Key Points From This Episode:
Are DIY investors responsible for their actions? [0:01:44]
Starting a blog [0:03:40]
Switching from stock picking to index funds [0:07:00]
Managing behaviour [0:09:30]
The 4-minute portfolio [0:11:45]
When does it make sense to optimize? [0:13:20]
Fee-only vs. fee-based advice [0:15:10]
Index fund rebuttals [0:20:58]
Choosing a conflict of interest [0:21:37]
Robb’s biggest beef with Canadian financial services [0:25:18]
Trusting the bank [0:27:27]
VGRO vs. robo advisors [0:28:02]
One-fund retirement portfolios [0:30:20]
Read the Transcript:
So, before we jump into our main discussion, I want to quickly revisit something that I said on the podcast last week. I said that DIY investors are solely responsible for buying A-class mutual funds in their online brokerage accounts and they shouldn't be complaining about having not realized that they were paying this trailing commission to their broker. I basically made the buyer beware argument, and Rob you and I went back and forth about this on Twitter later that day, actually, after we recorded, but before the episode came out. So, I don't want to debate that with you on the podcast, but maybe you can just share your thinking.
Well, I mean, I think the regulations are in place, or should be in place, to protect our most vulnerable, and so I look at our seniors and new immigrants, or people new to Canada. And does this make sense to them? And can we have something in place to protect someone who may not understand fully how the embedded commission or advice model works? And so, I look at discount brokers who are restricted from providing advice, so why should they be able to sell funds that have a built-in trailer fee? And so, my argument is that they should be forced to rebate those fees, or just not offer them altogether. And so, that's where it looks like the regulations are going. I understand your point, which is that it's a big responsibility for a DIY investor and they should do their research. But there's a lot of funds out there. I can see how easily someone could get, based on a simple screen, be lured into that, into those kinds of funds without fully understanding that they're paying for something that they cannot legally receive. And I just think it should be [crosstalk 00:03:15].
So, that's like someone searching for, I don't know, a Canadian dividend fund and they see maybe one with good past performance as A-class, and so they buy that one not knowing they're paying this extra fee?
Exactly.
I think that's happened. Yeah. I think we're going there now. Okay. So, that's that aside, I've all ready given you a quick intro, Rob, but maybe you can just give us a brief overview of your story, building the blog up to what it is today.
Oh, sure. So, we started the blog back in 2010, and at the time, I was going through a lot of change in my life. I just turned 30, I just had our first baby. A couple of years previous, my wife was diagnosed with MS, so it changed a lot of our family focus and trying to come up with more balance in our lives. And turning 30, and I also changed careers. So, I worked as a sales director at a hotel and worked in hospitality for 10 years and then moved to the public sector, trying to achieve that balance in life. So, no more working 50, 60 hours a week, it was 9:00 to 5:00 gig, more or less.
And so, along the way, I'm learning all these... Now I have a pension instead of contributing to an employer-sponsored plan. I've got kids now, so looking at RESPs. We're a one income family now, just due to our family circumstance and my wife's health at the time. And so, there was a lot going on, and I've always been interested in money, and I started reading a lot. I was reading blogs like Million Dollar Journey and Canadian Finance Blog. These guys are in a similar situation. And as I was consuming all this content, I thought, "What the heck? I could write this and contribute my own story." And that's how Boomer & Echo was born.
What is the big draw? Is it you like helping people, or are you fascinated by the content? Or do you see a hole in the content in Canada? What's the motivation for you? because it's such a great blog site.
So, I think blogs in general are appealing because if you follow a lot of mainstream media, they do the financial facelifts, and it's some ridiculous scenario where a couple's earning $250,000 a year and wondering if they're going to be okay in retirement. And I think people want a little more relatable stories, and that's why blogs have become more popular. If someone can find themselves, "Hey, this is just a regular, 30-something guy going through all these things," and I'm sharing my experiences so people don't make the same mistakes I do, and that's where a lot of the writing comes from.
When I bought my first house, of course, the mortgage specialist at the bank had me tick off the box that said you're going to pay the mortgage life insurance premiums and things like that, and so as I started learning more and looking at that and saying, "That's not something that a lot of people should be doing," and then I'd write about that experience. And I do a lot of research into why, and I think a lot of people appreciate that. And over the years as the blog has grown, and that goes back to my position about the DIY investors getting screwed by the discount brokers, is a lot of my experience falls into consumer protection, because I don't want people to make mistakes or get exploited.
That's great. I think one of the most public lessons that you've learned and written about extensively on the blog is that when you started out, you were an expert "stock picker," and you were finding dividend paying stocks, and that was the the key to a retirement. And there are a ton of blogs out there like that, that focus on dividend investing. And Cameron and I have spoken on the podcast and written about many times how that's... I mean, it's a flawed way of thinking about investment returns and investment portfolios. In 2015, you saw the light and switched to index investing. Can you tell us how you came to that decision?
Sure. I mean, I think it was a longterm coming before I even made the switch. And so, around the time when I switched careers... I mentioned I had a employer matching RSP program and we had to use HSBC, I think we used, as the bank that we had to make our contributions to, and then the employer matched, and so when I was leaving, I realized at the same time I had these mutual funds that were paying 2.7, 2.8%, and that was right around the financial crisis. And my portfolio was almost cut in half and all those kinds of things.
So, anyways, I did a lot of research on discount brokerages, moved my money over to one, and just following along the MoneySense, the Norm Rothery, not Dogs of the Dow or the TSX, but along those same lines, I had 10 good dividend paying stocks and just kept building it from there. And I built up my portfolio from about $25,000 in 10 or 11 stocks to about $100,000 and about 20, 23 stocks, but they were all Canadian, those Canadian blue chippers. I read everything from the Norm Rotherys to the Tom Connollys, these dividend investing gurus, and thought... I drank the Kool-Aid. I bought into the fact that this is all you need. And because the markets were going up and Canadian stocks were performing well, and especially these dividends stocks, it was working, and so I had no reason to say, "I should step back and diversify more. This is working and this is how I'm going to invest forever."
So, thankfully, I started reading Canadian Couch Potato and Michael James and really reading from these index investors who, in Michael James' case, used to be a stock picker and saw the light. And the more I read, it was like, "You know what? You're right. I'm looking at my own behavioral biases and blinded into thinking this is the only way." And so, I read the Daniel Kahneman, Thinking Fast And Slow, and I want to protect myself from myself and I don't want this narrow view of thinking in terms of my investing strategy. I was loving the Canadian Couch Potato site, I loved the model portfolios. What I didn't like, I'll be honest, was how complicated those portfolios were at the time. So, back three, four or five years ago, it was taking five, six, or seven ETFs to build this diversified portfolio. A lot of talk on US-listed ETFs and doing Norbert's Gambit to transfer funds. It just sounded really complicated, and I didn't feel like investing needed to be that complicated.
So, what ultimately was the tipping point was when Vanguard introduced it's all world ex Canada fund, the VXC, and I thought, "This is it." So, I changed my strategy right there. I sold my $100,000 worth of dividend stocks, and I split it 20% between VCN, which was the Canadian portion for Vanguard, holds about 300 or so of the biggest stocks in Canada, and then 80% VXC, which was getting the exposure to thousands of companies all across the world. And so, with those two funds, suddenly now I'm not looking at my portfolio every day, wondering why the certain oil stocks were going down or getting cut in half, and wondering which stocks I should buy, I owned a small slice of everything, and it's been quite liberating.
So, I mean, you talk a lot on your website about simplicity, and Rick Ferry tweeted on the weekend talking about making things simpler is better. Do you miss complexity at all?
Not at all. I'll be honest. And I wrote about this, I think we'll get into later, which is the amount of time I spend on my portfolio is minimal now. I'm adding new money. I don't worry about the, when is it a good time? I've got to buy on the dip. I've got to keep my powder dry. All that, I don't worry about it. I just have a regular schedule of investing every month and keeping to that 20/80 allocation. And honestly, I'm keeping it even more simple because I'm not necessarily selling, when I do my asset allocation or rebalancing, I'm not necessarily selling one to buy the other, I just add new money to the laggers. Right? I add new money to the one that's lagging behind and bringing it into balance that way, and it's super easy to do. And so, no, I don't miss the complexity. I don't miss the research on individual stocks. To be frank, I probably wasn't doing a good job of it anyways. It was just, stocks were going up and it looked like I was succeeding.
I don't think anybody's truly good at researching stocks, so no worries there. You mentioned Dan Bortolotti's previously complex portfolios, and I think, actually, pre-2015, he had his uber tuber with 12 or 13 ETFs, that also gave you the small cap and value exposure.
That's right.
And one of the questions that I have for you is we, Cameron and I, on the podcast, talk a lot about factors. Factors is like exposure to small cap and value, which you don't get with a market cap weighted ETF portfolio. Obviously, there's a massive trade-off between simplicity, which you're getting with a two ETF portfolio, and factor exposure, which you're not getting. Do you have any thoughts on factor investing and where the tipping point is in terms of complexity versus optimization?
Yeah. So, there is a tipping point, I think for sure, and optimal might be more important when your portfolio grows a bit in size. I mean, I think you follow the personal finance Reddit site, Personal Finance Canada, and you see the questions all the time, "I'm just starting. I've got $5,000 or $10,000, and I need to be exposed to REITs and gold," and all these things. It really doesn't matter at that level, in my opinion anyways. Even though I know I'm leaving money on the table by using a BXC instead of the US-listed funds, but I think what I gained in terms of simplicity, at this point, outweighs that.
Maybe once I'm at a quarter million dollars or more, I look to more optimal solutions and factoring and things like that. But I think I'm capturing what I can in terms of the market returns at pretty close to as low as fees as you can get. And I have faith in the market. I have faith in the market when I talk about product development, look at Vanguard now has come out with a one fund solution. Right? So, now, instead of the seven or eight or 12 fund uber tuber, you can get, I mean, pretty much as diverse as you can get with [crosstalk 00:14:53].
And is it the absolute optimal thing to do? Maybe not. But is it better than 98% of the portfolios out there? Absolutely.
Yeah. 25. Yeah. And I do want to come back and talk more about that a little bit later, but right now, I want to ask you about the fee-only planning service that you're offering, which I think is... I mean, it's very cool. I don't know if you saw the blog post that I wrote last week, about how the fee-only planning services fit in to the DSC, the differed sales charge, where advocates is arguing that small accounts need, they need the deferred sales charge so they can afford advice. And I argue in the blog post that when there are low-cost solutions, like Vanguard's one ticket fund, or even a robo advisor, combined with a fee for service advice model, I think the DSC is completely obsolete. But I was hoping you could tell us, what type of financial advice are people looking for when they contact you? And then, also, what kinds of people are contacting you? Is it retirees? Is it younger people?
Well, it's a mix of both, and so to answer that question of the demographics, I have everything from... When I talked about the people in my situation when I started the blog, which was just had a kid or just got married, really where there's a financial life event that has happened, and they need to reset and get their goals and their priorities in place. And so, there's that demographic. And then there's the soon to be retired, and so they're this group of Boomers who are maybe five years or three years away from retirement, and just really need a financial reality check, or a sober second thought on on their opinion. And I get a lot of, "I don't really trust my advisor, my bank advisor."
That was my next question. I'm so curious to hear like, who are they working with now, typically? Can you say anything on average where they might be?
Most have an advisor through either a bank or an investment firm, and so they're coming to me... And it's mostly blog readers, I'll be honest. I don't just hang my shingle out the door. It's blog readers who've been reading my stuff for a long time, who have said, "Yeah, I get what you're saying, and your philosophy jives with where I want to go. And so, I'd like to engage your services." Because I write about the general. I mean, I can't write... Obviously everyone has a personal circumstance that's different, and so when I write a blog post, it's about the general you, not about you specifically. And so, I'll get some readers contact me that says, "Well, here's my situation. And what do you think?" And they really want that unbiased advice. I mean, I think what's really hitting home now is that conflict of interest or that advice tied to product sales. That's not what people want, but it's what they've been used to for decades. And so, they want to bounce it off-
That's really interesting. I didn't really think that through, but I'm very interested to hear most of the people, and it makes sense, but most of the people contacting you are with an advisor and they're looking for an un-objective second opinion. I think that's really fascinating.
But then you also have selection bias, right? You have people that are looking to become better informed. What would you say from your experience, Rob, how would you rate the state of the average investor in Canada today?
Oh, it's not good. If you take it out of a one in 10 scale, it's probably really low towards the three mark, even. But you're right, it's a selection bias. It's people who are all ready reading and wanting to further their knowledge. I feel like I write about mutual fund fees all the time, and I'm just beating people over the head with it, but then I get an inquiry or an engagement from a prospective client who says, "Oh yeah, that last post I read, it really hit home with me, and I'm thinking what about the previous 10?" Right? But they had to be in the right frame of mind to look at their own personal situation, and maybe CRM2 is helping with that, where people are seeing the fees and plain dollars now. I don't know what the answer is, but I will tell you, the inquiries have gone up substantially in the last year. And people are really... They really want an unbiased, objective opinion.
And what's your opinion of the service providers in this country, be it the mutual fund companies or the banks, insurance companies?
Well, I mean, I don't want to paint the industry with one brush. I know there's good advisors out there. But I mean, there was a study that came out, kind of blew my mind, that was advisors, yeah, they're selling commission-based products and products that have high fees, but they're also investing their own money into it. So, they're eating their own cooking, but not in a good way.
They're really buying into it. So, I think it's the industry itself has trained this army of advisors to buy into active management and these products that people don't necessarily need, so that old suitable versus in your best interest. Yeah. And so, it was really surprising that they really believe this, and you get that from anyone who... So, I mean, I can't give investment advice or give my opinion on whether you should buy this stock or this fund, but what I can do is look at your current situation and say, "Well, here is the fees that you're paying. Here's a site that has these model portfolios. Have a look at the difference in fees, and are getting that in value from your advisor? And look at the index funds." And so, if they go back to their advisor at their bank or investment firm, and I hear it all the time, the advisor gives this rebuttal and the rebuttal is the same all the time. I'm sure you guys hear it all the time, as well.
I used to be trained on it in the early days in this industry, how to defend yourself against index funds, and looking back... I mean, we're talking 23, 24 years ago. And in hindsight, it's absolute nonsense.
Right. But they believe it, and so now reading the study, it makes sense. It's not just a playbook from the industry. I mean, it is, but the advisors actually believe it.
Absolutely. Absolutely. I mean, those training materials on rebutting against index funds, they're still out there. I've seen them this year. Yeah. Yeah. It's crazy. So, one of the questions that I have for you, Rob, is obviously you've got this experience with clients with this fee-only model, which is probably as objective that you can get. I mean, the only, and I'm not saying you have this conflict of interest, but the only conflict of interest that I can think of in that situation is that because it's time-based, it's in the best interest of the advisor to make the situation seem more complicated. But that's a pretty good conflict of interest when you compare it to everything else.
Yeah. And I will say that, you mentioned the retainer, but there's only very few clients that keep on retainer. And these are the ones that need a lot of handholding, or want a lot of handholding, which I might check in with monthly or quarterly or whatever they need. But for the most part, it's a plan, and I treat it as an action plan, not necessarily this 50 page manual charts that you'll never look at again. It's like here's eight things or six things that you could take action on right now to improve your situation. Here's what the outcomes would be if you do it. And a lot of times, that's what people want, and then they're gone. And so, I don't have this ongoing relationship where I need to like, "Oh, well, have you ever thought about this?" I even had a client inquire who said they actually met with a fee-only advisor in his home city who wanted to keep him on and dangle him along with these really complex meetings and whatnot. And this guy was 27 years old. He just needed to be pointed on the right direction and go.
Right. So, the question that I have relating to all the stuff that you were just talking about, which was totally relevant to my question, how do you think that the fee-only, so the model that you're giving advice on now, how do you think that stacks up in terms of, I guess, pros and cons to something like what PWL does? Which is we're still fee-based, we're not earning commissions, but we are earning revenue based on the assets that we manage, which means as the portfolios grow, our dollar fees tend to go up. And obviously, that has its own conflict of interest where it's in our best interest to gather as much assets as possible, but I guess also to grow the assets. Anyway, so my question is, how do you think those two models stack up?
Well, I think, for one, what you're doing, and you have a fiduciary standard which I think is imperative, so I think about situations like when a client might come to you and say, "Should I take the lump sum on my pension when I leave my employment, or should I take the pension for life?" and it would be in your best interest to take the lump sum and invest it. But because of a fiduciary duty, you would give an objective opinion, and it might be to take the lump sum, but it would be in that client's best interest. So, those are decisions that I would make, or help a client make, without any overhanging conflict.
However, I deal with very, I will say this, I deal with very basic financial planning, and when things get a little more complicated, either they have a corporation or farming or US assets or residency and things like that, for one, because I have a full-time job, I don't have time to deal with those types of situations. And there's absolutely a place for a fee base, for those more complicated scenarios, or people who need better planning, advice and tax advice, absolutely, the fee-based model is the way to go.
Interesting. Good answer. So, what are some of your biggest issues or biggest beefs you have with the financial services industry?
Oh, how much time do we have? I mean, I just think it's the transparency. Right? I mean, I've been railing on the embedded commissions for years. The Canadian securities administrators finally had a chance to do something about it and came up with these real meek and mild changes, which supposedly aren't now going to be followed in Ontario, at least in one case with the deferred sales charges. So, I just think we're not we're way behind maybe the United States and other areas in terms of the fees that are charged, the transparency. The industry, I mean, they're just hanging on for dear life to this old model of commissions, and it's more about client and asset gathering than it is about giving advice.
If I could say my biggest beef, it's that there's still this belief that active management or that your financial advisor can provide enough value on the stock picking side or mutual fund picking side to justify that fee, and we know that that's not true because the active manager's going to lag behind the market. But it's so prevalent in the industry and investors aren't as informed, and so the industry gets away with it.
But there's so many great writers like you and Dan Bortolotti, the Couch Potato, Rob Kerrick, how is this not getting through quicker?
And it's not just that, it's that like in Canada, yes, I agree, the strong voices are important, but I mean, in the US they have probably similar strong voices. But in the US, it's changing hugely. The assets are flowing every single day out of active and into passive, and in Canada, the trend is not... I mean, the needle is barely moving.
Well, and you look at the trust we have in our banks. Right? And so, where do I go when it's time to open up... Think about saving for retirement, I go to my bank, and the bank's got the same playbook they've had for years. It's not until you start doing some research and really be aware of what else is out there that you'll even stumble upon another way, because the banks don't offer ETFs and they don't even look at indexing, and so you'd never know any better. And if you just trust your local banker, then nothing's going to change.
Last couple of questions here. I know you wrote recently about the Vanguard and the Horizons One Fund solutions, and we chatted about that earlier too, how do you think with products like that starting to come onto the market, how do you think services like Wealthsimple and Nest Wealth, which are basically doing that, how do you think they fit into the space?
First of all, I'm a big fan of what the robo advisors are doing, because it's just another choice. Whenever I hear the industry advocates say, "We have to have embedded commissions and deferred sales charges, or the small guy won't get advice," I look to the robo advisors, because that's all they really need is to get started investing and get started without the two and a half percent mutual fund fees. They can do it in an environment that's in a platform that's familiar to them in terms of a Wealthsimple or Nest Wealth.
So, I think they are absolutely doing... It's absolutely welcome in this environment. I will say that a one fund solution really puts the pressure on that model, because it's, I would say, just as easy to buy one ETF. I don't know. To set up a discount brokerage account is not that complicated, and to purchase one single ETF or a stock ticker is not that complex. So, I think it will start to put pressure on it. And there's just way too many robo advisors out there. I mean, I think the industry's going to consolidate big time. You'll see the one or two players left, the rest will either die out or get swallowed up by banks. I mean, the remaining ones might get swallowed up by banks.
Yeah. So, I mean, it's a good thing. I talk about the product development and what prompted me to start indexing in a model I felt comfortable with, and that took Vanguard to release the VXE fund. I think now, listening to a lot of investors where you could just do this in one ETF that's going to be really palatable for many people to get started, and to just put their nest egg, when they've got this unwieldily portfolio of mutual funds and they know they need to make a change and they know that there's this one simple solution out there, I think they're going to gain a lot of traction.
Right. So, last question I have to finish up, and on the same theme, and I know there are a lot of comments on your recent blog post about the one fund solutions, but do you think... And I'll share, Cameron, on my thoughts on this after you answer, but do you think it's sensible to retire with a one fund portfolio?
So, your whole retirement portfolio is in a VBL or something like that?
I think it can be sensible. It's no different than having my own strategy with the two ETFs or a model portfolio with the three, you just have to manage your draw downs in a way that makes sense. I mean, do your retirement plan with your retirement income in mind and factoring in CPP and OAS and what you need to take out of that portfolio every year. I think retirees get fixated on income generation with not wanting to touch their capital. And so, if you just have this one fund and you're just going to trim back your holdings by 200 shares a year, whatever that is, I think that's perfectly sensible.
Yeah. So, most of our clients, and especially clients since these one fund portfolios have been in existence, their entire portfolio, obviously across different accounts, but their entire portfolio will be in one of the dimensional fund advisor's one fund solutions. Right. So, we're big advocates of that. And like what you said, it allows you to focus on all of the non-portfolio stuff, which is arguably more important, especially when you've got a portfolio that is optimized, regardless of how many funds it contains, or how many funds it is.
No, that makes sense. I mean, there's so many other things to focus on and your investments all in one vehicle, a broadly diversified vehicle, that's low cost, to absolutely makes sense and focus on the bigger picture.
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