Episode 313 - When Should You Hire a Financial Advisor?

July 11, 2024 Guest User

Low-cost index funds and digital tools have revolutionized wealth-building, making it easier than ever before to manage your own investment portfolio. However, additional support and expert advice can be critical to help you reach your financial goals, especially when facing complex financial decisions, feeling overwhelmed, or deciding to change your investment strategy. Today on the Rational Reminder Podcast, we discuss when it makes sense to hire a full-service financial advisor, whether or not every investor needs one, and how professional guidance can enhance your financial outcomes. You’ll find out how delegating your financial decision-making can not only boost your wealth but also improve your wellbeing, increase your peace of mind, and mitigate the impact of cognitive decline on your financial decisions as you age, plus so much more. For valuable insights that could transform your financial future, tune in today!

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Key Points From This Episode:

(0:02:15) Why you would hire a financial advisor when DIY investing is so easy.

(0:06:35) The services that financial advisors offer and how you can benefit from them.

(0:10:09) What investor inertia is, how to overcome it, and what the trade-offs are.

(0:16:31) How delegating financial decision-making can improve wealth and wellbeing.

(0:18:16) Insight into the value of financial advice for retirement planning.

(0:22:17) Your Trusted Contact Person (TCP) and why they matter.

(0:23:05) Ways that financial literacy shapes demand and expectations for financial advice.

(0:24:21) Common reasons that people seek professional financial advice.

(0:26:22) How financial advisors act as a commitment device for good financial behaviours.

(0:27:47) Important considerations and questions to ask when hiring a financial advisor.

(0:32:43) Our after-show observations, feedback, banter, updates, 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.

Cameron Passmore: Welcome to Episode 313. The band is back together again. Did you guys know that 313 is my favorite number?

Mark McGrath: Actually?

Cameron Passmore: It actually is. Ben, you might know why?

Ben Felix: I don't know.

Cameron Passmore: My birthday is March 13th.

Mark McGrath: There you go.

Ben Felix: Okay.

Cameron Passmore: So, we're sitting at the phone system years ago in the office. We had to pick what your extension number is. They said, "Well, we'll make you whatever it was, 102." I said, "Can it be 313?" They said, "Sure, you'd be 313." So, I've always been extension 313 on the phone in those days. So, now you know why is that my favorite number. So, we finally get to 313.

Mark McGrath: You've been waiting for this for years.

Cameron Passmore: I've been waiting six years for episode 313.

Mark McGrath: Congratulations. You made it.

Cameron Passmore: Anyways, it's great to have the band back together. For those on YouTube, Mark, your backdrop is phenomenal.

Mark McGrath: Thanks.

Cameron Passmore: Nice Fender up there.

Mark McGrath: Yes. I got my guitars up, actually brought the amp downstairs, still going to plug it in. I moved my office from a spare bedroom that we added into my garage. We've got a one-year-old daughter, and she's eventually going to need that bedroom. So, my wife kicked me out of that room and I had to rebuild downstairs. Through just apathy and other priorities, it took me a while to get the things set up, but here we are.

Cameron Passmore: Ben, you want to tee up today's conversation.

Ben Felix: Sure. We're going to cover when it makes sense to hire a financial advisor.

Cameron Passmore: Pretty factual-based tee-up. Do you have any backstory, or inspiration, or anything to share?

Ben Felix: No, it's kind of a derivative, I guess, of topic we did a while ago, or I guess a few topics we've done at different points in time. But I think, a different take on it, and kind of taking the perspective of, even if you don't have an advisor right now, or even if you don't need an advisor right now, under what circumstances might it make sense to hire one?

Mark McGrath: I do get that question a lot, like people reach out, and they ask that exact question like, "When does it make sense?" Sometimes, it makes sense now, and sometimes it absolutely doesn't. So, I think this is going to be a very enlightening episode.

Cameron Passmore: Love it. Okay, with that, let's get to the episode

***

Cameron Passmore: Okay, Ben, let's get going. When should you hire a financial advisor?

Ben Felix: So, obviously, low-cost index funds, which we talk about a lot, make investing easier today than it's ever been. I think is pretty fair to say.

Cameron Passmore: Easier. It's phenomenal today. I would say, it's the people lately. What's available today in the marketplace is simply mind-blowing, compared to the stuff we had 30 years ago. It's super cheap, even if you pay the same price, it's much better quality.

Ben Felix: Also makes you wonder a little bit about expected returns. If investing is that much easier and everybody's doing it, you'd expect the returns to come down a bit. But that's another topic. There's a paper on that, on how everybody indexing would affect expected returns. But anyway, separate topic, different day.

So, investing has gotten easy. We've said before, investing is kind of solved, at least functionally. But obviously, the other important thing is that household finances go way beyond investments. We've talked about this many times before solving investing does not solve household finance in totality. I think that's one of the reasons why financial advisors continue to exist, despite the growing acceptance of index funds. I mean, the other thing is, a lot of financial advisors themselves, for their personal stuff, but also for their clients. I would probably say that the good financial advisors are recommending index funds as well. So, that just kind of goes to show you that there's a lot of other stuff other than choosing that specific product that goes into financial advice.

Index funds are not a financial plan. They're a product that helps us solve implementing one component of a financial plan. But considering other aspects of financial planning is what an advisor is ideally going to do. But then. even still, I don't think everyone needs a financial advisor. I do want to specify before we keep going that, I'm thinking about a financial advisor who's going to manage your investments for you. When we say financial advisor, financial advisor is a pretty loose title. It's gotten a little bit more regulated in Ontario recently, but even still, it's fairly loose. It can mean a lot of different things, basically.

So, I'm thinking about someone who is going to take your investments, and manage them for you, and then give you ongoing financial advice. So, that's distinct from like, when should you go and visit a fee-only financial planner to get a financial plan done for you? We're not talking about that. We're talking about, when should you delegate your investment management and financial planning to a full-service financial advisor.

Cameron Passmore: It's also distinct from what I think a lot of people expect when they seek out a financial advisor. As we've said many times, I'm sure you guys agree, whenever you tell someone what you do, which I try to avoid. The question back is always something predictive, always.

Mark McGrath: Why do you try to avoid that? You just don't want to get into the discussion or you think it's very difficult to convey?

Cameron Passmore: Because it's always about – my neighbour just asked me two days ago, "What stock should I be buying these days?" He knows what I do. I've told him many times; he still can't help but ask. Great guy, but I'm not about to entertain that and try to explain why that doesn't exactly reflect how we advise people.

Mark McGrath: I'm similar. I have friends or friends' parents will go over for dinner and just get into conversations or whatever. You're like, "Oh, yes. How do I explain what I do?" So, I just say, I'm a financial planner, and I deal with personal finance. Often, it gets into the portfolio discussion, that's always the question. Like, "Oh, what's going on in the markets? What's hot? What should we be doing?" It's like, "Oh, man. This could be a really long conversation."

Cameron Passmore: But do you ever successfully convince them of the merits of what you believe in?

Mark McGrath: I won't change their behaviour more than likely, but I've had conversations with my friend's parents who were stock pickers, for example. When we explain things like market efficiency, and how markets work and risk, they find it very, very fascinating. I've had them come back and just want to continue talking about it at subsequent dinners and hangouts. But I don't think any of them have actually changed their portfolio as a result, but they're definitely fascinated in that way.

For a lot of people, it's like a totally foreign way of thinking about how markets work. They just think that, you just buy the good companies, and that's it. But yes, anyway, started totally derail your thought process there, Ben, but I just thought I'd ask.

Cameron Passmore: Back to the program.

Ben Felix: Well, the funniest answer that I've heard somebody have for that question of what do you do is, "I sell life insurance." Then, nobody wants to talk to you anymore.

Cameron Passmore: I’ve said that a couple of times, I confess. I say I'm a life insurance agent.

Ben Felix: Yes, less interesting than anything related to financial markets.

Cameron Passmore: That's no disrespect to life insurance agents, at all. It's just, I know people don't want to talk to life insurance agents.

Ben Felix: Yes. Okay. Anyway, back to the topic. Financial advisors let you delegate the majority of your investing and financial decision-making, and the related ongoing tasks, and they monitor your financial situation. That's a pretty broad overview, I think of what a financial advisor does, but I think it's also a pretty good definition.

Now, that combination of services can be useful for a lot of reasons. I'll come back to those reasons in a sec, with supporting academic research, as usual. But first, I want to mention subjectively why people say that they hire a financial advisor. This is a very different, very different thing. Like, we'll get into the evidence in a sec, but I think this is interesting. The theory and evidence, actually, in this case.

So, Morningstar analyzed 312 individual long-form responses to the question: please list some reasons why you hired your advisor. They manually analyzed these, and they sorted them into various financial and emotional motivations for why you hired the advisor. The top overall motivations were to alleviate discomfort in handling financial issues, and the desire to achieve a specific financial goal. Then, the next most common motivation was behavioural coaching, access to behavioural coaching.

Overall, in their analysis, non-financial motivations were identified more frequently than financial ones as the reason that somebody hired an advisor. So, I think that suggests that purely quantitative assessments of financial advice probably missed the mark. There's a whole bunch of us out there that different fund companies, like Morningstar has one too, try to quantify the value of financial advice. But. I think research like this really shows that it's really hard to quantify it, first of all, because it's really hard to know what the counterfactual was. What would that person have done otherwise? Like, what's the baseline that you assume financial advice adds value over. But in the other pieces, there's just a big subjective component that I think is a lot harder to quantify.

Mark McGrath: Even then, it varies so much by individual. I've explained this to people before, like, I can have two clients that are in very similar stages of life and similar financial circumstances. And the value that each of them derives from the relationship will be totally different based on the individual decisions and pathways that they take. So, those studies are out there, but yes, I'd be very hesitant to try to quantify it. Even for an individual, let alone like a cohort of people.

Ben Felix: Yes. I think it also touches on fees, like fees are obviously a big topic when we're talking about this type of financial advice. It's something that's gotten a lot of attention, which I think is warranted and is a good thing. But it's also like, you don't need to expect to get 1.5% back for spending 1% quantitatively, because a lot of the value of financial advice is going to be qualitative. I've had that conversation in the past where someone's like, "Okay, I'm going to pay you 1%." Like, "Show me quantitatively why it's worth it. Show me the 1.25% I'm going to get back in whatever tax savings, and so on, and so forth." But I don't know if that's the right question. I mean, this research from Morningstar suggests that it probably is not the right question.

Anyway, Morningstar did another study with 620 survey responses this time, again, long form, and they did manual analysis. Responding to the question, please list some reasons why you continue to have an advisor. So, instead of, why did you hire your advisor, why do you continue to maintain this relationship? In this case, discomfort handling finances as a broad category with specific reasons as subcategories of peace of mind and money makes me nervous. So, that was the top. Discomfort handling finances was the top overall response, followed by the quality of the advice. So, they continue working with an advisor because they've gotten good advice from them. Then, behavioural coaching.

So, in this case, they didn't hire their advisor because they wanted to get behavioural coaching, they continue to work with them, because they have been receiving behavioural coaching. Those subjective responses suggest again that if people could learn the necessary skills, and increase their confidence in their financial abilities, they might not need financial advice. That's true. I mean, people who listen to this podcast will feel that. because they're listening to this podcast to gain those skills. But it's kind of true of any skill.

But the thing with gaining skills, again, using people who listen to this podcast as an example, they're taking the time that they could be spending to learn about other stuff to listen to this podcast. Gaining any skill comes at a cost. This is where we start to get into some of the academic literature on this. That trade-off is addressed in a 2016 paper in the Journal of Financial Economics. The paper is titled, ‘Time Is Money: Rational Life Cycle Inertia and the Delegation of Investment Management’. So, they talk about how empirically, there's this phenomenon called investor inertia, where investors devote only sparse attention to their personal finances. They suggested this can be explained by the time costs required for being actively engaged in managing your personal finances.

So, to address that inertia, to address the lack of doing stuff with your personal financial situation, people can do one of two things. They can either delegate their financial decision-making and portfolio management, or they can use their time to gain the necessary skills to do it themselves.

Mark McGrath: It's super fascinating to hear it described that way. I have a couple of clients and one is a good friend of mine. He's brilliant, he's an engineer, a high-income earner, very capable, very highly educated. I've always described him as financially apathetic, because it was the best, I guess, term that I could come up with. He's the type of client where we go into meetings, and he just tells me like, "I don't care what you do, just do it. I trust you it's all going to be okay."

To your point, it's not about capability, it's potentially about the trade-off, the cost of their time, and their interest. I mean, he could spend the time to figure it all out. I mean, the entire compendium of human knowledge is on the Internet, anybody can go and figure anything out these days, but he just has absolutely no interest in it. So, it was really interesting in reading the notes before our conversation today to see it described that way because it describes him perfectly.

Cameron Passmore: Did he do a deep dive from an engineering standpoint on how you operate, or is it a friendship-based trust?

Mark McGrath: I would say, with that particular client, it's friendship-based. I have another client that's somewhat similar, also very highly educated, very capable. For them, I think it's trust-based as well. They're not an engineer, they work in a different field. They're a physician. But I think, that one's trust-based as well. But yes, we've always talked about money, and he's known me for years, and years, and years. So, I think he just automatically said, like, "Just take my money and figure it out, and just call me when you need to" kind of thing.

Cameron Passmore: Whereas, I have an example of someone who I would say is financially apathetic, but did the deep dive, checked all the boxes, build trust, and then he's off to other things he wants to learn about. He doesn't want to relearn and redo. It's too monotonous to continue to do what we do for people.

Mark McGrath Felix: Yes. Interesting.

Ben Felix: One of the things about all of this is that it's an ongoing process. This paper addresses this too, they talked about how – this isn't something you just learn once, because your situation changes. Tax laws change, as we've just seen recently. Financial products change, new products get created. So, there's always things that you need to be learning about in order to do this stuff well. So, they model that in their paper, that there's this cost to acquiring this knowledge. The trade-offs, I think, in their model, they're trading off against, I think it's leisure time and job-specific human capital.

Like you mentioned, a couple of people with specialized professions, Mark. Depending on what they do and what their career stage is, the opportunity cost of time is going to be different for each person. That's what this paper is kind of trying to model. So, they build and solve a realistically calibrated lifecycle model where the time cost required to manage one's portfolio is traded off with the opportunity to accumulate job-specific knowledge and to enjoy leisure time.

Cameron Passmore: That's cool.

Ben Felix: Investors in the model. Yes, it is cool. They also have the option to delegate their portfolio management for a fee. The attractiveness of delegation varies over the lifecycle. In related research by, it's either the same coauthors or large overlapping group. But in another paper, where they kind of referenced this previous paper, I was just talking about a lot, sort of similar research, but looking at some slightly different stuff. They showed that consumers are always better off in their model when given access to a financial advisor when they can delegate. But the gains to delegation decline with age.

Specifically, they find that workers can expect a 1.07% improvement in lifetime welfare when they have an opportunity to delegate. Accounting for fees, this includes the cost of fees to delegate their financial decisions to an advisor from the start of their working lives at age 20. So, they do find the biggest welfare gains come if you can delegate as soon as you start working, which can be problematic because people at that stage don't have money to invest. It makes it hard to start a relationship with an advisor in many cases. But anyway, that's a separate issue.

Then, on the other hand, in their model, they find that when the delegation option is introduced just prior to retirement, so at age 60, so they say you can't delegate until age 60, the lifetime welfare gain is much smaller, it's only 0.02%. So, they conclude that it's better for investors to have an early opportunity to hire financial advisors, since access to financial management early in life can produce important improvements in lifetime wealth and wellbeing.

Mark McGrath: It's very fascinating to me, that the gains were so muted later on.

Ben Felix: In this model. In this model, the opportunity cost of time with respect to how it contributes to the value of human capital is really what's driving the trade-off here. When someone's retired, that trade-off basically goes away. Because when you stopped working, your future income goes to zero. So, there's no more notion of increasing your human capital.

Cameron Passmore: Different value trade-off.

Ben Felix: Yes, I've got other research on why financial advice starts to matter more for different reasons, post-retirement.

Mark McGrath: Does that number still count the leisure trade-off, and the job-specific skill training trade-off? Because, I mean, obviously, the leisure component of it would go parabolic at that point.

Ben Felix: I think it does. The number I just talked about was lifetime welfare, so it does include the leisure measure. But again, in retirement, you don't have other stuff to do either. You’re time is less limited.

Mark McGrath: Yes, that's true.

Ben Felix: I think that trade-off is less painful, probably. So, the other thing that's worth mentioning is that, delegations' ability to improve wealth and wellbeing. This is my own interpretation, I guess, or addition. This is not based on the paper we just mentioned. It's just kind of logical. That relationship, delegations' ability to improve wealth, and wellbeing is going to be increasingly relevant with increasing complexity. Like a single person saving just enough to max out their TFSA, and investing in a Vanguard asset allocation ETF, they don't have that much learning to do in order to manage their finances. Although they could have other stuff like their insurance, legal planning, and things like that, that would maybe take a little bit more learning. But anyway, just for the spirit of the example, simple situation, less learning to do.

But if you take someone with a family with multiple kids, maybe they've got a taxable investment account, maybe they've got a family trust or a corporation, all of a sudden the learning curve is like, that becomes something that not even a single competent professional would know everything about. Like, you might have a team of tax professionals, a legal professional, and a financial professional, all giving you advice in those more complex situations. So, to think that you can level yourself up without giving up significant opportunity costs of time, I think a trade-off becomes pretty obvious with that increasing complexity.

Mark McGrath: On that note, I think, in some cases, that complexity is subjective too. I've got clients that I was just talking with yesterday. From my perspective, it's not a very complex situation. It's two young individuals, no kids, both have pensions at their job. But they're seeing the complexity ramp up for them. But maybe, it's because of this trade-off in time and leisure. So. they've got a rental property, for example, and they're just starting to get a little bit overwhelmed with their own finances. So, I don't think that you can draw a line in the sand as to where things are complex because it's probably a reflection of those individuals, financial literacy as well.

Ben Felix: Yes, that's fair. There was one paper that I found in the Journal of Retirement that looks at this, looks at what is the effect of financial advice on household outcomes. It a 2020 paper in the Journal of Retirement. They use a survey of more than 4,000 working households to assess the impact of financial advice. They find that households using financial advisors, on average, have higher incomes are wealthier, married, more highly educated, more confident in their retirement planning, and more disciplined in their financial process.

Now, all of that, there could be some significant selection bias in there, where those people are more attractive to financial advisors. So, what the authors of this paper do is use regression and nearest neighbour matching methods to control for confounding variables. They find, even still with that, with the control for confounding variables, they find an approximately 15 percentage point increase in the retirement income replacement score, resulting from the use of a financial advisor. So in that case, they seem to be confirming what the other more theoretical paper talked about, where there can be these overall welfare gains from delegation.

Then, a separate study looks at the effect of professional financial advice on subjective wellbeing. So, those are the two things we mentioned earlier in the theoretical paper on what is the value of delegation? Well, you could have increased wealth through increased labor income, and you could have increased wellbeing through more leisure time. So, in this paper, the authors find that people who receive professional financial advice tend to have higher subjective wellbeing, and that the association is stronger for households that experienced an increase in income. Individuals who do not consider themselves financially knowledgeable, that kind of speaks to your point mark, where different people will get different benefits. And individuals that have a weaker internal locus of control, and the lower degree of conscientiousness.

Locus of control, I'm going to come back to in a bit. Some other really interesting research on that. Retired investors, we kind of talked about this already, they might gain less from delegation because their human capital is no longer a significant asset. But the other relevant issue that I think starts to become really important in retirement is the potential for cognitive decline. There’s a relatively recent paper out on this that found that older people tend to underestimate their own cognitive decline and that those who have experienced a severe cognitive decline but are unaware of it are more likely to suffer wealth losses compared to those who are aware or did not experience a severe decline. So. this study is looking at data from the Health and Retirement Study, which has a representative panel of the US population aged 50 plus, and they're studying the relationships between self-ratings of memory changes, assess changes in memory performance, and wealth changes across waves of the survey.

The results of their paper suggest a causal role of unawareness of cognitive decline for wealth losses, and wealth losses among unaware respondents mainly reflected decrease in the value of their risky assets, so like their financial market investments. They also find that wealth losses are concentrated in the highest wealth quartiles, which is an interesting point. So, they interpret their own findings as being the effect of overconfidence, where people who have experienced cognitive decline but do not realize it end up making poor financial decisions largely with their investments.

Now, they do talk about hiring a financial advisor in this paper. They point out that delegation itself is not necessarily the solution. You kind of alluded to this earlier, Cameron, with the idea of doing a deep dive on the person before hiring them. Delegation itself is not necessarily a solution, because it requires non-trivial cognitive skills itself, to make sure that you're delegating to the right person. Then, of course, we also have conflicts of interest, which make that whole issue even more challenging.

Cameron Passmore: So, it's the timing of when you make the choice of advisor could impact your outcome.

Ben Felix: Yes. They're kind of saying that, if we're saying that cognitive impairment is a problem, and we want to solve it with financial advice, it's not necessarily a solution, because you need cognitive ability to choose a good financial advisor.

Cameron Passmore: So, if you've made the choice before the decline, obviously, you'd be better off than making it during because during, you might choose an inappropriate type of advisor.

Ben Felix: Yes.

Cameron Passmore: That is so, so interesting.

Ben Felix: Yes.

Cameron Passmore: Not surprising, I guess, but it's fascinating.

Mark McGrath: We've got the Trusted Contact Person now in the industry. This doesn't solve the problem, because your point, you have to actually hire the advisor prior to some kind of cognitive decline. But I think the industry has made strides in this area. We've got, I think it's mandated now that advisors in Canada have to make a reasonable effort to add a Trusted Contact Person to somebody's file. The Trusted Contact Person isn't like a power of attorney, they can't actually act on behalf of the individual, but they can be contacted by advisors in limited circumstances. If there's concern about things like fraud, or cognitive decline, for example, then we can reach out to the client's Trusted Contact Person and just say, "Hey, is this making sense? Is there an issue going on that we don't know about?" So, it's another line of defence against that, but again, you still need to hire the advice before the decline happens.

Ben Felix: Yes, it's a great point that we have that requirement in place now. So, related to that, actually, related to the idea that you have to have cognitive capacity to choose a good advisor. Other research has found that more financially literate people seek help from financial professionals, and that this effect is more pronounced among older people, and those with more wealth, and more complex financial positions. As a result of that paper, implies that financial literacy and financial advisory services are complementary, rather than substitutes for each other. I thought that was interesting.

I think Mark Soth and I talked about this on Money Scope at one point, that even if you want to delegate to a financial advisor, you definitely have to be very trusting and end up trusting the right people, which is obviously, that's pretty messy. Or, you have to have some baseline level of financial literacy in order to assess whether you're getting good advice or not.

Mark McGrath: That doesn't surprise me, actually.

Ben Felix: Yes. Well, it makes sense.

Mark McGrath: I wonder if there's some kind of Dunning-Kruger effect to that almost. Just through my conversations with people online, for example, who start with, oh, there's index funds now, financial advisors are basically going to be wiped off the face of the earth. It's like, "Oh, man. Where do we even start?" You know so little about what financial advice is, you don't know your own blind spots. I think the more you know, the more you recognize you don't know, there's things you don't know. That's probably an impetus for people to seek advice.

Ben Felix: Yes. Something that I've definitely noticed just being at PWL for the last 10 or so years, is that there are lots of highly capable and financially literate people who eventually make the decision to delegate to PWL for lots of reasons that we've talked about. Could be the opportunity cost of time, maybe they want more leisure time in retirement. Or, in many cases, it's been like a more financially literate spouse who wants continuity for their less financial literate spouse. That's a very common thing in relationships. For whatever reason, I'm sure there's interesting research on that, that we could dig into at some point. But it's very common for them to be one more financially literate spouse in relationship. If they've been doing a successful job managing the household finances for their entire lives in the event that they experienced cognitive decline, or an unexpected death, that puts their less financially literate spouse in a potentially difficult situation, where they now are the person with low financial literacy, trying to figure out who they can trust.

Mark McGrath: Those are super vulnerable moments for the surviving spouse too. Often, the probability of them making a catastrophic mistake, and this is totally anecdotal, but I think the probability of them making a big mistake is very high in that period of time after something like the unexpected death of a spouse. So, they're thrown into this emotional turmoil. Then, on top of that, they're given the task of managing the finances, which was a job that they were not all that involved in, in some cases.

So, I've had a lot of conversations with people over the past couple of years who have told me, "I'm good for now, but in a few years, I'm probably going to hire you for this very specific reason that I'm the head of the household financially, and I manage all the finances. I'm worried or concerned about what happens if something happens to me." They want that continuity, or at least. they want to have conversations with their spouses to let them know, "Hey, if something happens to me, you need to go talk to Mark or to PWL." Even my friends who are advisors at other firms have told their spouses like, "Hey, if something happens to me, go to Mark." It's a huge honor, but also a huge responsibility. So, I think just again, anecdotally, I've noticed those conversations for me have been quite prevalent.

Ben Felix: Okay. So, we've covered a lot of the big ones. There are a couple of other interesting ones. Some research has suggested that financial advisors do act as a commitment device for good financial behaviours. One study found that German brokerage clients with self-control issues, and they measured that by people who smoke cigarettes, and there's other literature on how people who smoke cigarettes do, in fact, have poor self-control. But anyway, they found that they were more likely to delegate their decisions to financial advisors, and that their overtrading for these investors is reduced. Their investment biases are mitigated and their performance is improved.

Mark McGrath: That's the personal trainer effect. Like I said, if it was as easy as just Googling information, we'd all have six packs. I have a gym right here, I know exactly what my diet should look like, how often I should exercise. There's a reason I'm only showing myself from the chest up right now. It's not a lack of information. Let me put it that way.

Ben Felix: Good analogy. There's another study on German investors, similar concept. But in this case, they find that financial advice improves saving behaviour. So, particularly, for households with low self-control, and it increases the ratio of stock market share in total financial assets. I don't have in my notes, but there's another one on exponential growth bias, where people who exhibit exponential growth bias, like they're not good at thinking about compound returns over the long term, they tend to be more likely to delegate to financial advisors. That's another interesting one.

Now, I mentioned briefly earlier that it's really important to note that not all financial advisors are the same. Many of them do have severe conflicts of interest that can affect the advice that they give, even if they're good people. Like, incentives are hard to fight against. So, I think when seeking out a financial advisor, it's important to ask how they're paid. That's one of the first questions to ask, in general, not always. But in general, those receiving commissions in exchange for selling financial products may be affected by conflict of interest. Fee-based advisors, which is what PWL is, they charge a direct fee for their ongoing advice. That setup mitigates a lot of a conflict of interest, associated with selling financial products. If you're selling financial products that pay you a commission, you have to sell financial products that pay commission. Those products that pay commission tend to be much higher fee for the end consumer. Fee-based products tend to have lower overall fees.

Mark McGrath: There's still conflicts there, obviously.

Ben Felix: Hundred percent, yes.

Mark McGrath: As you guys know, I'm co-authoring a book with Dan Solin, and we've got a whole section in there on, for example, advisors like us who are fee-based, and what our conflicts are. I just think a great example is, should you pay off your mortgage or not with portfolio assets? So, we're incentivized. I think our incentives are aligned very well with our clients. But at the same time, to your point, incentives are difficult to overcome.

So, if somebody who's a fee-based advisor is given the choice to say keep more of your money in the portfolio, which generates more revenue, versus paying down a mortgage, for example. So, I think there's conflicts in every model, but I think I agree that transactional-based relationships are probably the hardest of all conflicts to overcome.

Ben Felix: Yes, definitely. It's also worth asking, I think, if the advisor is a fiduciary. A fiduciary is required to act in your best interest, which seems like it should be table stakes for something as important as financial advice, but it is not.

Mark McGrath: Most people think their advisors are fiduciaries. There's actually – I don't have it at my fingertips, but I believe there's data on this, a survey of some kind. Most consumers of financial advice in Canada believe that their advisor is a fiduciary.

Cameron Passmore: That could not be, right? It doesn't make any sense not to be.

Mark McGrath: You'd think so.

Cameron Passmore: That's the default assumption, right?

Mark McGrath: Yes. It's different in the US too. I think a lot of people who want the answer to this question are reading like US-based advice, where fiduciary duty I believe operates totally different than it does in Canada. But it in Canada, the only class of advisors that are de facto legal fiduciary is our portfolio managers, like licensed portfolio managers who have discretion over their client's investment accounts within – you have something called an investment policy statement. But we have the discretion to make changes to client's accounts. That's the only category that's de facto a fiduciary.

But interestingly, courts have found that other advisors had a fiduciary duty in certain circumstances based on their relationship with their clients. One of the things they look at is the level of trust that was placed by the client in the advisor. So, the reason I bring this up is because you might ask your advisor, are you a fiduciary? Their answer might be no, because I'm not a registered portfolio manager. But they might, in fact, be found to have a fiduciary duty after the fact. It's super complicated.

Ben Felix: Yes, it is complicated. It's not legally binding, I don't think. Although, maybe the fact that we've done it puts us in a stronger position of trust, which maybe does make it more legally binding. But we do this thing called the CEFEX certification, which is the Center for Fiduciary Excellence, which is this third-party organization that we pay to come and audit our processes and client relationships. They dig through our client notes, and they look at the advice that we give, and they give us the stamp of approval to say, "Yes, you're acting as a fiduciary."

Anyway, some firms do stuff like that, to take that extra step to show that it matters to them. Okay. So, I think that's the meat of the notes. Just to summarize, hiring a financial advisor can make sense if delegation is valuable to you. This can be the case if you're uncomfortable with finances and investments, and do not want to dedicate the time to learning. For many people, the choice to delegate is rational due to the opportunity cost of time. This is increasingly true as the financial situation in question gets increasingly complex. Hiring a financial advisor can also make sense to mitigate the risk of cognitive decline affecting your household's financial decisions as you age, and to act as a commitment device to reduce unwanted behaviours.

Mark McGrath: Yes, nailed. That was awesome. I don't know if this fits into one of the categories you just described, maybe it does. But I have had a couple of people say that, as the complexity grows, as the portfolio grows, they're concerned about the responsibility that they have to their family with respect to all of the financial decisions that are being made. I think it comes from a place more of like, liability than anything. They're worried that if they were to make a mistake, it would impact the relationships they have with their family members. So, for them, it's almost like just an offloading of risk and liability than anything else. Again, maybe that fits into some of the categories you described. But for these people that mentioned it to me or proposed it to me that way, it was a different way of thinking about it for me.

Cameron Passmore: It's kind of what Dan Harris described when he was on a couple of months ago. Everybody wants someone to worry with.

Mark McGrath: Yep, exactly.

Cameron Passmore: That was great. Okay. Head over to the after-show where two or three people join us.

Mark McGrath: You say that every time. Do we have stats on who drops off or who listens to the after-show?

Cameron Passmore: I think we have three firm people that come.

Mark McGrath: They come only for the after show. They ignore the after show. Just come for the banter.

Ben Felix: People love saying that they're one the three. It's a funny way of saying that they listen to the end. It's like a funny podcast inside joke.

Mark McGrath: Nice.

Cameron Passmore: Good trip, Mark?

Mark McGrath: Yes, it was really good. So, I was in Europe for three and a half weeks.

Cameron Passmore: I bet your tweet was excellent. The observations you made were more excellent than your tweet.

Mark McGrath: So funny how social media works. That was like an off-the-cuff tweet that I wrote just without thinking. I think I got like over 1,000 likes and 60,000 views or whatever.

Cameron Passmore: What did you say?

Mark McGrath: I said something like, "Just got back from three and a half weeks in Europe, things I learned. Europeans smoke a lot. No tipping culture is amazing. Working public transportation systems are incredible,” and there's one other point. I mean, these are all true things that I was like really struck by. But at the same time, it was kind of just a throwaway tweet, and people loved it. I heard from a lot of people who had moved to Europe or lived in Europe and who agreed with me.

Yes, the trip was great. We went to Barcelona, and we went down to Valencia, to Prague where I went to a concert, one of my favorite bands called The Smile. That was amazing. Prague's incredible city and to see a cool band and a cool venue was really, really fun. We went over to Stockholm, where my sister-in-law lives, and spent six days or so there. Then, we did a couple of days in Paris, then we came back.

Cameron Passmore: Oh, beautiful.

Mark McGrath: With the kids too, they were troopers.

Cameron Passmore: Don't you love Barcelona?

Mark McGrath: Oh, man. What a city.

Cameron Passmore: What a city.

Mark McGrath: All of them. Paris, and Barcelona, there's a lot of similarities. But Barcelona is incredible.

Cameron Passmore: Cool.

Mark McGrath: Yes. Going back. For sure going back.

Cameron Passmore: I cut and pasted a tweet I saw this morning that I think Sam Row put out. I didn't know this, but Nvidia joined the S&P 500 and replaced Enron back in 2001. That's kind of cool.

Mark McGrath: Interesting.

Cameron Passmore: It turned out well. Kind of very well, I'd say. We had a nice email from Steve in London. He said, "Hey, Cameron. I just listened to episode 311. I love your shows. But the brevity of the episode was a pleasant surprise, short and sweet, very informative, and excellent feedback letters. Loved hearing about the young British officer and how much has been garnered from your, show great stuff. The trading options data was extremely interesting, but not unsurprising. Never amazes me how many people opt for the get quick, rich path as opposed to time slow and steady. Time and consistent investing wins all the time, closest thing there is to a sure thing. Congratulations to your wife on her upcoming retirement. It's been almost three years for me now and is truly a fantastic phase of life. Regards, Steve in London, Ontario." I thought that was nice to reach out.

Mark McGrath: Nice. Was episode 311 the episode where I was in Europe, and you guys decided to read out the comment from somebody allegedly named Eugene Fama who said that you guys are 11 out of 10, and Mark is mid?

Cameron Passmore: We just shared it, facts only.

Mark McGrath: Yes. I just wanted to confirm that was the episode. Okay. Got it.

Cameron Passmore: It was that episode. Yes, we passed our judgment.

Mark McGrath: I know exactly who that is.

Ben Felix: We read every review. We always read them. It's nothing about you, Mark.

Cameron Passmore: It's nothing personal.

Ben Felix: We couldn't skip it.

Mark McGrath: No, I don't blame you.

Cameron Passmore: That wouldn't be fair.

Mark McGrath: As soon as I read that comment, I knew exactly who it was. I won't call them out, because they're going to listen to this episode. I message them immediately after, like, "This is you, wasn't it?" He's like, "Yes, that's me."

Cameron Passmore: Confirmed.

Mark McGrath: Confirmed.

Cameron Passmore: We know who it was.

Mark McGrath: Good stuff.

Ben Felix: It's funny.

Cameron Passmore: Meetup this fall. Hopefully, we'll still go ahead, even though it's possibly, the book might be delayed a little bit, Mark.

Mark McGrath: Yes. Not delayed in any like administrative sense. I was talking to Dan this morning. I submitted my first draft of the book that I'm doing with Dan Solin called Wealthier: Field Guide for Millennials. We're going to revamp I think some of the voice of the book a little bit, so it's more of my voice, and less Dan's. Even though Dan, obviously wrote the book, and he's the foundation for the entire thing. I think we want Canadian readers to really feel like it's me that's talking to them and less Dan. So, I'm going to go back and revamp parts of it. So, it's going to add a little bit to the writing process. But I don't know if we'll be able to get it all done and published by September, which was the original deadline. But we're going to do our best to do that.

Cameron Passmore: But you'll still be in town then, right? So. you're in town on the fall. Dan's in – so, we'll probably still do a meet up, but it may not be connected to the book necessarily.

Mark McGrath: Sure. Yes. Exactly, yes.

Cameron Passmore: A lot of our friends are in town, then too. So, should be a good time to get together, including our friend who I think I alluded to being on the internet.

Mark McGrath: Who's that?

Cameron Passmore: Jason, he was quite proud to be. This is what episode five, we've mentioned, Jason.

Mark McGrath: Never heard of him. Who's that?

Cameron Passmore: Never heard of him. He is kind of a big deal.

Mark McGrath: You think so.

Ben Felix: He's coming on, we've talked to him. He's going to come on. Jason and I are working on a paper together about infinite banking, which is the idea of shovelling all of your money into permanent insurance and then borrowing against it to fund your consumption. So, we've got a paper that is mostly written on that, it has been for a while. But with the tax changes, we had to update the analysis. So, it was like mostly done, and we're like, "Okay, nice. We got a final draft." Then, the tax changes happen. We're like, "Ugh!" Everybody do everything, because it's all about comparing, like investing in a taxable account versus using permanent insurance. So, that's at least one component of the research.

Cameron Passmore: Isn't that your happy place, you guys?

Ben Felix: We're having a great time. It's still tedious, though. The annoying part is that doing the analysis is fun, but doing it for like, whatever eight different cases or whatever we have, and then formatting it into a paper is not as fun.

Cameron Passmore: It'll be a blast to have Jason on.

Ben Felix: Yes. Once we're done with that, Jason will come on and we'll talk about it.

Cameron Passmore: Let's see if we can get him to come out of his shell a bit.

Mark McGrath: Oh, yes. He's such a recluse.

Cameron Passmore: We can build up some confidence in him to come bring it on. Get on there. Okay. I'm out of content. You guys got anything else?

Ben Felix: I think we're good.

Mark McGrath: We're good.

Cameron Passmore: Okay. As always, everybody, thanks for listening. We'll see you next week.

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

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Participate in our Community Discussion about this Episode:

https://community.rationalreminder.ca/t/episode-313-when-should-you-hire-a-financial-advisor-discussion-thread/30941

Papers From Today’s Episode:

‘Time Is Money: Rational Life Cycle Inertia and the Delegation of Investment Management’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2350785

‘The Use and Value of Financial Advice for Retirement Planning’ — https://www.pm-research.com/content/iijretire/7/3/46

‘Professional Financial Advice and Subjective Well-Being’ — https://www.researchgate.net/publication/359635224

‘Smoking Hot Portfolios? Overtrading from Self-Control Failure’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3347625