Yes.

Ben Felix: I think that's happened to a lot of people. But I also think that people have noticed that, in particular, Wealthsimple's returns have been not great. I mean, in that list of robo-advisor returns, Mark, the lowest one, and I don't mean to pick on Wealthsimple. But as anyone that listens to the podcast regularly knows, they've come up a few times for various reasons. So, I've just got a bunch of stuff that I've done on them in the past. But anyway, in this five-year period, though, you had that on, or the MoneySense had that on. Wealthsimple had the lowest five-year return. We'll talk a little bit about why that is.

But I think, more generally, there are two main reasons that there is this dispersion. Actually, you even have data, Mark, on the five-year returns of XBIL and TBIL. Even they have 40 basis points of annualized tracking error over that period. That's as passive as it gets. But TBIL has global bonds. XBIL has Canadian and US bonds only. That's caused some difference. XBIL has a little bit more in US, a little bit less in Canada, like less home country bias, and the US has done so well over that period.

Anyway, two relatively passive portfolios, relatively comparable portfolios. Even they can have pretty significant tracking error or tracking difference. I think it's the same with robo-advisors. So, if you look at what's actually in their portfolios, one big difference is going to be just asset allocation. You think about home country bias, or even just how much is an international versus US, other asset classes like REITs, and how they're allocating to that, if at all. How the stock bond mix changes, like I looked at a couple of different ones, and one of them had the most aggressive portfolio, still had 6% in bonds. That can drive a lot of that tracking difference. As we saw with XBIL and TBIL, very similar portfolios, but with little differences in asset allocation can make a big difference, even over a five-year period.

I looked at the BMO SmartFolio, that's one of the most aggressive options, have still 5% in bonds. Then, they had 19% of Canadian stocks, 34% in US stocks, 35 international, seven in emerging markets. Then, modern advisor, a different robo-advisor, their most aggressive portfolio is 29% of Canadian stocks, 19% in US, 21% international, 20% in emerging markets, and, 11% in Canadian REITs. Those are two, like you sign up for these two different robo-advisor.

Mark McGrath: Massive difference.

Ben Felix: It's huge. It's crazy.

Mark McGrath: Yes. We should probably also just point out before we go on, the returns that I posted and the returns we were talking about. Wherefore, what we call a balanced portfolio. If you look at the footnotes of that MoneySense article, they said all of the comparisons they did had between 50% to 60% inequity and 40% to 50% in fixed income. The returns that we're talking about for those particular robo-advisor, and I know you're going to get into more data, but the stuff that I was talking about at least is for what we'd call a balanced portfolio. When you're comparing to TBIL and XBIL, that's why you're making those comparisons.

Ben Felix: Yep. That's a good clarification, because I will talk about different asset allocation profiles for Wealthsimple, specifically, because I had the data on those ready to go. Okay, so that's one piece. Asset allocation is going to be different. Is that good or bad? It's a neither. But investors need to be aware that when they pick a robo-advisor, they are implicitly picking an asset allocation approach. The robo-advisors will tend to have different ones, and it's not like you're just getting a good passive portfolio, because you're using a robo-advisor.

If you want 10% of your portfolio in REITs, personally, I wouldn't. But if you do, then hey, there's a robo-advisor that's doing that. If you don't want that, then you should pick a different robo-advisor. But it's not like you can just pick a robo-advisor and automatically get a good portfolio. Although, both of those are still relatively low-cost ETF portfolios, which is great, I guess. Maybe better than a bank actively managed mutual fund, but maybe not. I actually have data on that too, that I'll touch on in a bit. That's one piece, asset allocation.

I think the bigger issue, in particular, for Wealthsimple. Again, I'm sorry to pick on them. But just what I have data for ready to go. Is that, they're engaging in something closer to traditional active management on some level. I'm not saying that Wealthsimple as selecting securities and doing fundamental analysis. They're not, but they have made changes to their portfolios in response to changes in the market environment, in an attempt to improve their long-term returns.

Again, I'm going to talk about Wealthsimple and how they've changed their portfolios over time. They've been very good about detailing their changes and explaining exactly why they're doing them. They've been super open about it, so it's not like they're doing anything shady at all. But it is interesting to see they've made all these changes, and the outcomes have not been great. That doesn't mean they've been bad decisions, and I do want to talk about that.

In 2019, the big change, they added longer duration government bonds and inflation-linked bonds, and they reduce their credit risk and their fixed income portfolio. They also added low volatility stocks, and they increase their exposure to international undeveloped and emerging markets. Then, in Q3 2020, they removed shorter-term government bonds and replace them with a mix of credit, longer term bonds, and gold. Then, in March of 2022, they switched up the minimum volatility equity ETF for a different ETF that incorporates other factors like quality and momentum. They change their fixed income allocations back to what they were prior to the 2020 change, and they reduce their exposure to emerging markets. Lots of changes. I don't know if I captured all of them. Those are just the ones I was able to dig up.

Mark McGrath: Yes. Those are pretty big changes. This isn't the difference between picking one stock or the other. Those are fundamentally different ways to think about portfolio allocation.

Ben Felix: Yes. They made meaningful changes.

Cameron Passmore: As we've said, it's tough to be a robot.

Ben Felix: Yes, it's tough to be a robot, for sure. It's humans making the decisions and I talked to the humans that have made the decisions. I'll touch on that a little bit too. Now, it is worth noting also that their current portfolio. When you go on the website now, and you look at the historical performance of their portfolios they show, they show inception dates of 2016. Those portfolios are also materially different from the initial portfolios when the firm first launched. So, they are managing portfolios as early as 2015, I believe, and you can find in archives web pages the holdings of those initial portfolios. They used to be very different, like they contained actively managed funds for dividend stocks, for risk managed stocks, and risk managed bonds. In addition to having low-cost index funds.

Mark McGrath: Do you know what that means, risk managed stocks and risk managed bonds?

Ben Felix: I don't remember. I read the pages for the funds.

Cameron Passmore: Sounds good.

Mark McGrath: It does sound good.

Ben Felix: When I wrote this, I wrote it months ago, so I don't remember what it – yes, it does sound good.

Mark McGrath: Do you think all active portfolios are risk-managed? I just wondered if it was a marketing term. If there's some like actual academic term that I didn't know about called risk managed stocks?

Ben Felix: No, no. I'm pretty sure it's a marketing term. I'm sure they're doing something to manage risk, but I don't know what it is.

Cameron Passmore: Does that imply there's risk unmanaged funds somewhere, maybe?

Ben Felix: I think it implicitly does. Yes, I mean exactly that. Okay. So, big changes from 2015 to now. But then, there's been other changes since 2016, in the overall approach to portfolios. The question is, has this been good? Has it helped their performance? Of course, if it has, then, that's great. They do post their returns, which is also very nice, nice and transparent. They posted returns net of a 0.5% fee, which is the fee that they would charge on an account under $100,000. Then, their fees 0.4% if you're above. They do have lower fee tiers for larger accounts too.

The numbers that I will talk about are net of a 0.5% fee. It is worth mentioning that Wealthsimple's customers may be getting something other than portfolio returns for that 0.5% fee, just as PWL's clients do, although they’re different services. The Wealthsimple customers might get convenience, peace of mind. If it's a large enough client to access financial planning services, then they may also be getting that. I don't know what asset level you can access. Do you know, Mark when you can get financial planning?

Mark McGrath: I want to say 500,000, but I also might just be pulling that number out of thin air.

Ben Felix: That is their generation level, is 500,000, so that might be right.

Mark McGrath: That could be. I can see if I can look it up while we're chatting here. I think it's also worth pointing out that from what I've heard that like – I mean, if you think about a firm of that size, and the number of staff, they have the number of clients. I think the front end, this isn't a knock on them at all, but the quality of financial planning services going to materially differ from other firms. What is being called financial planning, from what I've read from reviews is often just basic retirement projection in some cases, or like an hour a year to discuss goals, and then kind of plotting goals. The depths of financial planning, I think, is also worth noting at least.

Ben Felix: Yes, I agree with all that. Just to set this up, people listening, keep in mind that the returns we're going to talk about are net of that 0.5% fee, which may be paying for stuff that is valuable to people for reasons separate from portfolio returns. We're going to look at since inceptions in 2016, return numbers, through the end of 2023 for Wealthsimple and compare them to asset allocation ETFs from iShares as benchmarks. Now, the iShares' asset allocation ETFs did not exist over this full period. So, for periods when they didn't exist, I have back filled, back tested that a net of the appropriate fees for the ETF, which will give us numbers that are very, very similar to what that ETF would have earned if it didn't exist at the time. But it is worth noting that it did not actually exist for this full period.

The other thing I want to say is that, these asset allocation ETFs are not perfect benchmarks for Wealthsimple strategy, because Wealthsimple is doing different stuff, as we've mentioned. But my idea here is that, this is a reasonable alternative that someone investing in Wealthsimple could have alternatively invested in to get the market's returns, because it's a nice easy, single ticket portfolio. They post returns for conservative balanced and growth portfolios, and those roughly mapped to 35%, 60%, and 80% equity portfolios. The conservative portfolio returned 2.5% annualized since inception in 2016.

The iShares' core conservative balanced ETF portfolio if it had existed over the full period would have returned 4.6%. The balance, Wealthsimple's balanced portfolio, 4.4% since 2016 through 2023. The iShares' core balanced ETF portfolio, if it exists for the full period, it didn't, 6.14%. Then, the growth portfolio for Wealthsimple, 6.5% annualized since 2016. The iShares' core growth ETF portfolio, 7.65%. I mean, big negative differences, even if we add back Wealthsimple's 0.5% fee. Even if we said that someone got a ton of value from that, so we're going to add it back to the returns.

Mark McGrath: Ben, did you do any sort of attribution analysis. Can you point to a specific portfolio change that made most of that difference in the returns? Or was it just a combination of things? I'm just curious if it like one kind of – in hindsight, poor outcome, or if it was a combination of other factors? Because it seemed to me just from reading what you just said, that the more conservative portfolios had a lot worse relative performance than the more aggressive ones. So, it sounds like maybe that fixed income call in 2020 or whatever it was might have been the big impact call.

Ben Felix: Yes. I think it was the fixed-income call, and I did talk to Wealthsimple about this. They showed me some data on – I think it was that fixed income trade, where it's just like, the trade made sense, but they just got a really bad outcome, and it really hurt. I think you're right, that it was the fixed income that really was a drag on stuff. It's also worth mentioning that the 2015 portfolios, which was their first full year managing portfolios. They might have been open in 2014, and the first full year of 2015. Maybe that's what it was. The growth portfolio in that first full year, return 4.7% and the iShares' benchmark, the iShares' core growth ETF portfolio, 9.32%. For balanced Wealthsimple, 1.65%. iShares, 7.69%. Conservative Wealthsimple, 0.71% versus 6.04% for the iShares comparable ETF portfolio. Keeping in mind that was a different era, basically, where that's when they still had a lot of the active stuff in there. It was a very, very different setup.

Mark McGrath: That's right. That's just one year or two.

Ben Felix: That's just the calendar year 2015.

Cameron Passmore: You're not accounted for any sort of tax trade that might have happened from those dispositions and switching, correct?

Ben Felix: That's a good point. No. I don't know how they would have handled that. I'm sure they would have been tax aware when they transitioned to the new models, but I don't know the details there. I send my notes on this to Wealthsimple, to some people that I know they're a while ago, I was going to make a video on it and I still will, I got busy with other stuff. But then, Mark, you suggested the robo-advisor topic, and I was like, "Oh, I actually have something written on this. We can use that. So, I sent everything we just talked about. I sent it to Wealthsimple, and ended up having a conversation with their CIO, who was great. He was previously at Bridgewater with Ray Dalio, he's brilliant. Talking to him was an absolute pleasure. All his explanations for the changes they've made to portfolios, you could easily argue that they're sensible, given the objectives that Wealthsimple has, which is minimizing the left tail of the distribution of outcomes for their customers, which is a perfectly reasonable objective.

Like any investment decision, a good decision, which they may well have made does not guarantee a good outcome. Even if you're going to get a good outcome in the long run, short-term noise, a few years after you make a decision can make you look completely crazy. Even if you've made an objectively good decision. Although, I don't think that there are many objectively good decisions in investing. Anyway, the big thing for investors to understand is that, Wealthsimple robo-advisors in general are not necessarily buy and hold "passive" investors. You can ask the Wealthsimple for an ETF portfolio. They told me this when I talked to them, and I asked if I could say this. They said I could, which is kind of cool. But I guess if you call their customer service and say, "I want a buy and hold index fund portfolio." Apparently, they'll do it, which is kind of cool.

Mark McGrath: Sort of defeats the purpose, doesn't it? At the end of the day, you're paying sort of higher robo-advisor fees. If you're going to pay those fees, so just get a sort of, again "passive" portfolio, you can just do so with one of the other ETF providers.

Cameron Passmore: Yes. But you have to do it right, someone's got to implement it, someone's got to report on it, somebody's got to do it.

Ben Felix: But you get more than that, though. You do get some level of advice from Wealthsimple. I think that they are trying to build out their advice services, especially for larger accounts.

Mark McGrath: Even within – maybe I'm wrong, but could you not just open like a Wealthsimple trading account?

Ben Felix: I don't know if you get access to the financial planning services? That's a good question. I'm not sure. I don't know. I'm not sure. Anyway, someone who is using the Wealthsimple's managed portfolio service, and is happy paying their fees for whatever reason could request a buy and hold index fund portfolio. My understanding is that they will be willing to do it. But I don't think most of their customers would be aware of that. Another one on this topic of our robo-advisors, passive investors, a big change was Wealthfront. I don't know how big it was, but Wealthfront in 2022. Wealthfront's one of the big US robo-advisors. They made this big announcement. I don't know how big the announcement was. I thought it was big, because I was like, "Wow, these guys are crazy." But they pulled value –

Cameron Passmore: Shockwaves.

Ben Felix: Yes. They pulled value out of their factor tilted portfolios in 2022. To quote from their statement, they said, "We'll no longer use the value factor in our service, as the research suggests it is no longer as effective as it once was." I can't help but laugh there. They're talking about price to book specifically. I don't know if there was ever consensus that value stop being effective. I think there are obviously people who did think that for a period of time, and maybe still do. But since January 2022, value has been pretty great. I don't know. What's another case of a good decision with a bad outcome? I'm not sure.

If I look at the value premium, measured in USD, because that's where Wealthfront is. From January 2020 to April 2024, value premium, so value minus growth in the US, 1% premium; APY, 6.7% premium; emerging markets, 9.55% premium since January 2022 through April 2024.

Mark McGrath: Sorry. Does international include, or that's APY. I guess you have Canada as well.

Ben Felix: I didn't include Canada in there, just because I don't think Wealthfront cares about Canada. But I do know the value premium over that period has been very positive for Canada too. It might actually be the highest premium of all those markets over that period.

Cameron Passmore: As we talked about.

Mark McGrath: Oh, really.

Cameron Passmore: Yes.

Ben Felix: I may have that somewhere. No, I don't have it open. Now, I do also want to say that PWL is not purely passive either, like in the sense that we're not just holding market capitalization weighted index funds, and doing nothing. We tilt towards small cap, and value, and profitability. And we're using dimensional funds, not index funds. We're doing different stuff too. In a lot of cases, it has underperformed, just buying index funds, because the value has not done super well. Although, it has done very well recently, just over the last 10 or so years, it has not done very well.

I think a big difference is that we're not making changes to portfolios, much over time. I've been here for more than 10 years now, and we've been doing the exact same thing the whole time. Other than maybe adding profitability, Dimensional adding profitability, and more recently adding short-term reversals to the strategy. But it's like, big changes, like we're going to overweight emerging markets or we're going to materially change how we do fixed income. Although, Dimensional has added some more credit to their fixed income portfolios since I've been here. So, they're having little changes, but nothing big, and nothing tactical, like nothing in response to what we think is going to happen or what Dimensional thinks it's going to happen. It's like small updates incrementally based on pretty serious research, as we heard about from Wei Dai in a recent episode.

Cameron Passmore: You've been lucky as COVID rolled through and the markets roiled in March of 2020. If you're in a 60-40 or 70-30, that was consistent. Even on those days when the market moves 10%, and your 60-40 became 55-45. They're automatically rebalanced, meaning just stuck to the rules. That's where, to me, these kinds of asset allocation tools really show their value, because it's automatic, it just takes the subjectivity out of the advisor's hands, because it would have been very easy during that period. We all remember it, it would have been super easy just to kind of, let's just wait and see, we'll keep a lower equity position, we'll see how it looks. You could have missed easily at charging snapback that happened late spring, early summer of 2020.

Mark McGrath: It's so hard to do like as a human. It's so easy to pick that out in hindsight, and say, "Well, I would have bought here. I would have sold here." It looks obvious, if you just look at the chart. When you're at the hard right edge of that graph, and things are down, like you're – I was opening the markets, and every day was 10% down. Everybody has a trigger point. Where it's like, "Okay. Enough is enough, we're going to rip off the band aid." Being able to kind of systematically take that decision out of your own hands, even as an advisor, as an investor, I think is, to your point, it can save you, it's like insurance against massive potential mistakes.

Ben Felix: Yes. I did want to just throw that out there, that I'm not trying to say that we're better than robo-advisors, because we are perfect. Market cap weighted index investors, that's not the point at all. But I think it really just highlights that investors have to understand what it is that they're investing in. We could have had the same conversation just now about asset allocation ETFs, or about index funds more generally speaking, like you can't just take index funds and assume that you've got a good portfolio, because you could have really bad index funds.

I'm not saying the robo-advisor is bad. I'm just saying that robo-advisors are going to have different portfolios, and they're not passive, and they're not objectively good investments. So, you got to know exactly what you're doing. But that whole idea that a truly passive portfolio exists, as saying, it's just a flawed premise from the beginning. Every portfolio including index fund portfolios, as we just saw contain a whole bunch of active decisions. That was lesson number 18, I think in our most important lessons in investing episode that we did. There's no such thing as a passive investment. There's the spectrum of passive and active, but nothing is truly passive. Because everything is active on some level, you've got to understand which active decisions you're making and why. It's the same thing when you're delegating those decisions to, in this case, a robo-advisor, you got to understand how they're managing the portfolio, how they're approaching asset allocation, how they're making decisions about changing asset allocation over time. Those are all really important.

I think the answer to the question, are robo-advisors passive investors? I would say, well, nobody is. So, no, they're not, but that's not necessarily a knock against them. It highlights that, even with robo-advisors, and with index funds, and with human financial advisors, and all that stuff. But I think robo-advisors have an image of being passive. So, you've really got to evaluate how they're approaching both asset allocation and changes to asset allocation over time.

Mark McGrath: I don't know that the average investor is going to understand that either. To your point earlier, as this kind of starting as an index fund portfolio, or a cap-weighted index fund portfolio. I don't think it's obvious to a lot of people who are signing up with a robo-advisor service, necessarily what they're getting. The questions that you mentioned, they should ask are obviously very important. But I feel like the amount of financial literacy it takes to understand that would be such that you wouldn't really want to – potentially a robo-advisor in the first place. outside of some of those other benefits that you talked about earlier, Ben.

I think if you're at the point where you're able to kind of analyze their portfolio decisions as an investor, like you're probably better off just either putting the portfolio together yourself or buying one of those one fund solutions. I think like a lot of the average investors who bought the robo experience thought they were getting that sort of broad-based market exposure, and they didn't. How do you, say, Wealthsimple versus somebody else? Your outcome was totally different as a result of it, right?

Cameron Passmore: It's really interesting. You'd love to know the psychographics of the typical new client going into Wealthsimple, because I'm hearing that they're having tremendous success getting new clients of late, like in the billions, which is great for them. But what is that profile? What is that key value prop that they're coming to them for? Is it the user experience? Is it indexing? In air quotes. Is it passive? Which is you guys know, I find such a loaded term, and everybody has a very different definition of what passive really means.

Mark McGrath: While we were chatting, I did look up the pricing and features for Wealthsimple. From what I can gather just on the pricing page, you get the same benefits, regardless of whether you're with the robo side or the self-directed side. I don't see a delineation between the two in terms of the services that you can avail yourself of. It looks like it's just based on assets. So, we're talking about financial planning earlier. So, if you have $100,000 in assets, you get check-ins with an advisor, which is kind of like the later planning that I was talking about. But interestingly, at the generation level, Ben, which you said is at 500,000, you do get what they're calling financial planning. That could be saving strategies, investment education, tax planning, retirement planning, estate planning, and insurance analysis.

I'd be really curious actually, if any of our listeners have gone through that financial planning experience at the generation level or not. I'd be very curious to see what they thought of it. But I think also, Cameron, to your point, Wealthsimple does a ton of cool stuff. If you just look at all the features, and benefits, and some things that – or maybe just more marketing than other things. But, things like stock lending, people are going to want that, people are going to want to see if they can "juice their returns" by participating in stock lending programs. They have 5% returns on their cash accounts, which act like a checking account. These are really cool things, so it doesn't surprise me that they're seeing a ton of success in that.

Cameron Passmore: Did they bring back the VIP lounge, the airport lounge passes?

Mark McGrath: At the generation level, it says you get 10 passes per year. We've partnered with Dragon Pass to offer you and your guests 10 airport lounge visits per year, available at over 1300 locations worldwide. So, you need to have a half million with them, but these are really cool little perks. Right?

Ben Felix: Very cool. Before we started talking about the servers and stuff, we were talking about what a low-knowledge investor would expect to get and whether picking a robo-advisor would have been a good thing or not, which ties into our, would you rather question. So, I think we can go there now. Before we go to the would you rather question, I do want to highlight that over that 2016 to 2023 period that we talked about for the Wealthsimple vs iShares returns. The RBC select portfolios, which are traditional actively managed bank, RBC in this case, mutual funds. Their conservative and balanced portfolios outperformed the corresponding Wealthsimple portfolio. Wealthsimple has the edge in the growth portfolio, but the bank mutual funds, even that if they're relatively high fees actually did better.

With that context, would you rather put all of your money with a robo-advisor? I know robo-advisors are broad, because you could just pick like, hey, the one that actually does the index fund portfolio. So, maybe it's too easy of a question. I don't know. Would you rather put your money with a robo-advisor? Maybe one of the robo-advisors that has a history of making these sorts of tactical moves, we'll do that. Would you rather put all your money with a robo-advisor or in a big bank actively managed mutual fund?

Cameron Passmore: Robo-advisor hands down for me. I like to progress in nature of this. I like to value prop they bring, and they're shaking up technology. I think I'd behave well in that environment, so maybe I'm a bit biased. But I think it's cool. It's cool technology, progressive and the banks – as I said at last episode, I love the bankers I work with, but they make enough off me. Now, having said that, to your point, Ben about the RBC select portfolios, I think there's some great behavioral biases that can be built in if you're kind of – because I'm sure there's a lot of people, just put all the money into one of those funds, and just never look at it. I've had a terrific long-term experience.

If you can set it and forget it, behaviors, we've talked about many times will trump your returns or what the ultimate. So, someone can behave better with the RBC select portfolio, beautiful. What caused the outperformance recently? Biggest speculate, but it doesn't really matter. So, that's what I would do. Mark, what do you think?

Mark McGrath: Interesting. That was a good answer. I'm glad you brought up those portfolios, specifically, Ben, because my answer is going to comment on the fact that a lot of these massive bank funds are basically closet index funds at this point. I think, RBC specifically, might be wrong. I think there was a lawsuit at some point, it might have been TD, I'm not sure. But I think there's a lawsuit at some point against one of the big banks for closet indexing. I don't know that they won or lost the lawsuit, but I think it's relatively well known that when you get to a certain size, like the RBC select balanced portfolio, I think is north of like $50 billion. It's hard to do much but become an index fund at that point.

From that perspective, those big bank funds, yes, they have higher fees. But if they are more traditionally, really an index fund versus lower fees for active management, I think that makes the decision really, really difficult.

Cameron, you made a good point, which is these new technologies like Wealthsimple. The user experience is really, really slick. But from a behavioral perspective, it makes it super easy to just go online and make a decision. I think that's less true if you don't have that technology at your fingertips. My answer is actually, probably a big bank fund, but it wouldn't be like one of the sector funds or something. I would pick probably one of these big bank closet index funds.

Ben Felix: Yep. I think that lawsuit, there was a class action, it was against TD, and it has been dismissed in a bunch of different courts, I think. I don't know. BC. It was dismissed in BC. That was BC again, yes. It looks like it's gone to BC court a few times and has not gone through as a cause of action, which means nothing's actually happened.

Cameron Passmore: Ben, you get to be the tiebreaker.

Ben Felix: Okay. The closet indexing thing, I 100% agree with. That's actually what I was thinking as well. Like, hey, if you can get a consistent equity exposed portfolio with an RBC aggressive fund or whatever, that might be better than a robo-advisor that's going to do a bunch of weird stuff, like add gold to your portfolio. In terms of consistent asset class exposure, I might actually prefer the bank fund. Now, maybe not for me specifically, but more generally speaking, there's a paper from a professor at a Canadian university. I don't remember which university is at.

Cameron Passmore: See, Mark, he's got a paper to back up his answer. We have to up our game the next time we do this.

Ben Felix: Of course. Sorry, guys.

Cameron Passmore: We need a better game, Mark. We had to gang up on him one week.

Mark McGrath: Yes. We're going to have to collaborate.

Cameron Passmore: [Inaudible 0:38:16] has to compete here.

Ben Felix: Was I not supposed to bring papers to this conversation?

Cameron Passmore: No, no. I'm just saying, we're learning.

Mark McGrath: We always expect you to bring papers to your conversations, Ben.

Ben Felix: Okay.

Cameron Passmore: Some week, we'll catch you.

Ben Felix: There's a paper called Are Banks Better Money Doctors? It speaks to Cameron; I think what you were saying. They look at an analysis of mutual fund flows of bank and non-bank mutual funds using Canadian data. Super relevant, obviously, to this conversation. High-level findings relative to non-bank funds. Bank funds have lower flows on a monthly basis. They also have lower flow sensitivity to performance than non-bank funds. Investors and bank funds are reacting less to performance. Usually, what you would see is after good performance, investors pile into a fund after bad performance, they pile out. Or not necessarily pile, but they're sensitive to the performance. The flows are sensitive to the performance.

What this paper is showing is that bank flows are less sensitive to performance, and they find that that effect is largely driven by lower outflows after poor performance. The bank fund does poorly, people don't bail as much.

Cameron Passmore: That's the beautiful part about the bank's business. People are there because of the bank's brand. The Canadian banks have been around for over 100 years. You've got that built in loyalty, which just makes such a beautiful, consistent – I'm TD green, like you're green. You just are. Amazing, amazing businesses.

Ben Felix: yes. This effect mostly exists in equity funds, less so unbalanced funds, and not at all in bond funds. But anyway, if I had to pick one, I'm probably going with a bank fund too, Mark, same as you.

Mark McGrath: Nice. I think it's a good disappointment on your face, Cameron.

Ben Felix: You know who's not going to like that? Jason. Jason is going to be furious with us for saying this.

Marl McGrath: Jason Pereira.

Ben Felix: Yes.

Mark McGrath: Yes, he will.

Ben Felix: He's not going to be impressed.

Mark McGrath: We should bring on our friends to answer these questions, the would you rather game. It'd be cool to have a guest.

Cameron Passmore: That's actually pretty funny.

Ben Felix: See if we get Jason to come out of his shell.

Mark McGrath: Yes. I don't think that would be too hard.

Ben Felix: Hard to get an opinion out of him.

Mark McGrath: Yes, totally.

Cameron Passmore: Okay. Do you want to go to the after show and we'll keep talking robos?

Ben Felix: Yes, let's go.

Mark McGrath: Sure.

Cameron Passmore: Do you guys remember when the robots came out, there was this wave of fear that came across the industry? This is something that Michael Kitsis, who's a commentator for those who aren't in the business. He's a very high-profile commentator on our space. He was in the camp that they're not going to have a huge impact. But there's a lot of fear that's going to put massive pressure on fees, especially if you're in the AUM fees based on assets business model. The reality is that the fees have not come down hardly at all over the past decade. But the amount of services and value being delivered has gone up. So, people have to do more to justify the fees, the punch line.

However, there is a lot of money going into this space at the robo space, and kind of circumventing the independent advisory model, which I think is super interesting. But in terms of, is it having a big impact? I watched a presentation by Chip Roame of Tiburon Advisors, which is an advisory firm to advisory firms. The scale of our industry worldwide is absolutely massive, like it's over $150 trillion in size as a wealth management, liquid wealth management space globally.

One of his points that he was making is that, even Fidelity, which is like the largest at $10, $11, $12 trillion in $150 trillion marketplace is still relatively small. You're not talking about massive amount of market shares. His point was, everybody is relatively small. But certainly, one of the big trends is this shift from active to passive. If you're an active manager now, you certainly got the headwinds against you from this massive shift towards called passive or index type investing. Thought that was pretty interesting when you think about the scale, like even Vanguard at $6, $7, $8 trillion.

Mark McGrath: Yes. I think BlackRock is around $10, I think, maybe just north of $10. So yes, even between the three of them, they have call it less than what a quarter of the global market share.

Cameron Passmore: Yes, far less.

Mark McGrath: Base on those numbers.

Cameron Passmore: Based on those numbers. He said, the Morgan Stanley, those are the giants. But the other comment that he made is that there's very little new money coming into the system. The whole system that we're in, there's roughly 2% growth, organic growth coming into the system. So, most people are kind of trying to chip away at each other's clients, and that's really what's going on at scale right now.

Mark McGrath: Wow, that's interesting. It's funny you mentioned just the size of the market and the size of the active versus passive marketplace. I actually took this information from the – what's it called? The PWL Active Passive Fund Monitor, Ben, is that what you guys call it? Thanks. Because I was writing this for the book as well. The US is way ahead on this, but in the US, passive index assets have now actually surpassed the value of actively managed assets. In Canada though, 83% of the marketplace is still actively managed products. The Canadian marketplace at the time that I read the Active Passive Monitor was just over $2 trillion, I think it was, somewhere around $2 trillion. Passive index type products were about $310 billion versus $1.5, $75 trillion in active funds. We've got a long way to go before there's even a seismic shift or a tipping point.

Ben Felix: These are fund assets. There are like other non-fund assets that might change these numbers, but this is like mutual fund and ETF assets.

Mark McGrath: Yes. We think non-fund assets would skew towards active anyway.

Ben Felix: I don't know if that's true, because a lot of like – if you go to the institutional world, you can very easily have an institution who is managing their portfolio, very similar to an index fund, but they're not an index fund, because we're holding the securities directly.

Mark McGrath: Interesting.

Ben Felix: Yes. I think there's probably more indexing than you might expect in the non-fund portion of the market.

Mark McGrath: Very interesting. Cameron, to your point, I remember in 2015, when robo-advisors were the big boogeyman, and there were a lot of advisors that were really scared. This was going to be so – you'd hear it from people too, who just don't like advisors, like, "Your days are numbered, the robots are coming for your job kind of thing." Obviously, in hindsight, that was kind of laughable, but we're experiencing it again now with AI and ChatGPT. People on Twitter just chirp me all the time, "Your robot is taking your job, you better go apply at Starbucks" kind of thing. I don't know, and this doesn't even just apply to financial advice. I don't think the market for human advice ever disappears completely. Whether it's tax, or financial advice, or legal advice, or fitness advice, or whatever it is. I think there's always a market for humans wanting to interact with humans.

Sure, maybe the technology gets so good that at some point you can't tell. If nothing else, that will focus the business into those who offer higher quality services. So, it might kind of trim from the bottom. But even with AI these days, I'm not yet worried for our industry, or my own job, that's for sure.

Cameron Passmore: Humans are so messy. AI is going to help us better help humans, but humans by nature are messy. Financial planning is booming. That's the big shift. I mean, we said this a couple of weeks ago, back in the day, threw in financial planning for free to manage the assets. Now, effectively, Ben, as you see, investments are largely figured out and the value prop is more shifted towards the financial planning side. That's exactly what Kitsis has been saying. Super interesting.

Ben Felix: Yes. I think there's been a bunch of cases where everybody thought advisors were going to be done. I think even with discount brokerages, everyone's are like, "Well, advisors are done." But the business just evolves, whether an advisor does is changes. He used to play stock trades, and then discount broker shows up, that's no longer valuable, so the business model shifts. I don't know what the next shift will be. I don't know if robo-advisors changed much. other than maybe, like you said, Cameron, didn't compress fees at all. And maybe pushed people to improve their services, maybe to improve their online offerings. I don't know how much change the actual services though. maybe a little bit more planning. But with AI –

Cameron Passmore: What are the general awareness of just a non-bank or non- large firm option for your investments to financial planning? I think there's a lot of people don't even know that firms like us even exist, that this is possibly an option. Like having you go outside of the bank in Canada or the big brokerages in the US.

Ben Felix: Like your experience on Twitter, Mark, even people that know us don't necessarily know what we do.

Mark McGrath: Yes. Well, that's largely like Questrade’s marketing program. Is it Questrade who's basically like, "Oh, you're still using dad’s guy? You didn't know that there was another option?" I think, to your point that, even just letting people know that that's not the only way to have your money managed, whether it is through like discount brokerages, or robos, or kind of independent firms. A lot of people have been with the banks, as you pointed out, Cameron for decades. Their family's been with them for decades, the loyalty is there. A lot of bank advisors do great work, but maybe just educating Canadians that there are other options. I think that the robo has probably helped accelerate that.

Cameron Passmore: Speaking of value prop, I mean, what's up with a new calculator? Can you give us an update?

Ben Felix: I want to actually talk about that in the context of AI, as well. Just to your comments, Mark, about whether AI is going to take our jobs. I think it can maybe change what we do, like some of the stuff we've been talking about has. But this new calculator that I'll talk about in a second, Cameron, I tried to use AI to help me code it. It was absolutely horrific, like completely useless, in fact.

Mark McGrath: Would you use ChatGPT to help you like write the math, and the code, and stuff?

Ben Felix: Yes, because Jason Pereira told me to. See, I'm coding this thing in VBA. He's like, "Well, just use ChatGPT to do that." "Okay, I'll try that." Just tried a bunch of different prompts, and the code it gave me was like a joke. Maybe I was doing it wrong, I don't know. Maybe someone who does software for a living is going to tell me that it's my fault, not ChatGPT's. But anyway, it didn't impress me. For that type of stuff, for modeling complex financial decisions, I'm optimistic, maybe it will get there. I think, technology is great, but at least for now – I know it's moving fast. But for now, it's not there.

Mark McGrath: I think it can help a lot of basic, like questions that don't involve the modeling, the math, that type of thing. Again, in Dan's book, at the end of the book, or at the end of one of the chapters. He basically said, I asked ChatGPT this question, and here's his response. It was a very, very simple five questions. Should I pay off debt, or should I invest, what debt should I pay off first, and these types of things. It answered those questions really well. So like, general logical reasoning, I think, is pretty good. But yes, from what I've heard, just from watching the programmers and stuff on Twitter, it's got a long way to come before it can do that kind of stuff that you're talking about.

Ben Felix: Yes. So yes, the new calculator. We had that breakeven calculator for personal investment. If you own a taxable asset with capital gain, we built a calculator that people can see online. That helps you understand how long you would have to hold that asset to make deferring your capital gain more advantageous than realizing it before the capital gains inclusion rate increases. That's enough for a while. We did that one pretty quickly after the federal budget proposals were released.

More recently, we added to that calculator a little toggle button, where you can switch between personal and corporate investments. Now, you can look at a corporation, and you can see, again, what is your breakeven horizon with the corporation. What we left out of that model is the ability to include how you're paying yourself in your corporation. We talked about this in a recent episode, where I kind of talked about some of the modeling that I've been doing on this. We may include that later, and it does matter to the decision. You would make a different decision if you're taking a certain amount of money out of your corporation, with respect to realizing a capital gain.

Then, if you're not taking any money out your corporation, but it's also a lot more complicated both to model, and to show what's happening in the outputs. We've done that modeling. We may release it in our public tool. But for now, we're just going to keep that portion of it as an internal tool.

Mark McGrath: It's pretty cool, though. I've gone through the internal kind of training on it. But yesterday, Ben helped me use that calculator in conjunction with the financial planning software that I use for a particular client who needs to make this decision. Cameron, as you mentioned, we're all going away, but I leave tomorrow, I come back June 24. So, I booked this trip, of course, and then they propose the changes. I'm like, great. I literally come back the evening before the changes are going to go into effect. For my clients who may be affected, I've had to kind of figure this out before tomorrow. So, Ben helped me with the calculator, and it's quite impressive, like the amount of thought that's gone into it. And just the way it presents sort of where the breakeven is, and how sensitive it is to some of these inputs and expectations. It's just such a complex decision, I think, for a lot of people, that without this type of modeling, there's going to be mistakes made around this for sure.

Cameron Passmore: I think it's unfortunate how this whole thing is coming down. I'm not even talking about the policy, but it's more of the rush and the timing and the complexity around it. This is very complicated stuff. Also, for the tax department too, very complicated.

Ben Felix: It's complicated and we have no legislation, no draft legislation to go on. It's like capital gains rates increase, but we have to zero details on how it's going to work or whatever. That can change what people might want to do. So it's a really, to me, it feels I don't want to get political at all, but it feels irresponsible.

Cameron Passmore: But we're living it, client's situations, other professional situations. There's this massive rush to come up with an answer. Your basically flying blind. Good to move on, Ben? You want to talk about private credit and some of the feedback you got in the community?

Ben Felix: Yes, I will mention that. I do also want to say that we did do a Money Scope episode, Mark Soth and I on some of the stuff we just talked about. So, we talked about the modeling that both Mark Soth and I have done on capital gains, and the corporations. We talked about individuals too. That episode came out last Friday, I think. when this episode comes out.

Cameron Passmore: That's basic, easy listening stuff.

Ben Felix: Yes, it was a pretty intense episode.

Cameron Passmore: Just good background chatter.

Ben Felix: Mark Soth was very excited to have his first 3D chart that he's ever made, because that decision requires 3D graphs to understand what is happening.

Mark McGrath: That sounds like something he'd get excited about.

Ben Felix: Oh, he was excited. I was too, though. We were both super excited. Yes, private credit. I mentioned in a previous episode that someone had reached out who had worked in private credit for an insurance company, and they've kind of shared some experiences, and given some feedback in the episode. Somebody else in the Rational Reminder community, they identified themselves as a private credit fund manager. Obviously, they're anonymous, so I can't verify that. But based on their comments, I believe it. At the very least, their comments are pretty interesting, so I'm going to share those.

They said that the payoff in private credit is like selling a deep in the money covered call. As we said, you can refer to the prior Rational Reminder episode on that topic. All the points raised there when we talked about covered calls apply the same to private credit. That's pretty interesting. Another parallel that they thought about was, it's like, private credit can be a lot like dividend investing, where the appeal is high distributions, and the twisted benefits, less focused on capital gain. They said he should definitely disregard the Sharpe ratio for private credit, because returns are highly negatively skewed. You've also got limited upside, which reduces standard deviation, which is a double benefit for the Sharpe ratio.

I had talked about the smoothing being a reason to disregard Sharpe ratio, had not thought about the skewness. That's another good reason, so that it makes talking about Sharpe ratios of private credit even more ridiculous than I thought. Then, their last comment was that, smoothing as a service is a real thing. Some investors asked for it. Others are market-to-market only. But I thought that was pretty interesting that some people will actually ask for, like they want the smoothing. So. the concept of smoothing as a service is a real thing.

Mark McGrath: For sure it is. I talked to somebody on Twitter yesterday, I was talking about volatility or something. Somebody came in and commented, and – not sure of the quote exactly, but it was something like, "Oh, I hate my manager. He never has those like plus 30 years. He just gets me 7% to 8% every single year." I was like, "Oh, it was probably a bunch of private credit, and private equity, and real estate, and that kind of stuff." So, I didn't dig into it further. But to your point, that individual is obviously being sarcastic. They loved this steady 7% to 8% every single year. For them, it really was a feature, not a bug.

Actually, at the FPAC meetup, the Financial Planning Association of Canada meetup in Vancouver a couple of weeks ago, I talked to another advisor that I know. He works for a firm that does a lot of these private assets, a brilliant guy. His background, he's a mathematician by background, turned advisor. He fully recognizes that clients do want that return smoothing, and it might lead to better decision making. He felt like he's kind of at a crossroads. Is my obligation to the best client outcome. If that returns me, then can provide better outcomes and better decision making, then I actually do kind of go on the duty to use these types of products. Either way, it's a really great conversation, and I can see why some investors want that type of smoothing as a service as you put it.

Cameron Passmore: This is something Morgan Housel talked about with Shane Parrish on the knowledge project a couple of weeks ago. It was exactly that. I don't pass judgment; he was saying on how other people invest. If it works for you, and you can stick with it, so be it. You have to find what works for you. He says, "I happen to be a Vanguard guy, ETF guy, 100%, with a lot of cash. That works for my family, but that may not work for you. You may have a need to have an active portfolio or some other type of portfolio."

Mark McGrath: That's why when I – when my billion dollars, it's all going into whole life for that steady smoothing. It's a benefit to me.

Cameron Passmore: Someone reached out to me on Twitter today, actually. Garrett reached out to say, "It's been a long time, but only one episode left to go" in his binge of listening to all past episodes. The final one was a conversation with Morgan Housel about his new book, Same as Ever. So, it was pretty cool to binge them all in relatively short amount of time.

Mark McGrath: That's impressive.

Cameron Passmore: Can you read the email we got?

Mark McGrath: Yes, I will. I will just say. it is not easy to binge the Rational Reminder. I often tell people who are new to the podcast, like go back to Episode 1, but we're recording, what, 309 today, and some of them are long, and some of them were like very deep. So, kudos to Garrett for binging on them.

Cameron Passmore: Episode 1 was pretty rough.

Mark McGrath: Yes, things have improved since then, for sure.

Cameron Passmore: I found a picture. Ben, did you ever see that picture of you and I in the room? I think we took that picture during Episode 1.

Ben Felix: Oh, yeah. I don't know. I haven't seen it.

Cameron Passmore: I'm giving a presentation next week, so I'm including that picture and a bunch of other stuff in that presentation.

Mark McGrath: You should share it on the forum. I'm sure people get a kick out of it.

Ben Felix: Yes. You should put it in the YouTube video for the episode.

Cameron Passmore: I'll give it to the team.

Mark McGrath: The next one is from Shoumik in Vancouver via email. "As a fellow Canadian, it's great to have such a nuanced, intelligent, and in-depth financial podcast that has intelligent takes on indexing, CPP, financial planning, interviews with Nobel Prize winners, and the general tenor of the discussion being focused and helpful to the average person looking to do well in work and life."

Cameron Passmore: Very nice.

Ben Felix: I actually replied to that email from Shoumik. He replied back with a whole bunch of commentary. I guess he's been binging episodes too. But he had notes and comments on, I don't know, five or six episodes, the stuff that you found interesting. I replied back to him saying, I find it super interesting to hear people's thoughts when they've recently listened to a whole bunch of the episodes, because I can't keep all this stuff in my head, personally. When someone goes and binges a bunch of stuff and comes up with like, "Based on these 17 episodes, these are the insights I have." I'm like, "Wow, that is so cool."

There's a bunch of good discussion in the community. From our last episode with [inaudible 0:58:09], my least prepared episode ever. Personally, that turned out to be a great episode, that a lot of people seem to really enjoy. Sparked a bunch of good discussion on buying versus leasing a vehicle. Also, on how much life insurance you need. Lots of good discussion in community on that. Some of the community asks why I prefer leasing. I thought about that for a bit, and I had some notes that people might find interesting. I like being covered by the manufacturer warranty for the full period that I have the vehicle. Because if you have major repairs, you take it back, and they fix it. That's like it's it. I like having a [inaudible 0:58:41] floor on depreciation of the vehicle. We talked about that I think in the last episode on this too. Although I did mess that up by going over a lot of mileage, my last lease, but I'm not going to do that again. I got more mileage this time.

Cameron Passmore: Did you have to pay a penalty per kilometer on that?

Ben Felix: Well, no. They called me because they could tell I was going to go over. So, they said, "Listen, if you keep driving at the same pace you're driving it now, you're going to owe about $5,000 at the end of your lease term."

Mark McGrath: Sorry. How do they know that?

Ben Felix: I guess I taken in for a service maybe, I don't know. Must be that. I don't think they're watching.

Mark McGrath: Yeah, just like monitoring you're driving. Okay.

Ben Felix: I don't think they're monitoring.

Cameron Passmore: So you want to do the flip while a value is still higher, even though you had turn left on the lease. Interesting.

Ben Felix: Yes. It was like a reduced buy out of negative equity based on – like I paid less than I would have paid if I kept driving the same vehicle, and they rolled it into the new lease, which was finance at 3.99%. Which like, that's free money basically, today.

Cameron Passmore: Was the monthly payment materially higher? I don't know specific numbers, but the monthly delta?

Ben Felix: It's a bit higher. The leasing rate was higher. I think it was a 1.59 in my last lease.

Cameron Passmore: Yes. Okay.

Ben Felix: I think it was higher. The MSRP on the vehicle has gone up since the last one, so yes.

Cameron Passmore: Had the residuals, but you increase the mileage, you may have decreased the residual.

Ben Felix: Yes. Increase the mileage, and we had that negative equity that we're rolling in, so payment did go up. I like minimizing the negotiation of the time of purchase. I've done two-use vehicles in my life, because that's supposed to be the good financial decision, where you buy a used vehicle, and there's less depreciation. Did that twice. You've got to negotiate twice. You got to negotiate again when you buy the vehicle, and you got to negotiate again when you later sell the vehicle, or as lease, you just take it back. I'm not a car person. You said the same thing, Mark. The information asymmetry concerns me, I don't know what I'm doing.

A new vehicle in warranty with no depreciation, like that just mitigates me getting screwed basically. I also like new vehicles. I mean, that could just be the argument. The new vehicle that we just got is a lot nicer than the previous one we had. It's got great new features that I like. Then, maintenance issues. The two used vehicles I had, each one, they weren't super old or anything like that. But each one had major issues that I had to deal with while I owned it, and I've now done two full three-year leases, and not a single issue.

Mark McGrath: I'm sold.

Ben Felix: Yes, right?

Mark McGrath: Sounds great. We bought our last cars, I think I might have mentioned. To your point, I just hate cars. We have one car, it's five years old. I will drive that thing into the ground, I think. But when the time comes, I'm now sold on leasing. So, thank you for that.

Cameron Passmore: We had notes down here. You and I, Mark both watched separately, but we watched the Ashley Madison story at Netflix. Is that an unbelievable story? I didn't realize it was a Canadian, Toronto story?

Mark McGrath: Yes. My wife watched it. I didn't watch it. My wife watched it.

Cameron Passmore: Oh, you didn't watch it. Okay.

Mark McGrath: My wife has this tendency, bless her. I don't think she listens to the Rational Reminder, so I can say this safely. She'll watch something, and then she'll be like, "Hey, I watch this thing." And it will take her just as long to explain the thing, as if I were to just go and watch the whole thing myself. If I watched a documentary that's two-hours long, I'll give you a five-minute recap. She'll spend like an hour going through like every single detail of it. Sometimes I have to cut her off. I'm like, "At this point, we may as well just go back upstairs and watch it together, because it's going to take you two hours to explain the entire documentary." So, she gave me like the whole nine yards, the whole play by play on it. So, I didn't watch it myself, but I may as well have because of the way she explained it.

Cameron Passmore: It's crazy. Misses the head of AI too. You can only imagine Ashley Madison in today's world. I mean, it was manipulated massively to get more largely men on the site. The information they have kept before the breach is just incredible. Thirty-seven million people are on that site. With this dream, your life is short, have an affair. Like, wow.

Mark McGrath: Wow. I remember when the breach happens too, because it was big news at the time. I don't know when it was. It was probably, what, 2015, 2016 or something like that, that the actual data breach happened. I remember, I was at a concert or something, and I saw – I was scrolling through news waiting for the main act to come on. I was with my wife, and I was just like, "This is bad news for a lot of people." So, we had a discussion about it then and there. It was the first time she'd heard of that particular company. But she remembered that when the documentary came out, she's like, "Oh, yes. Mark told me about this like a decade ago."

Cameron Passmore: I take you haven't watched it, Ben?

Ben Felix: No. Honestly, it's a good thing I'm going on vacation. Because my attachment to Excel has become a problem, I think. Like legitimately, I need to stop modeling stuff for a bit.

Mark McGrath: You're in love with it, instead of just loving it, like it's becoming personal?

Ben Felix: I don't know, Man. I can't stop modeling stuff. But I think we're at a place with our model now where there's only one big piece left. But the thing is like, it's for the capital gains stuff and the corporation that we've been talking about. But we see so many more use cases for that model to give really, really efficient, high-quality advice to clients. Tere's always just like one more piece we have to finish to make it that much better.

Cameron Passmore: Plus, the three of you are feeding off each other. You, Dr. Mark, and Braden. I mean, I can only imagine that fuel going around.

Ben Felix: Yes. So, I think well, I'm off and I'm not going to bring my computer or anything. So, I'm not going to be doing any modeling. But Braden's going to try and finish the last big piece. Then, once that's done, it should be at a point where the rest is just like refinements, and tweaking, and front end. As opposed to actually building the modeling engine. But getting to the point we're at now has been, I don't know, man, I get sucked into my work often anyway, but it's just been on a different level with this thing. I don't know why. I could see the value that it would ultimately add maybe, or maybe I was just making like good progress every day, and it was just kind of in a good flow state. But I've not sat down on my couch in my living room for like weeks.

Mark McGrath: It's probably just the sense of urgency too, like knowing that this deadline is coming up. so you've got this shrinking window of time where this is going to be a value.

Ben Felix: That's for sure.

Mark McGrath: It's a crazy amount of work that you guys have put into it. Knowing that if this goes through as planned, post June 25th, like the whole reason for this thing was to make a decision around capital gains today. And post June 25th, again, there's lots of other applications, I think, for the calculator. But this is really centering on one decision for a subset of Canadians, and you're just pouring your heart into it. It's wild to watch.

Ben Felix: Yes, it's an important decision, and I think it's an example of something that we can really add value on in terms of helping people make a good decision, and a decision that a bunch of people have to make. But, I think if we weren't as excited about the other applications for the kind of modeling engine that we've built, it wouldn't be quite as interesting. But because it's going to help with this one sort of acute problem that a bunch of people have, and it's going to be something that we can build a bunch of really useful derivative tools from. I think that's made it just really hard to stop looking at.

Mark McGrath: Can you say you're addicted yet? Like, is it getting close?

Ben Felix: I didn't want to use that word, because I didn't want to offend anyone. That's one of those words that –

Mark McGrath: Fair enough.

Ben Felix: – is kind of sensitive. But yes, that's how I feel. It's hard to stop. I've been going to the gym, because if I don't, I don't sleep well. But it's like, I'll work until eight, go to the gym, and then basically go to bed. Wake up the next day and open Excel.

Cameron Passmore: Sounds like a dream world.

Mark McGrath: And nightmare for me. But, yes.

Ben Felix: It's pretty great, actually. I've been mountain biking too, actually. I've been mountain biking everyday that it's not raining.

Mark McGrath: Nice.

Cameron Passmore: Love it. How's your outdoor renovations, Mark? They're behind you now or still going on?

Mark McGrath: No, they're still going on. They've almost got the deck done. A lot of it's like, I'd say like, 75% of the way there. When I get back from a trip, everything should be done and complete. It's looking great. They're doing a great job. I'm really excited to see what it looks like when they're all finished.

Cameron Passmore: Love it. You can reach us all of course, Twitter, LinkedIn, all our regular usual spots. Emails are always welcome, info@pwlcapital.com. I think this is the first episode we've mentioned our good friend Jason's name twice.

Mark McGrath: He'll be very excited about that.

Cameron Passmore: He'll be very excited.

Mark McGrath: The first time you guys mentioned him, I think you said like an advisor we know. Then, like eventually, it was like our friend. Then, eventually you used this first name, and I think we used his last name twice on this episode. So, he's going to be very excited with the progress that he's made in getting on to the podcast.

Ben Felix: He still jokes about that, though. Cameron, you said it. It was like, an advisor that we both know in Toronto, or some like vague description of him, but it was obvious who you're talking about.

Cameron Passmore: We call him Jason.

Mark McGrath: I'm going to message him as soon as we stop recording this, and he's going to be very, very –

Cameron Passmore: All the other planners is going to be – have to fold their names in too, I guess. It was such a great community in Canada of our people, we call it affectionately. There's so many great advisors. And there are all kinds of different firms, they got their heart and brains in the right place. It's so impressive. It's a great time to be seeking out advisors like that.

Mark McGrath: Yes, agreed.

Cameron Passmore: Okay. Anything else, guys?

Ben Felix: No. I got to go right now and finish the questions up for Antoinette Shore and John Griffin, who are both episodes that we're recording when we get back from vacation. But they are going to be incredible episodes, I can already tell you that.

Cameron Passmore: Yes. Wei Dai was great too. By the time this comes out, our conversation with Dan have come. Dan [inaudible 1:08:10] couch potato last week. Dan was also phenomenal, very good friend, dear colleague and a great communicator as everyone now knows. And many people already know because his legacy in the Canadian financial planning spaces. Legendary almost now. Okay, guys. Is that a wrap?

Mark McGrath: It's a wrap.

Cameron Passmore: All right. Thanks, everybody for listening. See you next time.

Is there an error in the transcript? Let us know! Email us at info@rationalreminder.ca.

Be sure to add the episode number for reference.

Participate in our Community Discussion about this Episode:

https://community.rationalreminder.ca/t/episode-309-are-robo-advisors-passive-investors-discussion-thread/30484

Papers From Today’s Episode: 

‘Are Banks Better Money Doctors?’ — https://www.researchgate.net/publication/377037694_Are_banks_better_money_doctors_An_analysis_of_mutual_fund_flows_of_bank_and_non-bank_funds_using_Canadian_data

Links From Today’s Episode:

Meet with PWL Capital: https://calendly.com/d/3vm-t2j-h3p

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://x.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://x.com/benjaminwfelix

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

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

Cameron on X — https://x.com/CameronPassmore

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

Mark McGrath on LinkedIn — https://www.linkedin.com/in/markmcgrathcfp/

Mark McGrath on X — https://x.com/MarkMcGrathCFP

Wealthsimple — https://www.wealthsimple.com/en-ca

Wealthfront — https://invest.wealthfront.com/