Episode 261: Structured Products with Felix Fattinger and Petra Vokata & Jill Schlesinger

24:51And if you then dig even deeper and you look, okay, who are these banks? These are actually the banks that have the lowest markups. and these are the banks whose markups decrease the most over our sample period. So the way we interpret this is, well, what happens in this more competitive market, only the efficient issuers, banks decide to stay to really serve that market segment because only for them, it's still profitable to do so. And we see competition in this market segment at least, right? And that's also kind of intuitive because if you have just one underline, it's fairly easy to compare products from different issuers.

25:31They just need to have the same one underlying. And this is kind of why we think we see decreasing margins, decreasing markups, and only the efficient ones who are deciding to stay in that segment. Now, in contrast, on the other side, if you focus on the segment of these multi-YEPs, so the ones that usually have three underlines, the picture is very, very different. So there, all of the issuers remain more or less active actually quite active over our entire sample period. And if you look at the markups, they don't move as much. Maybe they decrease a little bit, but depending on the specification, this trend is not statistically significant.

26:08So they seem to be much stickier and much, much more stable in this higher region. Now, how could that be? So, well, we think this actually is a symptom of competition that is mitigated or in certain cases completely bypassed because they are actually issuing these more complex products. So let me explain what we mean by that. We know retail investors only or like to invest in underlying stocks, which they know, right? So they don't like to invest in something they've never heard of. So for instance, to make it more precise, think of the S &P 500. So all S &P 500 member stocks, right? So we have 500 stocks to choose from when you structure your multi-YEP with three underlines.

26:50So for the structure, So the issuer, this means you have for any given product, potentially 500 times 499 times 498 underlines to choose from. Now, this gives you 124 ,251 ,000 possible combinations, right? So you can restructure your underlines in a way where you just replace one. So let's say you have Microsoft, Apple, and Meta, and then you just kick out Meta and you include Netflix, for instance, then this already gives you a new product and you don't have this one-to-one comparability anymore. And we also find evidence for this at the product level that in this case, actually, this direct price competition decreases.

27:36And we think this is the reason why these less efficient banks, well, all the banks, but in particular, the less efficient banks, they issue these multis to really dodge competition. And what's in line with this hypothesis is what we see the underlines that are used both for singles and multis are very similar and they change very slowly over time. However, as the number of multis that are issued increases, so does the variety of combinations. So essentially, once the market for these multis starts to skyrocket, what you see is what they're actually doing, they're just using different and different combinations of underlovings.

28:14Why do you think investors are willing to pay for the more complex products if we know they're getting hosed by a 5 % or whatever margin? It's a very good question. So again, here, what helps us is the experiment because with the experiment, we actually, so we can observe all the parameters, right? So we just let subjects, we elicit their willingness to pay essentially for different products of different levels of complexity. And what we find quite clearly, the reason why it's possible to extract these higher markups for more complex products is because at least our finance students with whom we are run these experiments, they underestimate the degree how much more risk you're actually taking when you move from a yield enhancement product with one underlying to a yield enhancement product with two or three underlines.

28:59So they are not just stupid. They do understand the direction. So they do understand the more underlines you have, the riskier it gets. But they are not fully capable to estimate how much more risky it actually gets. And to be fair, this is also a really hard problem, right? The way we can answer this is using numerical option pricing techniques in order to get to the heart of this. But kind of to ask the average retail investor to make this accurate, this assessment accurately, I think it's a very high ask. How do the YEPs in your sample generally perform? Before we get to the actual numbers, I think what's super important for these products is to always keep in mind, more often than not, it actually turns out in the favor of the investor, meaning that they actually get back the notional and the coupon.

29:46This is just simply by the fact that the underlying has to lose quite a bit before you start participating in the downside. And the coupon is guaranteed anyhow. So it's rare, or relatively speaking, in a fewer cases, you actually start participating in the losses. And if you do, they're usually substantial. So just to give you an idea, if we look at the year of 2014, which is outside of the global financial crisis the most extreme in our sample, we find that the average X plus performance of these single YEPs is minus 7 % and minus 19 % for these multi YEPs. So what you can lose is really a lot.

30:25And this is despite or including these huge coupons, which can be like 10, 15, or even 20 % for the multi YEPs. But you said they have good outcomes on average, but when you lose, you lose a lot? Is that... Yeah. So, well, on average, it's negative. So let me be even more precise. When we look at the X post performance over our whole sample period, they're very much aligned. I mean, they should be with our markup estimations, right? So usually kind of what the issuers make should be more or less what the investors lose, right? So it's a zero-sum game in that sense. And this is also what we find.

30:58So roughly speaking, because with X post, you just get a few number of scenarios that eventually play out. But what we find is on average, Our investors lose 1 % when they invest in signal YEPs and they lose 4 % when they invest in multiple. So here again, it's like with increasing complexity, the X post performance is also lower, which is of course in line with higher X anti markups for these more complex YEPs. So to come back to your question, so if you just kind of rank all the outcomes and you just count them, more often than not, you actually get your notional back in full plus the coupon.

31:37But if you start participating in the downside, you're usually in a scenario where you lose a lot. So these losses are big enough. So to make sure that actually on average, overall, you're losing money investing these products and you lose more on average again when you invest in the multi yield and handsome products. Okay. So we've got like a negatively skewed distribution, which again is kind of similar to covered calls. Yes, which is kind of what you would expect, I guess, to a certain extent, when you look at the payoff profile, right? It's kind of capped and the downside eventually can just go to all the way to zero plus the coupon, which obviously you will get in any case, as long as the issuer does not be.

32:20Yeah. Okay. Interesting. When you reflect on this paper and on your research on this topic, what do you think the main lessons for retail investors are? That's always an interesting question, right? So policy implications, how should we go from here? So one thing which is super interesting, again, in Europe, I think it's also true in the US, but kind of to a lesser extent. So the structured product market, relatively speaking, just has been smaller in the US than in Europe, particularly in some countries in Europe, such as Switzerland and Germany. So in a sense, what has happened, and I think this is a very interesting phenomenon, you have seen these online best execution platforms where brokers can essentially get access to and get a quote for a particular product.

33:04And you have many of these issuers that are linked to these platforms and they compete directly in terms of the coupon, which they offer. So you have essentially perfect competition, perfect price competition. And other research that we're doing indicates that once you go to these platforms, the increase in the coupon, so the improvement in the conditions, in the price you get are really substantial. However, we would argue that as long as all retail investors don't have readily access to these platforms, competition won't play out to the degree it should so that it can actually be to the benefit of investors.

33:42So what we think, if there is any kind of regulation, it should go in the direction to make sure that this competition can really play out and that you kind of make it harder that by just using strategic confiscation, you can dodge or completely bypass competition if you choose to do so as an issuer. Another thing obviously you can always talk about is investor education, right? As a regulator, you can try to enforce issuers to educate their investor on the risk they're actually taking. But I think this has to be done very carefully because there's many evidence out there that if there is a regulation, which is well intended just to make sure investors do understand better in what they invest in, well, issuers can work around this, right?

34:22So you come up with another socially costly obfuscation strategy to kind of get around this. However, what I think would be helpful, kind of leveraging this standardization, which we've already seen in Europe, which definitely will also be a good thing in the US, I guess, to kind of provide investors with really long-term average performances like across all the products within a given type. Now, if you would do this for these YEPs, then investors would really see, okay, in certain years, kind of the average product really has lost a lot. And this might kind of help them to really understand the downside risk they're actually taking.

34:57And by giving this additional information, it might be true that just using the standardization is kind of enough to get there because just with the standardization, But without this kind of long-ranging average perspective, what we've seen or learned in Europe, the standardization alone doesn't help, right? We still have this difference in markups between less and more complicated structures. But maybe as a final point, I just think retail investors, when they invest in these kind of products, they need to be aware what they're actually doing, right? So they are investing in something which the issuer can provide to them, but the conditions to which the issuer can do so are essentially dictated by financial markets as a whole.

35:44So even if you would assume, so the issuers are completely in favor or completely supportive of the investors, they don't have any markups. So they just said, okay, we're just going to do this because you're a valued customer. We want to provide you with this service. In that case, what essentially would happen, you would get something which is fairly priced in terms of what financial markets and aggregate have come up. Now, in order to really make money with such a product, you would have to be able to find underlying or in the more complicated case, underlying combinations for which you know or are relatively sure that financial markets actually overestimate the downside risk for these stocks.

36:25Now, if as an investor, you feel comfortable to do so, kind of to make the assessment of all these underlines of correlation, everything, and you're sure that the markets actually overestimate how likely it is that you have a really big downside event, then it's potentially possible to kind of have a positive expected return. But if you're not able to do that, then it will be very hard to have a positive expected return across all the scenarios for these particular product types. Yeah, interesting. So you have to kind of be expressing your view on option pricing or derivative pricing or something like that.

36:58And then you can earn, if your view is correct, then you earn a positive return. Right. So if you benefit, you think, okay, I'm sure Microsoft is not going to lose more than 25 % over the next year. And it happens that you are right, then you make money. But essentially, the premium or the compensation, the coupon you're getting is by when the issuers actually sell this put to somebody in the markets, which likely is not a retail investor. So this means you are right if this counterparty, which most likely can be an institutional with more information than you have, actually still, despite that you are in a better position to make that call and you actually have more information, you know more precisely that yes, indeed, for Microsoft, it's not going to happen, they're not going to lose.

37:43But if option markets are more accurate, then it's going to be really hard to beat that pricing in the long term. So it sounds kind of like if you believe you can be a successful active manager, maybe this can make sense as a way to express your beliefs. But on average, maybe not such a good idea for retail investors. No, probably not. And there is another, maybe as a final point, another result we have in the paper, which I haven't had the chance to talk about. So what you can actually do is you can, when you're just in a simple exercise, you compare the aggregate portfolio that just consists of the simple type with one underlying and the aggregate portfolio consists of the more complex type with the three underlines in most cases.

38:24Sometimes it's more, but mostly it's three. You can run simulations, right? So you can go and see, okay, so for all these underlying stocks, what is the expected return which you would get with a top of the art as a pricing model, right? So you can really try the best you can in order to get kind of forward-looking pricing inputs. And then you can just simulate these portfolios. Now, when we do this, what we find is that the portfolio, which just consists of the simpler product type, actually first order dominates. So the technical term is first order stochastically dominates the more complicated portfolio.

39:02Now, when you think about this, what this means, this actually means that if as an investor, you have an increasing utility function, just meaning that more money makes you happier. We don't have to make any assumption whether you have to be risk averse or not. Most retail investors are risk averse. But even if you're risk loving, you should never as an aggregate invest in this more complicated multi yield enhancement product portfolio. Never, no matter how your utility function looks like. And we think this is a very, very striking result because we are not comparing like the product with its individual components and find these dominants.

39:40We're actually comparing like the simple portfolio with the complex portfolio and we still get these very strong dominants. Yeah, unreal. That's a very interesting finding. Cool. Well, this was great research and we appreciate you coming on to talk about it, which you did a great job doing. Thanks for having me. Was pleasure was all mine. It's always interesting to talk about this stuff with people who are actually willing to look behind the curtain and kind of try to understand what's really going on. Awesome. Great to meet you, Felix. Thanks. Thank you, guys. All right. I think that was a great conversation with Felix Fattinger.

40:11Cameron, do you agree? Oh, fantastic. Such great research and such great insights into something that's pretty complicated. Yeah. And really well communicated. And some nice takeaways for retail investors, I think. Anyway, so let's go ahead now to our conversation with Petro Vocato.

40:31Petra Volkata, welcome to the Rational Reminder podcast. Thanks for having me. Petra, what motivated you to do this research on structured products? So it was to some degree a coincidence, really. So I started to do my PhD back in the day in Finland at Alfa University. And a great thing about doing PhD in Nordic on topics related to investor behavior is that you can observe very granular and rich data about other investors. And so in Finland, you could see every investor, what kind of stocks they hold, how do they trade. And one thing we noticed when we started to look at the data, the more newer addition of the data, was that there is a massive increase of the number of investors who buy these weird, exotic securities, which we didn't know what they are.

41:15We just knew these are some kind of structured products. And this was a large number of investors. So we observed hundreds of thousands of investors, which would translate to around 10 % of households in Finland. And that kind of adoption rate we observed over less than a decade, pretty much. And so I became interested to understand, okay, what are those securities? How can we get some data on those securities? And I started to talk to a company that the business model of the company was to collect data on structured products and then basically sell the data to banks. And they were so nice to me that they gave me their whole global database of data on structured products and i was like oh wow this is really fascinating there is very little research we don't really know what these products are are they good or bad there was a lot of controversy is it actually benefiting investors and so basically by this coincidence i started to do research on structured products once i got the data i understood that it doesn't make that much sense to focus just on finland because finland is a small market you know five million population so once i had the global data it became apparent that it makes sense to focus on other markets which are easier to study.

42:15So most of these days, I focus on the US market. Incredible. What types of structured products do you look at in your research? Yeah, so this is a good question, because structured products are like an umbrella term for very many different types of security. So broadly, you can think of it as a bundle of traditional securities. Most typically, it's going to be a bundle of some derivatives, some option, and either bond or equity. And in my research, because it's really important to establish certain characteristics, such as what are the fees of these securities. For me, it's easy to look at the US market, where it's relatively straightforward to calculate what are the embedded fees of the securities, because you have very good data on listed options.

42:57And also, it becomes way easier to focus on securities that are linked to equities. Because if we look at securities linked to commodities, we may run into issues of what are the correct pricing inputs. So mostly, I focus on products linked to equities. This is also the largest asset class and the data for more than half of the products are linked to equities anyway. I focus mainly on the U.S. market. And in particular, I focus on securities called yield enhancement products in most of my research. So the most characteristic feature of the security is that it's going to promise a high coupon, high headline rate, or you can think of it as yield.

43:31It's going to be very attractive, say 13 % per year. And then at the same time, this high coupon rate is going to be compensated with the downside risk. So it's going to come with an embedded short position and a put option. And so basically the downside is that you may potentially lose all your invested capital. So you chose these yield enhancement products or YEPs for what sounds like pretty good reasons. Do you think that the research generalizes to other types of structured products? Yeah. So this is something I want to be very careful about because as we are going to continue with this conversation, you will see that some of the results I find are quite extreme and they don't paint a very good picture about the benefits.

44:09these securities for the investor. And I want to be very careful in not generalizing those results to the whole universe of structured products. So from a priori theoretical standpoint, you can totally have good structured products that are reasonably well-priced and they can have good benefits for the investor. So I want to be very careful that most of what I'm going to talk about today is going to really apply only to the field enhancement securities linked to single name equity issued in the US between 2006 and 2015, I don't want to generalize outside of this market because I actually honestly believe that many of the securities outside of this market are going to be better priced and more beneficial.

44:48What types of securities tend to underlie the structured products in your sample? So in my sample, it's going to be mainly listed stocks. So mostly single name. Some of these securities are going to be linked to indices, but that's a minority. So you can think of a typical product is going to be linked to the performance of Apple or Tesla and going to be the most typical underlying care. How do you go about determining the effective fees charged by these products? Yeah, so this is a nice question and I can give you a half an hour lecture about it, but I'm going to try to simplify so that we don't lose too many listeners.

45:23So the first thing is that you need to understand what exactly is the payoff. And because these securities are very complex and they also are very heterogeneous, they come like in many flavors and many potential payoffs, the first thing you need to do when you analyze data on Structured Correct is to understand what is the payoff formula. The data I got was sort of semi-structured, semi-pre-processed, so there was a short texture description of what is the payoff of the security, but it was far from perfect. So the first step I needed to do is to basically translate this text into a formula, which you can then evaluate what exactly would be the price for this formula.

45:55Once you have the formula, what you can do is you can sort of rebundle the security. So again, And if you think about structured product as a bundle of traditional securities, you can go ahead and decompose the payoff. So to give you one example, if you, for example, have barrier reverse convertible, you can decompose it into a bond component. So a bond linked to the issuer of the security, bank A, and then the option component, which is going to be short position and a barrier put option. So once you decompose the security, you can then go ahead and price each of the individual components. The bond is going to be relatively easy.

46:31You just need to take into account what is the default risk of bank A. The option component is going to depend. Very few securities have very simple option components like plain vanilla options. Most of them are going to have some kind of exotic options, which are going to be a bit more difficult to price. So there are different ways how to price those securities. If you don't want to spend too much time, you can make some simplifying assumptions. So assume that implied volatility is constant. So go with the good old black short, constant volatility. And then you may use just closed form formulas, and it's going to be relatively straightforward.

47:05You just need to get data on what are the prices of options for the particle underlying, and you can go ahead and price it security. If you want to publish in top scientific journals, most likely the referees are going to push you to do something more sophisticated. So I ended up doing local volatility diffusion, where you basically calibrate the local volatility diffusion with the prices of options we observe in the market. And then once you have these local volatility diffusions, you can, for example, use Monte Carlos simulations or finite difference methods to price the exotic payoffs. So once you do the sophisticated option pricing technique to price the two components, you can sum up the price of all the components, the one component, the option component, and compare the price of the components with the price the investors pay.

47:52So say you find out that some of the components, it's$950 and the bank is charging the investor$1 ,000. Then you have embedded markup of$50. You can calculate what would this mean in annual terms, what would be the annual fee of the security. So when you do that in the paper, what level of fees do you find that investors are paying? Yeah. So this is one of the sort of more stunning results of the paper. So again, It's just field enhancement products. It's only 2006 to 2015, only in the US. That being said, I have more than 28 ,000 securities in the sample. So this is a very large sample study.

48:28I find that on average, the margin, so that the difference between the price the investor pays and the price of the component is 3.6%. And if you annualize that, because the expected maturity of the securities is shorter than one year, if you annualize it, you will have annuality of 7%. It gets a little bit better if you weight it by the size of the issuance. If you have volume weight at the fee, then it's going to be 6%, still a number that is significantly higher than what investors typically pay for passive index funds. So a very expensive product. Hmm. When I asked earlier about whether the results generalize, you mentioned that you think that these YEPs might be worse than other products out there.

49:10Why? Why do you think that is? Yeah. So I think that's because YEPs tend to have shorter maturity, and particularly the ones in my sample. And I also find that the big determinant of the cost is the maturity of the security. So basically the embedded fee has a very large component and it varies a bit with maturity, but not the whole lot. So if you charge a 4 % margin for a three-month product, you're effectively charging 10 % annual fee. If you charge 4 % margin for a four-year product, you are going to charge 1 % annual fee. And so that's going to have a big impact on how expensive are these securities.

49:44I know that, for example, in Finland, the typical maturity of these securities back in the days, in my sample that I played, was around five years. And so you would expect that these securities would be significantly cheaper than the security thing that I focus on in this paper. Okay, got it. So longer maturity is probably better, but still, the fees aren't like index fund level fees. No. So from the existing papers we have, there is one recent paper using I think Swedish data there, the annual fee was above 1%. So still very far from index funds. And I think that's typically the case also in some research in Switzerland.

50:20How have the YEP fees evolved over time? Yeah. So that's good news for investors. For investors, the good news is that the sort of general pattern of decompression that we see in other markets, you can also see this in YEPs in the US. So in the year when I observed the highest fees, that was around 2010, on average, I observed fees of 9%. By 2015, those fees declined to 5%. Okay, that's where my sample ends. So hopefully by 2023, that's maybe even lower. So from the perspective of investors, this would be good news that you see a decline in fees in the market. How do you estimate the expected returns of these products?

51:00Yeah, so this is a great question. So I think once you start to think about what do these fees mean for expected return, I think that's the most important step to pay to understand whether you should be buying those securities or not. And so again, calculating expected returns can be very sophisticated and eventually what I do in the paper is a more complex method, but let me try to simplify the logic so that the listeners understand how should you think about it. So say you're buying a mutual fund and say that you assume that the expected equity premia is 5%, 6%, that's typically what academics agree.

51:34Now, if you would be paying 6 % fee for that mutual fund, then in that you wouldn't expect any positive return, right? Because the fees are going to wipe out all the equity premia. Now, something similar basically applies to structured retail products. So the difference here is that the beta may not be one. So if you're buying index funds linked to S &P 500, beta is one, really straightforward. If you are buying structured product, beta may not be one for two reasons. One, the underlying may not be index. So in my sample, the average beta is higher than one of the underlying. So on average, maybe one and half.

52:10But at the same time, the delta of the security is not equal to one. So it may be in my data, it's less than half, but let's assume that it's half. That's because the upside is kept, right? So you receive some attractive coupon, but that coupon is kept. So at some point, you're not going to participate further in the upside. So as a result, your delta cannot be as high as the delta of investing in the market. So let's say that the delta is half. Let's say that the beta of the underlying is one and half. That implies that the beta of the product at issuance would be equal to the product of one and half times half.

52:47You just multiply the beta of the underlying times delta. So we would be having beta of the product 0.75. Now you multiply that with the expected equity premium, say 6%, your expected gross return on the product is 4%. It's a very simplified calculation, but this is basically how it works. So if you have expected gross return of 4 % and you pay 7 % fee, it's really easy to see that you wouldn't expect to get much from the product. Now that's exactly what happened. So in the paper, I use more sophisticated methods because you can claim that this delta I gave you, it's just the delta that applies at issuance, and it's going to change over the horizon of the security.

53:26So you can do more sophisticated methods. You can basically, again, take this local level of the diffusions and bet there some expectation about the expected return on the underlying. And then you can do, again, tons of Monte Carlo simulations, basically project what would be the payoffs of these securities, fees, and at the end, take some average. That would be more sophisticated way how to calculate the expected returns. But I don't think investors need to do this. They can just look at the fee. Once they see the fee, they can try to do some back of the envelope, very simple calculation where you would expect there to be something left after you paid.

54:00So how do the expected returns compare to the realized returns? So I didn't yet tell you what exactly the expected returns are. So let me give you these few numbers so that we can then compare it to the realized numbers. If I do this sophisticated calculation, which can be simplified with the simple calculation I gave you, you will get expected return of negative 18 basis points. If you calculate it as the total return of the security, if you annualize it, so in annual terms, you will have minus 1%. And this is going to be a little bit depending on the assumptions, but it's going to be somewhere there in the ballpark.

54:33If I calculate the actual realized returns over my sample period, I observe average total return minus 3.8%. And if I annualize it, then I observe minus 2.6 % negative annual return. A very, very natural follow-up question would be, well, you are looking at 2006 to 2015. Perhaps all of this is driven by 2007 and 2008. We have financial crisis in the data and so should be really focused that much on these returns. So one interesting statistic, if you look at one third of my securities that have the shortest maturity and therefore the highest fees, as I said, maturity translates into high fees. I observe negative average returns in eight out of the 10 years in my sample.

55:20So this is not driven by the crisis, this is driven by the high fees. That's crazy, crazy stuff. how do we know so we've got some negative returns maybe negative expected returns net of fees and negative realized returns how do we know that there isn't some hedging property that some investors are just willing to pay these high fees or accept these low expected returns in exchange for it's a good question it's kind of a typical question from a textbook finance right because by textbook finance models whenever investors pay are willing to buy something with negative expected returns. Oh, it must be that there is some huge hedging benefit.

55:54I'm still waiting to meet an investor who would tell me that his or her investment rational was hedging. I met investors who get very good reasons to buy some of these securities. So it could be, for example, for access, these securities were linked to some underlying that they couldn't otherwise get access to, or they have some kind of speculative motive. They believe that some outcomes are more likely. So I definitely met sophisticated investors who have reasonable investment rationals. These were not related to hedging. But to give you sort of more academic answer, why I believe that hedging really doesn't apply to the US market, one good reason of focusing on the US market is that in US investors have a really, really good access to listed options, way better than in some European markets.

56:38And so you can basically compare what would be the additional hedging benefits from yield enhancement products compared to buying some alternative from constructed from listed options. And so one exercise I do in the paper is that I contract the payoff of yield enhancement products to the closest payoffs you can get from a combination of max two options. So you are buying either one or two options which you can very easily buy online. And I'm constraining it only to positions for which you don't even need the marketing account. So something like really easily accessible to investors. And I find that almost in half of the cases, to 45 % of the product, you would get a payoff from listed options that is state-by-state dominating the payoff of the apps.

57:24Okay, so in any state of the world, independent of the performance of the underlying, say the stock of Apple, you would always get high return from just selling, you know, put option easily to your online broker than from buying deeply handsome products. So to kind of rationalize any kind of hedging benefits, you would need to have an investor who is not sophisticated enough to know how to sell a put option, yet sophisticated enough to understand that he or she should be buying a handsome product for some exotic hedging need. This seems really like a stretch. And then on top of that, these securities are positively correlated with the stock market.

58:00They are positively correlated with consumption and also with labor income. So they also do not sort of naturally serve as a hedging instrument either. That's a pretty good argument. How do the autocall features that a lot of these products have, how can they be used to manipulate the attractive annualized returns that often get promoted to investors? And this is something, I mean, I've seen this in product literature where you see these huge annualized return numbers that they're suggesting you can get. Yeah. No, I'm so glad you're asking this question because it's also like a regulatory challenge of these autocalls.

58:34So I see all sorts of regulators across the globe coming up with new disclosure for autocalls, which is kind of using the same manipulated as a return that I described in my research. And so this is clearly a very pervasive buyout in displaying returns and fees of autocallable security. So let me first explain what autocalls are because not everyone knows what is autocallable. So this is going to be a security which is going to have an automatic call feature embedded in the payoff. So most typically, it would say if the price of the underlying stock is above the price at issuance at certain calendar, at certain date, then the security is going to be automatically called back and the investor is going to receive some coupon.

59:18And oftentimes, these call features, they apply as early as three months after issuance. So you buy a security and in three months, it can be called back. Now, why does this matter? It matters because the positive or negative performance of the securities is going to strongly correlate with the term of the security. Okay. So whenever the security is called early, it's usually going to be the positive return, which is going to apply to very, very short horizon. And then when the security is not called and you hold it until maturity, that's exactly, these are going to be the situations when the return may be significantly lower.

59:49I can give you just like one example, which may make it easier to understand how exactly is this biasing the returns. Suppose that you have auto call, which permits 20 % coupon. So a nice attractive coupon rate. You buy it first, it's going to be called after three months, you are going to receive 5 % coupon. You buy it a second time, it's going to be called again after three months, you will receive another 5 % coupon. And then you buy it a third time, and this time it's not going to be called, you are going to hold it until maturity, which is going to be one year. And at maturity, you are going to lose 20%.

1:00:21Okay, so if you would want to calculate the total return from this investment strategy, you got 5%, 5%, minus 20%. In total, you lost more than 10 % from rolling over this investment. If you calculate the average annualized return, it's going to be 20 % for the first investment, 20 % for the second one, because that's the annualized return, right? The annualized over a whole year, and then minus 20 % for the third one. So if you calculate average annualized return, you will see a return of more than, it's going to be around 7%, right? So you can see that the actual sort of total return versus the average of annualized returns can be pretty far from each other.

1:01:02And this is a mechanical bias. So you're going to always see whenever you have basically a POP-dependent maturity and POP-dependent performance. How meaningful is that bias in annualized returns? Yeah, so it can be quite dramatic. So in my data where I analyzed over 7 ,500 autocalls, I see that the average annualized return is 6%. So that looks good, right? That's the nice return potentially. That's using the bias measure, so averages of annualized return. If I look at average total return, it's negative 1%. If I look at term-weighted annualized return, I'm seeing negative 2%. Okay, so these two simple comparisons would give you that the bias is around 8 % and it reverts the sign, right?

1:01:48So something that looks like positive performance may actually have a negative return, yeah. Those are big numbers. The reason this matters is that usually this is like the most frequently displayed metric for auto calls. It's usually displayed by market participants who may be conflicted. Okay, so either, you know, someone who is like structuring these securities, selling these securities or someone who is somehow connected to the market. That's why it matters. But you sometimes see even in academic papers, so that's not necessarily because of conflict, but really because it's a very natural way how to calculate performance.

1:02:22And I have also seen situations where regulators, these kind of biased metrics, and they are somewhat aware that this is not ideal. But when they hear from you, what is the optimal way how to calculate the correct measure, which is using some expected term of the security, et cetera, it gets so complicated that basically it's just very easy to just take the average. When you created the, which was what I was going to ask about next, the indexes of YEPs, is that one of the ways to deal with the issue that we just talked about? Precisely. It's not an easy metric to calculate, right? Because you need to be able to create an index, but I think it's the optimal way because first investors understand what index means, right?

1:02:59Like a time series path performance, so it's really easy for them to interpret if it's calculated correctly. If you do that, you will see that auto calls are not outperforming other yet in my data. You will see that in many periods, they do have negative or around zero returns. And this would be exactly the way how to correctly measure the performance. So you create an index where you basically roll over the investment on every day to new auto calls so that you weigh the term of the product correctly and you do not overweigh the securities, which were called only after three months. Right. Okay.

1:03:34And so when you do that, you created that index and then you compared it to a risk appropriate benchmark. Can you talk about what that looked like? Yeah. So you will not be surprised that it doesn't look that great for the products, given the fees they charge. So I chose as a benchmark, the CBO S &P 500 food ride index, because this is basically indexed from a hypothetical strategy that sells food options thanks to S &P 500. And so that would be sort of similar to the short position in food option that yet in my data and that. And if you compare it to the Stebo foot index, you will see an annualized alpha of 8%.

1:04:11Okay. So that would be actually even worse than the average fee charge. So it's the fees that explain the underperformance? Yeah. So partially. So this negative 8%, around 5 % of that is explained by fees. There is an additional negative 3 % return to underperformance, which is explained by the choice of the underlying So remember, my products are mainly linked to common stocks, whereas here the benchmark is SIBO S &P 500 put in there. It turns out that it's not just the fees, but also the choice of the underlying that doesn't serve investors that well. This is going to be also something you're not going to be surprised.

1:04:49So like your podcast, for example, on thematic ETF, right? Like this kind of pattern that the choice of the underlying may not always work for the investor. This is not unique to a structured product. There is a very nice Jeff paper by Neil Pearson, who is a professor at the University of Illinois at Urbana-Champaign. And he basically shows that the choice of the underlying in this market is very consistent with catering to investor sentiment. We are basically choosing Tesla at a time when investors overvalue Tesla. And as a result, after issuance, you are going to get also negative returns from the performance of the underlying.

1:05:24That's unreal. They're paying high fees and they're getting attention grabbing securities underlying the product. How important are, and maybe you can also explain what headline rates of return are, but how important are headline rates of return to investor demand for these products? Yes, I believe this is like one way how to rationalize why we see these securities. So by headline rate, in the context of yield enhancement product, the coupon would be one headline rate. So it's the rate of the promotion bond that you see very prominently advertised, sometimes even in the name of the security, but if not in the name, it's going to be very early in the prospectus.

1:05:57You will see what is the annualized coupon that the security offers. It's not the only very salient trade. So also the downside risk protection, so basically the threshold until which you are protected from the downside price movement of the underlying, it's also going to be very saliently, very prominently displayed in the prospectus. And so if you try to understand what explains the demand for the security, so why some securities attract higher demand and other securities attract lower demand. It seems to be that these rates of these headline rates, so the coupons and the downside barriers, explain actually a lot in the sales volume.

1:06:33And so I believe this is what makes the product look attractive because on the salient attributes, the salient headline rates, these securities do look attractive. So often 10%, 20 % annual coupon, protection up to 30 % downside price movement. So this on its own, if you do not look at all the additional features of the securities that may look very attractive. And so that may explain why investors find the securities attractive. What do banks do to increase headline rates of return? Yeah. And so that's an additional piece of evidence that suggests that this may be very important. So if you studied the choice of the payoff structure, you can think of it as a choice of payoff.

1:07:12You can think of it as a choice of complexity. You can think of it as a choice of the embedded exotic features of the security. These are all basically different names for the same phenomena. I find in my data a very robust pattern that the choice of exotic leads to more attractive headline rates. Okay. So you could structure a yield enhancement product with a plain vanilla option, but it would not offer, for example, 20 % annual coupon because you couldn't structure it so attractively. So instead of choosing plain vanilla food option, you may choose a barrier food option, which is going to be way cheaper to structure.

1:07:47And it's going to allow you to, instead of offering 5 % coupon, to offer 20 % coupon. This is something that I would be more confident saying that this generalizes to other markets because I have seen the same pattern also in outside of US. Also in Europe, I have seen it in Asia. I have also seen it in classes of products called capital protected securities, which are very different from the enhancement products. So I think that for choice of exotic features, these modulations of the payoff to make the headline rates look more attractive, I think that's a very, very robust by-life pattern that applies to structured product.

1:08:22Okay. So headline rates return, this is like the best case scenario return kind of thing. And that's what gets marketed. How does the headline rate of return relate to expected returns on the product? Yeah. So in theory, it depends. In theory, if you have two exactly identical products, they have the same exotics, higher headline return basically means that the security is better. So there's a good reason why investors should be paying attention to these headline returns, because in theory, if everything else is equal, this basically is reasonable statistic to look at. In practice, because banks are using these exotic features, additional embedded exotic options, that's not always the case, right?

1:09:04Because you can increase the headline return just by manipulating the payoff. So in my research, I show that basically because headline returns are more related to the exotics than they are related to the quality of the security, they do not directly translate to higher expected returns. In fact, large fraction of them does not translate to higher returns. It translates to lower returns because the higher is the headline rate, the higher is the security. And so it basically reverts the sort of intuition that I tried to explain at the beginning that all are equal. This is something you should look at that applies only if you do not manipulate the exotics because there is a lot of this additional exotics in the payoff.

1:09:42It reverts the relationship, the positive relationship, and it is for the negative relationship. Yeah, it's super interesting. So that's like if two issuers had the exact same underlying, but one of them got better pricing on the option, I guess, then they would be able to give you a higher coupon and then it would be the same payoff. But in reality, they're doing a bunch of engineering to make the headline rate higher, but they're actually lowering the expected return by doing that. I think you said it way better than I did, yes, but that's exactly what is happening. What do your research findings suggest about who benefits from this kind of financial product innovation?

1:10:18Yeah. So in questions like this, I again, want to be very careful not to overly generalize to all structured products or all financial innovation. I can tell you that in my data, if you consider a natural benchmark for the investors buying options, buying cheap passive funds, or just keeping their money in matrices, then you can make the claim that investors on average do not benefit from this innovation. You can quantify how much money from the fees goes to the brokers. So the advisors, brokers who are recommending these securities, that's going to be about half of the fees, so 3.5 % goes to the brokers.

1:10:54So clearly that's a higher commission than you would pay for just like trading options. The second part goes to the bank. So that's suggestive of the brokers and the banks benefiting. But obviously the banks may have additional costs, which I do not observe. They need to set up a structuring debt. There can be all sorts of legal costs, so I cannot make very strong claims about whether the banks benefit. There were also some interesting cases where banks wrongly had the product, right? So it's not obvious that it's a hugely beneficial product for the bank. But I think my line of work establishes that, especially in some contexts and in some pockets of the market, it's really hard to see that these products would benefit the investor.

1:11:33That doesn't mean that structured products in general could not benefit investors. So there would totally be other markets where the products are cheaper and they for investors. And you mentioned the embedded commission for advisors. That's one of the counter arguments that I've heard when I talk about structured products is that advisors can access them without embedded commission. And in that case, it's going to be that much better for the end investor. Yeah, it's going to make a big difference. Yeah. So given all the stuff that we talked about, why do you think retail investors are still buying these products?

1:12:04It's a big question, right? I don't think there's like one single explanation. I also do research on Ponzi schemes, right? So you can ask questions, why do investors invest in Ponzi schemes, right? So there are probably some reasons they find them attractive. My evidence shows that one reason for which there seems to be an evidence is that they overrate these attractive headline rates, the best case scenarios, and they may not fully understand the cost of these securities. I think that can be one explanation. Whenever I present this in some academic seminars, there will typically be some professors who said, oh, I bought these securities and I'm sure I understood the embedded cost.

1:12:37So I don't want to say that everyone is buying it because everyone doesn't understand. Really, there are some other reasons. It could be speculative reasons. It could be access in some European markets. It could be other reasons. But I think there is a good amount of evidence now that one of the reasons is that investors may be over-weighting these salient headline rates and under-weighting the actual cost of the security. What do you think are the main lessons in your research for retail investors. That's going to be a very boring answer, almost like a regulatory answer. Do not buy something you do not understand, right?

1:13:08So these are very complex securities. If you are not confident that you fully understand the payoff and what is the fee, you shouldn't be buying those securities. So you should make sure that you understand them. I think the same applies to advisors. Every now and then I receive an email from some financial advisor who is recommending his or her clients to buy those securities. And they may even sort of very honestly disclose that they have no idea what the fee is, but the security offers 20 % coupon and it has, you know, 20 % protection on the downside. So it does look attractive to them. So that would be my advice even to advisors.

1:13:40If you cannot quantify what is the fee, if you are not confident, you know what is the cost, which directly translates into the expected return. Do not recommend this to your investors either. If you can't do the, I don't remember the word, the volatility diffusion valuation. Volatility diffusion, they are simpler basically. So forget that I'm in the back of the envelope. ballpark. Yeah. Okay. That's a good answer. Well, Petra, this has been great. Your research on this is fantastic. And I think you did a great job describing it to us. Thanks so much for having me. I hope it's going to help to shed light to investors on what this market is about and what to pay attention to.

1:14:14Without a doubt. That was great. Thanks, Petra. Thank you. All right. So that's the end of our conversation with Petra Vokata. And that's the end of that segment. I think, I mean, two really, really good conversations, a ton of good insights, some really great research and lots of interesting tidbits of information and takeaways. Pretty cool the data set that she had access to to kick off on the Finland data set that she could dig into and then to broaden that to the United States. And I think that you spent a career studying this kind of stuff and have that kind of access to information and insights coming out of it is just sensational.

1:14:48Yeah. Yeah. Really cool stuff. Okay. So we're good to move on then? Yep. So we're going to do a one episode in 60 seconds for the time that Jill Slushinger joined us in episode 67. And then we're going to jump into conversation I had with her about her book. I think you were away that day, Ben. So I took that one. So we first met Jill back in 2019 as she is a very good friend of a friend of ours, Michael in New York City. And I met her in New York City when I happened to be there, went for lunch. And this is one wildly engaging powerhouse woman. She's incredible. And conversation at lunch was great.

1:15:25And she said, sure, I'd love to come on your podcast. So here's my summary of that conversation. Then I'll talk about her book after that. So Jill Schlesinger was our special guest on episode 67. And that episode was called the pursuit of finances and fun. Jill has a background as a trader on Wall Street, then a financial advisor, and is now a personal finance personality on CBS News and also has her own podcast, Jill on Money. She also wrote the book, The Dumb Things Smart People Do with Their Money, which of course is what we talked about. Her background combined with her current career in the media has given her an unbelievable front row seat to so many dumb things, which is exactly what she wrote about.

1:16:05And even with access to so much rational information, we are human, she says, and we make choices that can cause financial damage caused by things like blind spots and overconfidence. She also explained the value that she gets from her financial advisor, even though much of the work she could do herself. This then led to a conversation of the kinds of questions you should ask a potential financial advisor and how there's so much more to managing in that job than managing the funds. Now we also talked about the FIRE movement. Anyways, incredible conversation, incredible interview. And that was Jill Schlesinger, episode 67.

1:16:41So Jill then released a second book earlier this year called The Great Money Reset. Change your work, change your wealth, change your life. It was a really interesting book, very pragmatic book for people who are considering a pretty big shift in the life is exactly what the title suggests. So we reached out to Jill and here's our conversation with Jill Schlesinger.

1:17:11Jill, it's great to have you back on the Rational Minder podcast. I am delighted to be with you. Thanks for having me. I'm so happy to have you. I loved your book, The Great Money Reset. So congratulations on your most recent book. Thank you. It's a fun book to write, actually. The first one was like agony. This one was really great. Oh, isn't that interesting? Why? Why? You know, I had to write that first book. It's like sort of my take on financial planning 101. And as you know, there are about a thousand million trillion books written about finance, personal finance 101. I was trying to do it with a little bit of my own imprint on the topic, but you know, it's well covered.

1:17:50And I felt like it was a real, like eat your vegetables kind of book, which, you know, I think is important. But this book was born of my decades in the business of financial services. And really, I think, tracks really well with my own progress in terms of being more expansive and thinking about what people really want to hear when they're asking about financial matters. And also incorporating this crazy, daunting, frightening, and liberating experience called the pandemic. Wow, what a great setup. So what is the Great Money Reset? Well, this is a concept that I think many people would be familiar with, that at inflection points in your life, it could be a birth, it could be a death, it could be an illness, it could be a divorce, that something very dramatic will make you consider, is this really the life I want to live?

1:18:47And I think that the pandemic forced us, or many of us collectively, to ponder that question. This book is a response to all of the thousands of emails that I was receiving, both before, but mostly during the pandemic after those first few months went by from people who really wanted to consider alternate routes than the routes they were pursuing. And I realized that what I was doing over and over with many of these people was taking them through some guidelines. And so I thought the book was sort of an homage to all of those people who asked for help, told their stories and shared them with me and with the Jill on Money audience and allowed me to articulate and detail the steps you should be considering and the things you should be asking yourself when you are contemplating a reset of your life.

1:19:43And it doesn't have to be blowing up your life. It could be a new career. It could be changing a locale. It could be, should I go back to school? All of these questions are questions to ask. And I just think what, again, that experience of living the pandemic and really forced to being with inside yourself, watching hundreds of thousands, more than a million Americans die and people who knew people and were scared. And I think that it was a wake up call to many of us. And this book is hopefully a way to help you contemplate making changes in your life without a once in a century pandemic forcing you to do so.

1:20:22That's something you talked about in the book is that many people feel like they lack permission to consider a reset. Was one of your goals to set up a framework to enable permission, or is it more than that? Yeah, I think that we're tough on ourselves. I mean, at least the people that I encounter and they'll say things, well, I couldn't do that. Well, why can't you? So I think that as somebody who has reset a couple of times in my own life, that sometimes there seems to be an obstacle that's in the way. And usually when I've walked through the different scenarios, the obstacle is really you, that you're fearful.

1:20:58I get it. That you are anxious, that you don't want to blow up your entire life, that you want to limit downside risk. All those things are really good. That's like what makes you a human being is that you can contemplate those things. I just think that for so many people, the permission structure is let me walk you through the numbers aspect of this. Let me give you some questions. Let me tell you some stories about how people were really imaginative about what their next steps could be. And let's see if that helps as many people as possible. Now, you're a finance person. You talk about in the book how you must have your financial house in order.

1:21:37Can you talk about the five steps you highlighted that someone must go through before any reset? I think that what's important is that although I talk a lot about psychology and emotional issues, I do boil it back down to the numbers, right? So I think that when you are considering a reset, a good place to start is kind of what a financial planner would do, which is what I know you guys do, which is, hey, let's talk about what are your resources, right? So if you say, okay, my resources, my assets, yes, you list all the stuff that you own. But the other part of your resources is what is my job providing me?

1:22:19What is my income? What are the benefits that I receive? What are the things that I get through my workplace that would be expensive or hard to, if not impossible, to replicate outside of my employment? That's a really interesting exercise because often people will go through it and say, oh yeah, yeah, I forgot I had disability insurance. That is expensive. Or gosh, I'm part of this long-term care group policy. I couldn't get that on my own, right? So there are things that are available to you. So if we're going to talk about your assets, then you're going to force me because that's the way my mind thinks to talk about your liabilities and to consider your obligations, your debts.

1:22:58and this is important not because you're supposed to have zero debt because I am not a believer in that. It's just that we need to understand what's out there for you and a mortgage can be out there, a student loan can be out there, a auto loan can be out there. That's okay, that's fine and we just really want you to look at that. I think considering your housing situation is really important because when you look at your house, it is often a massive asset for many of us, especially, I mean, and even housing prices might have gone down a little bit month over month. But if you look over the last few decades, people have really made quite a bit of money on their homes.

1:23:39And yet, for some reason, we just, I don't know, feel like that's sacrosanct. Why can't I look at my house? Why can't that be something that is part of my overall game plan? That should be something that I would think about? And also, what about my housing situation has changed perhaps? I think that during the pandemic, a lot of people said, well, I'm really far from my aging parents. That was kind of scary. And that was a big moment where people said, I don't want to be so far away anymore. So I think that's important. I think that talking to your partner and really understanding, have I made some promise to you?

1:24:17Is there an obligation that I have to fulfill that's not just a financial one? If Cameron and I, we're married and we've lived a life a certain way, I'm not just going to blow up my life and make big choices that are impact a partner without talking to my partner. So these are just some of the things that we kind of start the process with. And of course, though, everyone's favorite, which is how much money you spending. I'm sorry, It sucks. But, you know, it really does matter and it does impact many of the choices that you will make down the road. I'm so glad you mentioned spending because I think a lot of people question their spending coming out of the pandemic.

1:24:57So is this one of the silver linings of the pandemic? And I'd like you to link that to anything you know about the psychology of kind of resetting people's spending habits. You know, it's so interesting to me because it's like this wild lesson in how the thing that you have just gone through really does inform you. And so when you think about this, you know, when you are calculating what you own and what you owe and your income, spending doesn't seem to get a high enough priority to me. And yet during the pandemic, what did I hear from people? Saving so much money. I mean, the government estimates, the Federal Reserve estimates that there was$2.7 trillion of excess savings.

1:25:37People were sitting at home. You can't buy that much bounty. You save money. And people would say to me, like, gosh, I really have prioritized what's important. Like, I get it now. All those things that I said, I'm living paycheck to paycheck, making a half a million dollars a year. You know, a lot of that paycheck to paycheck was choices you made about your spending patterns. Then we come out of the pandemic. And I don't know about you, but I know a lot of people who are spending quite a bit of money. And I understand that. You are entitled in some sense to have a little splurge. But as I speak to you now more than three years from the beginning of that pandemic, where people had to batten down the hatches, where they really understood what their spending habits could be, and now they maybe went a little bit nuts, what I'd love for people to consider is to say, how might I go back towards my pandemic spending patterns that are more sustainable in the future?

1:26:33You're not going to not spend money forever, right? That's just not going to happen. But are there certain things that you really didn't miss all that much that you can now say, all right, yes, I went on an expensive trip, but am I going to do that every single year? Yes, I wanted my kids to have some quote unquote experience. I don't know if it's a batting coach, if it's a, If your daughter's a soccer goalie and you wanted to get her a private coach to get, okay, that's past now. Can we recalibrate that and see if you can come to a different place with your spending where you are more consistent, where you're not, it's almost like you don't want, like, you know how everyone hates volatile markets?

1:27:14I feel like the last three years has been such a crazy volatile period for spending. And I'd love to regress to the mean in some respects to try to say, okay, I'd like to take some of those habits. For me personally, like I just don't spend as much money on clothes anymore. I really don't. And I know I have to do it for work. But the funniest story is that I think it was in 2020. So in the beginning of 21, I'm sending all my stuff to my CPA. And he's like, did you leave a zero off in your clothing budget? Because I can deduct my clothes because it's a work thing, right? I'm like, nope. He's like, wait, what?

1:27:51I said, nope. And yeah, and it was significant. And, you know, as much as I was like, people in this business, they're like, oh, you can't wear that. I'm not on the air every day. So if I wear the same thing that I wore seven weeks ago, big deal. Like, honestly, I don't care anymore. Are people paying attention to my content? I think so. And yeah, there's going to be some people who'll be like, your hair needs coloring. and you wore those shoes three days ago. Okay, I don't even have to answer that. So that's for me, the two areas that I felt in our family that we really did shift is we cook way more at home now and I do not spend as nearly as much as I did on clothes.

1:28:32Yeah, we're the same. So once someone has dug into the financial situation, understands their adequate spending level, what other general financial advice would you have for someone who decides they want to do a reset? Well, I think that when you're considering a reset, I think that you really have to start articulating different pathways forward. So I'll just use my own reset as an example of that. I was in financial services for most of my career. I owned a business for 14 years, a financial planning and investment management firm. I had sold the business. I was finishing a contract just, you know, like a workout to transition to the new ownership.

1:29:12and as I came to the end of that, I really thought to myself, you know what? I've been on the radio. I've been on TV. I've been doing some writing. I wonder if I could do that for real. So for real meant to me, like, can I make a living doing that? And I mapped out, you know, I of course went through those areas where I could, you know, tackle the numbers. To me, that was sort of the easy thing, you know, calculating what I own and what I owe and the income and how much I was spending and really thinking about all those aspects. But then I went into like, well, what are the jobs that are out there?

1:29:47What could the next reset look like? And so I kind of looked at it in three scenarios, like, you know, plan A, B, and C. I always feel like A and C take care of themselves. Like I'm a little bit of a nervous Nelly, so I always do the downside first. I said, okay, let's say I've sold my company and I've had a bunch of money saved and I'm going to give myself a year to figure out where I land next. And the worst case scenario is that if in a year, because it was, you know, it was coming out of the financial crisis, wasn't sure about like the economy, you know, what could I do? I know how to sell.

1:30:20I'll be able to sell. No matter what, worst case scenario, people need salespeople. I know how to sell. I'll make a living. Worst case scenario. Best case scenario. I don't know, like one of these networks that I've been on hires me to do something or gives me enough money so that I figure out whether or not I like this business called media. And the middle case, which is probably the most likely scenario was, you know, I'd work in some financial services organization, doing some stuff for them, maybe incorporating some writing on the side, maybe doing a little TV on the side, but that, you know, I knew that I had value in what I brought to the table in that world.

1:31:00and the most likely scenario. And I spoke to a ton of people in the financial planning world who were like, you have a place here if you need it. So in the old world of my old, old world trading, which was I was stopped out. I had a game plan. I knew that I could pursue one of those three routes and I'd be okay. And I didn't know which one was going to be the one that landed in my lap. It just so happens that because of the financial crisis, because we were driving into a recession, I was on television quite a bit as a guest and someone from CBS news called me and said, can we talk to you? We think we have something that you might be interested in.

1:31:38And so it was the beginning of 2009. And I went in and said, I'm exhausted. I've owned my own company. I've been working seven days a week for 14 years. I just need a break. I'm happy to talk to you, but like, I'm not ready to do anything till after the summer. And three weeks later, in the beginning of April of 2009, I signed a contract and I've been with CBS news since. It just makes you the perfect person to write this book. It's a great story. It's inspiration in there too. Yeah, it was pretty cool. A really practical part of your book, you talked about negotiating your compensation. And I think you called it, you framed it as bully your boss.

1:32:11You got to talk about that. Well, I got to tell you something that when When I wrote this book, it was a different time in terms of the labor market. People were like, they're like, oh my God, I am going to kill my boss. I'm going into a negotiation. I know exactly what I have to do and I'm going to extract my pound of flesh. Okay, well, times change and the labor market is different. but in general, I do believe that we need some better tools to walk into a conversation with our bosses, right? And so when I say button up your ask the B, okay, so the bully is silly. Let me talk in like real terms.

1:32:58So it means that you need to prepare for what you are asking your boss to do. And the preparation means that you need to be clear about your worth. It means doing some research. It's understanding, that's the you, the landscape of really what is going on in your company, in your sector, in the economy in general. And what is your value? What are you bringing to the table? And how do you articulate that? I also think that people sometimes go into these conversations and it's just money. And they cannot be that the only thing you're asking for is money. There may be other areas. For so many that I know now, they said, you know what?

1:33:41I don't want to work five days a week. I'm going to go find a place. I will make less money every year if I don't have to commute for five full days a week. And so I want people to be really introspective about finding out what they want, understanding that, understanding what the boss's position is, understanding that the boss has a boss also, or is maybe the owner and has different competing forces and to practice the ask with somebody who is really going to help you focus your conversation. And for some, like for my nieces and nephews, many times I will play the boss, the like curmudgeonly boss.

1:34:23So like, I always joke that I had an interview once with somebody and then I was talking, you know, afterwards and I said, the person becomes my boss. And I said, you know, this is what you did during the interview. Like leaned and like did not look at me, did not pay attention, did not do anything. And he's like, I did? He goes, I can't believe I did that. I'm like, yeah, you were kind of an asshole. Like that's really what happened. And I think that it was funny to me that, you know, he's like, I don't remember that at all. I mean, he goes, I just remember like when we were hiring, like there was so much going on and maybe I was distracted.

1:34:57It made me like, yeah, you know what? Your boss is a human being also. though. And if you don't get exactly what you want or your boss isn't really receptive in that moment, sometimes you don't know what's going on. Sometimes you do. But try the why is don't yuck it up, which is like don't pound the table, walk away, hold your head up high. And if you really do think this is not the right place for me and you don't like the reaction you got, do not quit on the spot. That is not what you do. Even if you had another offer in hand, I really don't think that's in your best interest. I think it's very much in your best interest to talk to your boss, keep a conversation going.

1:35:36And just remember, you have a very major league opportunity to keep that door open as long as you act with grace and dignity in that moment. If you act like a petulant child, your boss may be thinking like, oh, I just really got pushed into a corner. I gave Jill what she wanted. But then the next time the economy rolls over, maybe it's that Jill who will go out first. So just be careful when you're doing your conversations about negotiating salary and benefits and time off. All of those things are really important. Very pragmatic and solid advice. So someone's thinking about a reset. How far ahead should they be thinking about that?

1:36:18Well, you know, oftentimes what I'm hearing from people, when I'm hearing from people and it's like, I need to make a decision tomorrow. I don't think we make the greatest decisions. So what I'd like may be the average worker, mid-cycle worker, right? So if you're in your 30s and your 40s and you're thinking like, where am I? I think reading this book might spur you to consider that maybe the job you're in right now, the career you're in, is not the path that you maybe wanting to pursue? And is there a way if you start this conversation early enough in your career so you carve out a few different ideas about what could happen next?

1:36:58I just spoke to a young man who's 37, 38 years old. He and his wife are both CPAs. And he said, you know, I don't want to work seven days a week. And I'm doing that whether it's tax season or not. Like, I don't want to do that. And what I realized was that he was sort of saying to me, I'm willing to do that for a little while, but I need a way out. And so we started to consider, well, okay, would it be both of you making that decision? Is it just you or you? And so we started having these conversations and it's really fascinating to me that we're, you know, he could make 50, 60,$70 ,000 a year less and they would be fine.

1:37:37They'd been working really hard. Again, talking about that permission, I think that he kind of knows the numbers. And he was saying to me, do you really think it's going to be okay? And I'm like, yeah, it's going to be okay. You got to make some money. You know, you may not make$150 ,000 a year at the other side of this, but if you made 75, 80 or$90 ,000 and you had a job where you were, it was a more sustainable job for you for a longer period of time. And you actually enjoy what you're doing and have a life? Oh my God. Yeah, that's great. So I think that can happen at any time. I think for people who are maybe later in their careers, so maybe in your fifties, I'm often like a little stunned on my own show where people are like, I'm 55 and I want to be retired.

1:38:22I'm like, really? That's kind of young. Like that's 40 years of unemployment, you know, or 30 years of unemployment, meaning, you know, retirement. And also what are you going to do? So I think that if you're the kind of person who really wants to be engaged, but not at this same pressure point and level, in your 50s is a great time to be thinking, well, what else, what's my off ramp? I feel like sometimes what we do is we talk about retirement as this event, which is, you know, you come to the end of the cliff, you jump off, you're now retired. And I think for most people that I know, and most of, you know, my cohorts who are in their 50s, and even the early 60s, they're seeking a different kind of an existence in the 50s, 60s, and 70s.

1:39:05But it's not necessarily I got to move to the Sunbelt and play golf all day long. They do want to do something. And I think that that is what you need to be thinking about. What's my transitional phase? Is it my own business? Is it a side hustle that's a business? Am I a consultant? Do I join up with someone else who's doing something really interesting and I can lend my expertise to that? All these are great options. Any final pieces of advice for anyone considering a reset? Well, listen, I have to be clear that pretty much anybody can do a reset. It's really mostly your fear that can stand in the way.

1:39:43And I don't want you to think that you have to go back and go into in-depth therapy. But I do think that for many people, we will place onto our jobs and our careers a lot of the dissatisfaction in our lives. And so without sounding too hokey, I think that when you go through a reset process, what it can do is it can help you prioritize things that are going on in your life and lay out options. And the options don't have to be black and white. You don't have to do one or the other. There can be a middle period where you're not sure. And some people will go through a process and come to the end of it and say, I'm actually okay where I am.

1:40:27Now that I think about it, given the things I would have to maybe give up or do differently, maybe I'll stay where I am. I am always struck by the fact that I'm in a business where all I do is I talk about money. And what I always come to the conclusion of is that when I've talked to people on the air, when I get emails from people, resetting is really not about the money. It is really about your own resilience and giving you choices and opportunities. That's what your money is for. It's not to pile up on a balance sheet. It's there for you to work for you and to make you happier and maybe more content for the longest period of time possible.

1:41:11Again, the book is The Great Money Reset. Change your work, change your wealth, change your life. Jill, it was so great to have you back. Well, thank you so much for having me. I really appreciate it. Thanks to Jill for joining us again. And then time for the after show, Ben. How do you feel after three weeks off? Pretty good. The first week that I was off, I'd been sick. So I spent a few days, I'd been sick before the time that I was supposed to be off. So I ended up spending, I think most of the first week catching up on the stuff that I couldn't do while I was sick, work-related stuff. So I don't know if I was really off for that first week.

1:41:46And then the second week that I was off, I spent like 90 % of my waking hours in what used to be the forest in front of my house with a chainsaw. And there's no longer a forest in front of my house. I had a chance to visit Ben's place while he was off. And this yard that you created is like the ultimate area for adventure for your kids. It is incredible space. It's still a bit of a blank canvas, not quite a yard, but it's an area that used to have trees on it that no longer does. So I said adventure, adventure space. You can see that you're hanging out there and oh, it's so cool. It's not like flat.

1:42:24It's like little hilly and tree stumps and trees and it's a big rock, that massive rock in your yard. Two big rocks. So yeah, it's a really, really cool space. Lots of work to go there, but anyway, spent a bunch of time there. Then I got a mountain bike that I ordered about a year ago because I'm pretty tall, so I can't just go buy a mountain bike. I had to have one made to my size, my measurements. I finally got it. It took a while because of all the COVID-related stuff. I spent a bunch of time riding out in the trails around where I live. And yesterday, actually, I was out in the trails probably at the wrong time because around dusk and dawn is when bears tend to be out.

1:43:04Oh no. I was there a little probably too close to dusk, which is usually fine. But I had an encounter with a black bear while I was out in the trail. How close? 15 feet. I had a bear on my bike. Like I was prepared for this situation. So the bear bell alerted the bear that I was coming. and by the time that I saw it, it was already in the bushes walking away from where I was, but it was very curious looking back with its ears perked up, walking away, but looking back at me and I was like, nope, I'm out of here. So I turned around, went back the way I came. Yep. Anyway, that was my time off. Lots of fun.

1:43:37Yeah. So I had a chance to see Ben's basketball setup in his family room. So you and I were talking about, I thought this was so funny talking about, a dining room table here. What did you say? It'll impact my three-point line here. Yeah, I can't put a dining room table. It's going to get in the way of my three-point line. It's so funny. It's an awesome setup you've got up there. Very, very cool. We had a nice review posted on Apple this week. Do you want to read the review from Martin? Yeah, this is a very nice review. They're all very nice. This one was particularly nice. They titled the review, The Only Podcast I Won't Miss, A Five Star Plus Podcast.

1:44:15I came across the Rash Reminder about three years ago when I saw a post on LinkedIn from a respected acquaintance who called it the best finance podcast in Canada. I haven't missed an episode since and I eagerly anticipate every Thursday morning's release. Men and Cameron have a wonderful rapport and offer something for everyone from the hardcore finance wonk to the individual who is just trying to figure out what personal finance is all about. They're exceedingly bright and share their knowledge while remaining open to new ideas and to being persuaded by better information, the definition of being rational in my opinion.

1:44:44that are truly doing a public service. My only regret is that it took me three years to write this review and to express my gratitude. Thank you and keep up the tremendous work. Your efforts are truly appreciated. P.S. I'd love to see a rational reminder baseball slash trucker hat in the store. We can take a look at that. Yeah, great review. Also, Petra mentioned to us after we finished recording how she's an active listener and often recommends the podcast to her class. Yeah. That's always super cool to hear that from. One of the coolest responses I think that we can get when we ask someone if they'd be willing to come on the podcast is, sure, I'm a listener.

1:45:19It's like, wow. It always blows my mind. Yeah. Here's a cool story. I had a friend of the show, James, reach out. He said I could share this story. Just a quick note, Cameron. My daughter informed me today that she received an excellent grade on her final law paper. She argued in it that Canadian financial advisor should be held to a fiduciary standard. Proud dad moment for me. She listened to the Rational Reminder episode with Harold Geller twice as part of her research. So thanks. I guess she does listen to her dad at the dinner table after all. Anyway, I thought you might find that rewarding to hear.

1:45:52That is cool. So thanks for sharing that, James. And I had another LinkedIn story from another friend of the show. Great to connect. I've been a longtime listener and an occasional participant in the community. No other podcast, finance or otherwise comes close to the quality of the rational reminder. Not only did the podcast help me realize that I was dissatisfied in my sales role and pushed me to make an internal job change into management, but also recognized that I had many years of human capital ahead of me, and I wanted to push myself into a graduate degree more than I wanted to strive for an early retirement.

1:46:23I'm now halfway through my MBA in sustainable innovation in university, and have cited both the podcast and your guest's work in multiple assignments, most notably an investment portfolio project where I brought in Alex Edmunds' Grow the Pie, Fama and French's five-factor model, and Charlie Ellis' comment that only very few truly gifted individuals should engage in active management. Asking first-year MBA students to construct an actively managed ESG-aligned portfolio was, in my opinion, misguided, but at least I could give it a small cap value tilt. Much appreciation for the work that you, Ben and Angelica put into the podcast.

1:47:02Count me in as one of the three listeners to the after show and keep up the outstanding work. All the best. It's funny that that's a thing. Someone said that to me in real life recently. One of the three. There was a comment in the community that somebody left after episode 259. I wanted to just read that quickly as well. It was after we had talked about, you had done your 60 second recap of Brian Portnoy's episode and I had said, like we can't overstate how impactful that Brian was on us. So they, somebody followed up saying, I'll read it. I was not aware the episode with Brian Portnoy was that influential on my life and wellbeing.

1:47:43During COVID-19 lockdown, I had a rough time being concerned about the future, having a three-year-old kid, no savings and going for a PhD. At that time, I first met the fire movement and was about to stop living, not literally, in order to save money and shut down that feeling of insecurity. It was your podcast and its additional focus on well-being and what makes a good life that helped me get back on track, inspired by the talks you had with guests, especially on non-financial matters, as well as your writings really helped me in a hard time. I do not have the word to tell you how much I appreciate your work and the effort you put into building this community.

1:48:15You make a difference for many people, I think. I know you did for me. Thank you so much. Be proud of this project. I thought that was pretty nice. very nice nice indeed i thought i'd give a quick update on the 23 and 23 reading challenge we haven't talked about that in a while of course the challenge is still open this is basically a group of us that have come together to try to nudge each other to read a bit more and try to meet your own reading objectives for the year so you can visit rationalreminder.ca and click on the 23 and 23 reading challenge button we're using the app called bean stack which is actually pretty cool.

1:48:47All the instructions are on the website, easy to set up. In there, I have now 399 friends on Beanstack and I actually just logged my 31st book this year. And I only say that because that's just an atomic habit. Just daily, you chip away 31 books already halfway through the year. In the past 30 days, I've logged five books. However, Scott is a leader now with 13 books in the past 30 days. Amanda, who is always there, has done 11. Andy comes in at 8 and Roman at 6. So there's some people cranking out some serious numbers here. Sandrine told me that there's 462 people in this year's challenge. 1 ,981 books have been read.

1:49:30So far this year, 2 ,357 badges have been awarded and 13 people have completed the challenge. So sign up. It's never too late. I think we'll run it again next year. Any comments about the community, Ben? I did want to mention the community. We launched the ability to support the community financially a while ago because the reality is as cool as the RationalMinder community is, as a business expense for PWL, because it's expensive, we pay almost$10 ,000 Canadian a year for the software that it runs on. As a business expense, it's hard to justify because it's this global community of basically do-it-yourself investors mostly.

1:50:09Anyway, we rolled out the option for people to support the community financially to take some of that bite off of PWL's plate. And a few people signed up and we do have some people supporting, but I talked to somebody who's super engaged in the community and enjoys it, who somehow came up in a conversation and they mentioned that they didn't even know that there was an option to support it financially. So I just wanted to mention that there's a support button. I think it's kind of hard to see on mobile, but if you're on PC, there's a support the community button that you can click. and it's like relatively inexpensive.

1:50:41You can do like$3 a month at Canadian, but it does help. It does help to justify keeping that thing up and running. This fall, lots going on. You and I and Angelica will be at Future Proof in Southern California doing a live recording. Any advisors that are going to that? September 21st in Toronto, at the end of the day, we're going to be having a meetup if you're interested in joining us. So we changed from the 20th to the 21st. So it will be the Thursday night. You can email info at rational reminder.ca. Also, if there's any listeners in Salt Lake City, I'm going to be there in late September and have a one evening that's free.

1:51:19So if there's any interest, we could set something up to get together. Also, we have a store. I haven't mentioned that in a long time. We have a merch store. So you can visit rational reminder.ca and see the store button there. We sell everything pretty close to cost when you count shipping and And then you get a free pair of socks and koozie. And we have all kinds of stuff in stock. Our famous hoodies, apparently the supplier is no longer available with stock. So if you're thinking about getting a hoodie, you might want to grab one. And also there's just a few decks of Talking Sense cards left.

1:51:52Apparently those are being reimagined by the University of Chicago. So we shall see. So you want to talk about our, well, what led to our song. So anyways, for the three that are still left, might be down to two now. But Ben and I were invited to join Sean Maslick on his podcast, The Most Hated F Word, Fall in Love With Your Finances. So he invited us on to talk about the genesis of the podcast. So Sean's the host of this podcast and he's a financial wellness advocate and podcaster and he lives in Edmonton. So he invited us on and as you can imagine, knowing a bit about us, it was rather uncomfortable, I think what it was for me anyways to talk about how this all happened and how we got together and how we started doing this and what are some of the mistakes we made.

1:52:41I did listen to the episode and actually I think it came out if you're interested, which there's might not be a lot of people interested in that backstory, but if you're interested in the backstory, I think it came out okay. I did not listen to it for the reason that you said. It was uncomfortable to do and it would be probably even more uncomfortable to listen to. The interesting thing is that while we were recording this conversation, Sean had a musician listening to the conversation and through that wrote a song about the conversation and played us the song at the end of the recording. Like it was crazy.

1:53:18Anyways, so the song was written by Root Hub, who was based in Hawaii when he joined us on the podcast. Looked like he was in the jungle of Hawaii somewhere with his guitar. and we're going to play the song at the outro here. But yeah, it was quite the experience. No comment, man. I'm nodding my head. Sorry. Yeah. I guess people can't hear me nodding. We now have an audio recording of the story of, it goes back to how we met. Yeah, no, it's cool. I mean, it's cool to the extent that our lives should be documented. I guess that's a good thing. To the extent that. Yeah. To the extent. All right.

1:53:56So here's the song from our recording of the most hated f-word with sean maslick and this was written by root hub everybody thanks for listening have a great week rational reminder

1:54:30quality focus on the message and you unlock the key standing tall in integrity

1:54:45rational reminder the marginal gains that add up when you invest every day

1:55:00Oh, you can worm your way Inching forward everything

1:55:13Compounding, tris-comming, interview Or in an abracadabra that money's working for you And the rational reminder of the marginal gains Will that add up when you invest every day? Cheers to making better financial decisions Oh, and implementing them with precision

1:55:56Engineering new realities Research driven possibilities

1:56:09Evidence of milestones Conduents of energy Calling a community With a rational reminder of the marginal gains Oh, they add up when you invest every day Oh, the rational reminders of the marginal gains When you stay stack up, yeah, when you invest in you every day A rational reminder, a rational reminder, it's a rational reminder.