Episode 279: Stock Returns in Recessions, and FSRA's Approach to Regulation

24:30I mean, that's, So they were effectively, because you know, it's a price-controlled product. And so if they were getting risks that they didn't feel were as probable, they could push those risks back in the market with the result that other carriers were picking them up. And then they were doing the same thing. It was sort of a domino. It took us about three years, but it's a great example of you have a systemic problem and you can pick the sector, any financial services. And as the regulator you're grappling with, do you immediately start bringing enforcement action, which is time-consuming? There's delays.

25:00And that's not fixing the consumer interest in the short term. And so what we try to do is get the market through our supervisory powers and through persuasion to get them to fix it themselves because it undermines consumer confidence. If you don't have consumer confidence, then that's not good for the sector. And that results sometimes in extreme responses. I want to jump back to title protection. How successful do you think title protection for the titles of financial advisor and financial planner have been in Ontario so far? You know, there are all kinds of clients and investors in Ontario.

25:34There are those who are well advised, very high net worth. They've got an army of people coming after them to say, please use my services. Then there are many other people that don't have good access to advice. They don't have an advisor yet. And so it's interesting. We did a survey before all this rolled out. We found that the majority of Ontario consumers actually already believed that there was regulation of these titles, a financial advisor in particular. And at that time, there wasn't. Anyone could have called themselves a financial advisor. So you could be out there and looking at, let's say, a high-risk mortgage product.

26:09And the website says, speak to a financial advisor. You could be out there looking at an insurance product. And the website would say, speak to a financial advisor. And as far as we're aware, some of those individuals were only licensed to sell, let's say, life products. and we said to ourselves, we need to actually do better for the consumer. So what does that look like? We've now introduced those new requirements. Our understanding is that people are taking steps to get the additional proficiency and have the additional work done to validate their experience and their ability to service clients well.

26:44We are still in a transition period. Once the transition period ends, we will start reaching out to employers, to financial advisors, to financial planners, to make sure that they're aware that these standards apply. And what will happen down the road is you're going to have consumers when they deal with someone who holds themselves out to be a financial advisor or financial planner, they're going to know what they're getting. Can you talk about how title protection in Ontario differentiates between financial advisor and financial planner? So the financial planner is essentially a higher standard.

27:19It requires additional proficiency because they are expected to be able to develop integrated financial plans for clients. So they've got to be able to include a holistic analysis of clients' financial circumstances. And the financial planners are expected to be proficient in all core personal finance areas, including estate planning, tax, retirement planning, investments, and insurance and risk management, whereas a financial advisor would only be expected to have technical knowledge in at least one common investment product. We think it was necessary to have this distinction because when you go in to see a planner, there are tax consequences for liquidating your investments.

28:04There are very important estate planning elements that must be followed if you want to manage your own tax bill, if you want to leave a legacy to your family. At the same time, we were conscious of the fact that this has to be something that works for regular consumers. Because if you set the bar so that, for example, only completely independent advisors are wrapped in, that is going to mean that the vast majority of consumers that are looking for some help with their savings just would never be able to seek out that kind of advisor. And that kind of advisor might not have an interest in serving that kind of customer.

28:40So we wanted to set two levels, one for financial advisor, one for financial planners that really identified key requirements, but also at the end of it, met investor needs. I've got a bit of a prickly question. I think it's prickly. I don't know. Let's see what you guys think. This is just something that in the communities that I'm involved in, I guess, is the best way to describe it, that is an issue with the way the title protection has been rolled out. What do you think about the fact that there is a pretty significant disparity across many of the designations that allow people to use the protected titles?

29:11Like a CFP on one hand, and I don't know one of the other, easier to obtain designations allow people to use the same title. Well, what are your thoughts on that? I think that the objective was to provide consistency to the customer. So the investor needs to know, I'm dealing with a professional, minimum proficiency, continuing education, accountability. And if you met that threshold, that he met that standard, a credentialing body could apply to us and receive that status and could then confer the titles. We wanted to leverage what was already out there. We wanted to leverage professional bodies like FP Canada and so on that already had programs in place or that already were education providers.

29:55And we know that some of those standards, they're not all the same. And it is up to different credentialing bodies to say, you know what, I want to offer more. I'm going to increase the focus I put, let's say, on client discovery, because it's not just whether I know about my products. How do I get that information out of a client to make sure that I'm helping the client meet their needs? And that's a good thing from our perspective. If someone doesn't do that, we don't say to ourselves, okay, then you can't be a credentialing body. We let different credentialing bodies make the call from a business perspective of the value they want to add.

30:30And our standard has been published and transparent. If you meet it, then you can qualify. Certainly, there will be some cases where certain credentialing bodies have elevated requirements. It could be in terms of either the content or experience. Can I just add that because it is a minimum standards, the consumer should still be asking questions of the individual that they are proposing to work with, what the individual's financial services education background or training is, how long they've been providing providing the services that they're offering. What credentialing licenses or credentials or licenses do they have?

31:03To Houston's point, what is the issuing credentialing licensing body? Are they bound by a code of conduct? The point of the framework is to provide a minimum standards, but leave it to the advisors as well to make sure that they're explaining and be able to distinguish their expertise relative to the client's needs. Yeah, it makes sense. So Fizzer basically saying this is the baseline and credentialing bodies can still provide education above and beyond that and market themselves as doing such. That's right. And we know that this is an area where there is an expectation that things continue to evolve.

31:38It's a tougher environment. Think of interest rates, inflation, uncertainty with the economy. And actually, we're planning to launch a consultation on revisions to the total protection framework. And we're going to be asking questions of stakeholders as to whether they think any elements of our title protection framework need to be updated. And that speaks to really our culture as a regulator. You can't just put a regime in place and put it in the back shelf and not worry about it. You constantly have to adapt it. You have to adjust it. You have to make sure it's still relevant. And so there's a people don't usually use the word dynamic and regulation in the same sentence, but there's a have to be dynamic as a regulator, because particularly in financial services, the products are changing so quickly, distribution models are changing.

32:26And so we want to make sure that we're not letting things get adecuated or out of touch, and we're able to adjust them to better satisfy consumer needs. That's great to hear. It's incredible to have seen Ontario put title protection in place. That's something that we, I guess, complained about for a long time. It's great to see it. And also great to hear that it's going to be a dynamic process. The sad part about it is that there were people that we're dealing with. I'll take the mortgage world because it's one that we regulate along with USC. But we have seen cases where you've got high risk mortgage products that are being sold to individuals and the website will say, speak to our financial advisors.

33:05So there's a certain connotation of that term financial advisor that is attached. And what we're doing is making sure that there are at least minimum thresholds that must be met. Otherwise, you can't use it. I want to go back to what you were saying, Jordan, about what to look for. So what should consumers be looking for in a financial advisor or a financial planner? Asking really good questions. I mean, start to make sure, as Houston's identified, that they're using a credential appropriately and also understanding what their education background is. Do they have an MBA? Do they have a CFA? What training do they have?

33:40What background do they have? Are they new to advising? Have they been in it their entire career? How long have they been offering the specific services that they're proposing to offer the consumer? What other, they may have the right title, but what other licenses or accreditations do they have? What's the, who are the licensing bodies? Who are they regulated by? I think is a really good question. Are they subject to a code of conduct? If so, what is it? Is it voluntary or is it mandatory? So there's a whole bunch of things. I think ultimately, from my own experience, also get references. is make sure you're doing your diligence because there's a right array of qualifications and background and experiences and you want to make sure the person that's advising you is right for your needs i'll also add that the code of conduct let's say someone has a credential by a credentialing body and there's a code of conduct and there's a complaint well fizzra as part of our supervision of credentialing bodies is in the process right now following up with a number of them to say tell us what the complaints you received.

34:39How were they resolved? What were the nature of those complaints? And we want to see that credentialing bodies hold their members to account. So if there's an issue, the client, obviously there's a process and there are two sides to every story. But as the supervisor of this regime, we want to see that the users of these titles are actually bound by the code of conduct, not just in words, but in terms of the outcome. So we're digging into that right now for a number of the credentialing bodies. That's really interesting. So it's not enough to have a code of conduct. There has to be accountability behind it.

35:12I'd also add that a consumer's lifecycle needs are going to change, and the type of advice they're going to need is going to evolve. And you may have the right advisor at a certain point in time, but you may outgrow that advisor or you may have different needs that require a different advisor or multiple advisors, depending upon what you're trying to do. And so I think there's always, as you do with anything, there's always an opportunity to sort of pause, assess, and just reality check to make sure that you're getting the right advice for your needs. I'll also add one more element that we're working on.

35:43Over the next number of months, we're going to be launching a registry that will have everyone who uses the title of financial advisor or financial planner listed along with the credentials that allow that person to use those titles. And if there are any disciplinary sanctions that have been levied against such an individual, you'd actually be able to access that. So that'll be a first. It'll cross anyone who used that title. You'll be able to type in that person's name and see, okay, well, this person is credentialed by one or two or three bodies and this one or not, which is really important because ultimately I think investors are entitled to know that.

36:21And more importantly, they're entitled to be able to check that in an easy to use manner. It shouldn't be so difficult for them to check in the background to see if someone's been disciplined. Yeah, it makes sense. So is it kind of like the insecurities we have? Are they registered search? You can go see if an advisor is registered and what registration and all that kind of stuff. Is it the same kind of idea? That's the same idea. So it'll be searchable. And what you'll get here is it'll be integrated. So it doesn't matter what you're selling. It might not be securities. It might be insurance, it might be something else.

36:54But you'll be on this registry if you use the titles, financial advisor, financial planner. Yeah, that's an incredible resource for consumers. I want to move on to some recent enforcement that was pretty incredible to see, really, from our perspective in the industry. Can you talk about what FISRA uncovered in the recent review of tiered recruitment model life insurance MGAs? And maybe listeners may not know what that means. Maybe if you can give a little bit of background on what that is. Many people are familiar, of course, with the concept of just buying insurance and are well aware that you can get different products.

37:26When we looked at the way insurance was being sold, we discovered that there were some business models that involved not only selling insurance, but at the same time then recruiting the people that you're selling insurance to as an agent who would then recruit other agents as well as sell insurance and who would then recruit other agents as well as sell insurance. And as a business model, that's not a prohibited business model. But what we discovered as we dug into that was that in some of these cases, the training materials were misleading. The training materials would indicate that this is how you're supposed to sell.

38:06This is the way the product works. And say this or don't say that. So as a new individual selling insurance, imagine what that feels like. You just signed up. This is what the training says. Of course, that's what you're going to do. That's what the training manual said. And we found that there were instances where this was just not appropriate. We took enforcement action in the cases of two intermediaries, managed general agents. And we also dug deeper and we said, okay, who's doing the sell? And do we need to be concerned about that? So looking at the same managing general agents where we had concerns about this recruiting model, we had to take enforcement action in connection with about half of them.

38:52So 50 % of the agents that we sampled and reviewed required regulatory action. And we were very disappointed. Think of how many hundreds or thousands of clients that represents, where the regulator felt we needed to take action for half of the agents involved. And so we did that, and we're continuing to follow up. And I suspect there's going to be more common. And then we said, okay, what are they selling? Because it's a multi-sided equation, right? What are they selling? And we found that in some cases, they were selling products that were permanent products, complex products. And we recently published something on universal life.

39:35And many of your listeners will be aware of what universal life is like, but it involves elements that are quite complicated. It's not suitable for everyone. There are certain individuals where it's a great product. And there are other individuals where you'd question why this is being sold. I'll give you some examples. We sampled, again, same managed general agents, same population. We sampled the products that were being sold. And we found instances where there was no evidence that there were any registered accounts being held by the customers. Many of the customers had very modest incomes,$50 ,000,$60 ,000 a year.

40:12Many of the customers didn't appear that they'd gone through a needs-based analysis where the agent had said, you know, tell me about your life. Tell me about what your other responsibilities are. Tell me about your beneficiaries and your whole situation. And when we saw that combination, we felt we had to say something. So we found there are issues in terms of the training materials for these MGAs, the products being sold, as well as agent conduct, and all of that is deeply disappointing. I would add that, as Houston alluded to, this is ongoing. So Houston's team does the supervision when they're doing supervisory reviews as they did here.

40:46If they identify consumer harm, it gets escalated to my group, which is an enforcement. And so we're continuing to work on this. And the other thing we're doing, we're in the process of doing to be released shortly for consultation, is that this is going to inform how we actually determine suitability for licensing. And so how you determine suitability isn't just based on your education and qualifications. There is a wider array of factors that we can look at to determine whether or not you should have the privilege, because it is a privilege of having a license, not a right. And we want to make sure that consumers are better protected at the front end, not having to go in and find these issues.

41:24I just want to recap for a second for listeners. There was a multi-level marketing aspect that was involved in recruiting agents. There was training material that was teaching maybe unsuitable information. And then there were products being sold. I don't know if everybody, if listeners will completely understand the registered account piece. So registered accounts let you invest in a very tax efficient way and they have, in many cases, other benefits. Typically, you wouldn't buy a permanent insurance product until you'd maximize those. But in some cases, there was advice being given where people were being sold insurance but did not have money in their registered accounts, which is just incredible, not in a good way.

41:59And I think that the regulator, in this case of FISRA, has taken enforcement action for two of these managed general agents. In one of the cases, and it's public, it's on our website, we require that they essentially have a new look at the training materials and ensure that they were compliant with applicable law. But taking a step back, the sad part is that clients are being harmed. when someone without registered accounts or someone where there is no demonstrated need to have this kind of insurance that is something that is quite sad and it's multiplied by you know the thousands of agents that were part of the network and that continue to be part of the network for these three mgs i would just add the lapse rate for the products sold was also very high so the products consumers who were buying these products clearly couldn't afford them with the result that they were losing the benefit because they couldn't continue to make the premium payments.

42:54And there you have clear consumer harm. Wow. Are those lapsed out in the report? They are. Okay. Yeah. That's just crazy. Just for the benefit of listeners, when you fund a permanent universal life insurance product, a lot of the initial premiums usually go to fees and costs. And if that policy lapses, if you universal life insurance policy forever, they can actually be okay if it's done properly. But if you cancel it or if it lapses relatively early on in the policy, it's extremely expensive. So that's a mess. That's correct. And I think we have to also, let's be clear, this is not to say that all universal life policies are bad or that all life insurance is bad.

43:32Not at all. There are certainly very important benefits that are conferred. But these products, they have to be appropriate for the customer. So if a customer has a need, that need is being satisfied, the training and the illustrations being provided are appropriate and match the client circumstances and the agent knows enough with the client to provide that recommendation, then there's nothing to worry about. And the client now has a solution for their life. I think what really disappointed us was the fact that you had this combination of very, frankly, scaling up of the distribution through recruiting, combined with complex products, where we did not see satisfactory evidence of the need, plus agents that in many cases were not fulfilling regulatory requirements or best practices, that combination results in consumer harm.

44:22Wow. Yeah. It's a multifaceted and very large, significant issue. It's really impressive to see the supervision and enforcement that you guys did on that. And the report that you made public was also really useful. We're not done as well. Yeah. Which is great to hear. Yeah. I love to hear that. How important do you think the commission-based compensation structure in life insurance was to all of those issues that you uncovered? Commission-based compensation is standard for financial products. There's something that's always paid, and that is often the price of advice. And in fact, we know most customers pay that, and that's how they prefer to do it.

45:01Many customers don't say, listen, I want to work in the financial planner. I'm going to give you$5 ,000,$10 ,000,$15 ,000, and I'm not going to tie that to products. We know that's realistic, and we know that's how most investors pay for advice. However, we have done work to make sure that we address some of the biggest concerns we've seen. So the best example of that is a recent ban that's been implemented in connection with deferred sales charges on segregated funds. So in the past, you could have a sale of a segregated fund where the agent would receive a commission up front. But not only would there be a commission, but if the investor wanted to sell, let's say, the entire position one, two, three years down the road, the investor would have to pay a fee, sometimes a fairly steep fee, to get access to their own money.

45:54And we felt that there were two pieces of that. One, there's the commission. And two, there is having the need to pay a fee to access your own money. And we felt that that was not going to lead to good consumer outcomes. There are times when people need access to their own money. There are times when it's going to be quite challenging for them to carry on their life. They might need a renovation. There might be a health emergency. And three or four years down the road, one, two, three, four years down the road, no one can remember the conversation with the agent to double check and confirm, okay, did you know that there might be a fee applicable?

46:29And so the decision was made to ban the use of deferred sales charges in connection with segregated funds. And I'll add that that was also consistent with the decision made a number of years earlier on the mutual fund side of things. And what that does, we believe, is it makes sure consumers have access to their own money without being required to pay fees. I would just add that I think it really doesn't matter what the financial service product is. I think consumers have to be cognizant that in some cases, the compensation structure can motivate and incentivize behavior. that product may be sold that may not necessarily be appropriate for the consumer or in their best interest.

47:07And so it's really important for there to be transparency. A consumer asks, one of the questions you had asked earlier is what consumers should be asking about when they look at the advisors, it's how they're compensated as well. I think it's important to understand that. That's not to say that anybody who's doing a commission is bad. It's just that you have to make sure as a consumer, you're understanding how that potentially could incentivize the sale of certain products over others. I remember anecdotally, the first time I bought a permanent insurance product, I asked the agent what the commission was, and you would have thought, I asked to see his underwear.

47:42I think he wasn't used to being asked that direct question and got a little bit flustered, but I wanted to understand it. I wanted to understand what the commission structure was for the product he was referring me to relative to the others that have been considered. So will there be commission disclosure rules coming, do you think? We're working on the segregated fund space in connection with our partners on the security side so that in a few years time, there will be consolidated statements that describe the total cost of holding an investment fund or a segregated fund. And it'll be consistent across all platforms.

48:17So for example, if you hold a certain SEC fund, then it'll say this was your return for this calendar year. And this is how much in dollars you paid in fees to hold this fund. And whether you have a segregated fund or an investment fund, you will receive that with the same basis of computations. That's a project that we're currently working on with our regulatory partners across Canada. But what about for like a permanent policy? because I would argue that most people would be stunned if they knew the full comp that advisors were getting on permanent policies that were being written, like the total comp, like the overrides and everything that go along with it.

48:50At this point, we're focusing the project on seg funds and investment funds. We've got other projects on the way in terms of other areas, but right now, those are the areas of focus for insurance. So what else can consumers do to better protect themselves from these examples of less than great financial advice? You know, Jordan pointed out a few very helpful points. I would just add that it's necessary for people to read and to keep up with all the documents. I know that it can be a challenge. You know, sometimes the regime that we have in place relies on proficiency, accountability, the part of the agent who's doing the selling.

49:26Consumers also, they should take note of the disclosures that are being supplied. They should be asking questions and they should be evaluating options. So we mentioned, we talked about, you know, registered accounts previously. The government provides certain savings vehicles and tax advantaged structures for a reason. And I think that the products that are generally being sold by the financial services industry can work well with those structures. And we just encourage people to evaluate their options there. They have a sense of where they're going and to use that to evaluate the kind of advice they're getting.

49:59Reading is important, but so is listening. Just by way of example, this is an unpaid plug. This podcast is excellent. One of the sessions you did on permanent insurance, on just insurance generally, I think was one of the best educational mechanisms I've ever seen to explain things, very complex things in basic terms so people can understand it and ask the right questions. So I think there's so many sources today of getting information. I think podcasts are really an excellent one as well. Wow. Thanks for the kind words on that. That was a fun episode to dig into. We talked earlier about the MLM type recruiting and the maybe unsuitable training materials that were being provided to agents.

50:38So forgetting about consumers for a second, how can a new financial advisor be sure that they're not being trained in a way that's not going to be beneficial to the end consumer? You know, it's so important. There are licensing regimes and there are credentialing requirements to practice. and anyone new should spend time and put in the effort, study the materials. It's not just about passing the exam, but that individual is responsible for advice that's being given to dozens, hundreds of clients for the future. Make ethics and client centricity a priority because it should all be about the client to make sure that that product's suitable and makes sense for their life.

51:18I would also add that agents need to familiarize themselves with the regulatory guidelines and requirements. It is not acceptable to just say, you know what, I didn't know, I didn't read it. You are subject to the provisions of the Insurance Act and the regulations, and anyone who is a professional in this area should be keeping up with that as well as guidelines that are published by the regulator. In extreme cases, we also, one of the things that we introduced in 2022 was the lower protection in all of our sectors. And it came out of that project we did in auto insurance, but it applies across the board.

51:56And if you're seeing things and we just have one in one of the sectors where it actually is a company that was having business produced on its behalf and it thought the business was too good to be true. And it started asking some questions, making some inquiries, and they have identified potential fraud. And so our whistleblower protection allows people to report to us anonymously. It allows them to be protected against reprisal. And so it's another way in which we can actually monitor and people can come forward in a safe way to let us know, because as a regulator, you can't be everywhere all the time.

52:30We have finite resources and we try to do the best of what we have. But if we can get an early indication of this potential problem, we can get in quicker and avoid consumer harm. All right. Keeping on the theme of insurance, something that listeners know, because I've mentioned it a few times on the podcast, I've spent a lot of time reading about the infinite banking concept, which is, I would call it an insurance sales strategy. Somebody who promotes it would call it something else probably. One of the things that it does is encourage people to use participating whole life policies in lieu of registered accounts like RSPs and TFSAs, which is a practice we talked about earlier with universal life insurance.

53:06Is FISRA aware of the infinite banking concept? So I'll let Houston answer, but I just, before he does, I just, no relation to Michael Lewis's going infinite about crypto, I'm assuming. Infinite's going to get a bad name. Yeah, different kind of infinite, but this gives it a bad name for a different reason. You know, I think that we have to be careful when looking to a particular product to solve all of our needs. We've talked about financial planners, for example, and I would really encourage anyone who's looking into something where they're putting that much stake into a single product to consult with a qualified financial planner and be transparent.

53:44These are my needs. What are the services and practices I need to consider in order to meet my needs? They may come up with something where you can use the proceeds of your life insurance policies to borrow against and so on. But when someone is only licensed to sell one product, then there is a limitation because there might be other solutions and other verticals that might meet those needs better. And a financial planner is probably the right professional to help an investor in those situations. I would also say that it's important for an individual to consider, okay, what is the next best option?

54:20Let's say that an advisor comes and says, this is what you should do. and the investor would say, you know what, I'm not that comfortable with this piece. If I change that up, what would be the next best option? Why? Because it really spurs on the discussion and it starts to introduce, frankly, just options as to what you might do and other conversations that might be important when you evaluate whether that strategy is appropriate for you. Ultimately, people are going to be responsible for their own financial well-being. But again, I'd recommend that they go see a financial planner. Final question for you guys.

54:52What initiatives, looking forward, are you currently most excited about? There's so many. There's such a breadth of financial services that we look at. We do try to make sure that we're looking out for the consumer. So I've mentioned the work we're doing on segregated funds, on cost disclosure, and on conduct standards. I'll mention something that we haven't talked about yet, which is mortgages. Mortgages, if you open the front page of the newspaper, every day there is something on affordability and rising interest rates and what happens when all these low rate mortgages reset. In the coming weeks, we're going to be publishing something on mortgage suitability because we want to make sure that people know what they're getting into.

55:32And so agents are going to have to have a conversation with their clients who are getting a mortgage, or sorry, mortgage brokers, mortgage agents who will have to explain how this is suitable for them. We think that's important. We're also doing work on homeowners. We're speaking to insurance companies and gathering data to see how claims are being handled because ultimately that's where the rubber hits the rope. You make your payments for years and years and years. Once in a while, some customers will have to make a claim. And ultimately, we want to make sure that they're being treated fairly.

55:59I mentioned the registry where someone will be able to go online and say, this person told me that their financial advisor, what are their credentials and what, if anything, do I need to worry about in terms of their past? So those are some of the big initiatives that I can think of. George, anything on your end? Yeah, I would just say, just to put it in context, Next, we started up in 2019. So we started as a new regulator with a new mandate. And not even a year into it, we were hit with COVID, which presented a whole bunch of real challenges, particularly in financial services. And we've come out from that successfully and effectively.

56:33And we're at the point, I think, as a regulator hitting our fifth year, really pausing and looking at what we've done, lessons learned, seeing how financial services are evolving. I was at a conference last week where one of the speakers was talking about the focus now on decumulation products and how whether Canadians are being properly served as they head towards the final chapter of life and they have to start spending all that money they've ideally accumulated over their lifetime. And so the one thing I'll tell you is that this is never dull. You're constantly dealing with very complex problems every day.

57:06And as financial services evolve, we have to evolve with it, look at distribution, look at products. and actually facilitate innovation. And I know innovation sometimes is taken as a bad word, and it can be, but innovation can reduce cost to consumer. It can give consumer a better choice and it can result in better outcomes. And I think we're constantly looking at how the products are evolving and how the models are evolving to better serve the end users. And I think that, and also making sure we have an office of the consumer as well, making sure that we are in a position to empower consumers because as you know, and it's financial literacy month, It's really important for people to get the right information to make these decisions.

57:45And these are pretty significant decisions for consumers. Buying a house, buying permanent insurance, saving for retirement. As we're seeing, less and less people are going to have defined benefit pensions. And so it makes this the need for proper advice and proper product selection absolutely critical. Couldn't agree more. I mean, FISRA touches so many aspects of our day-to-day lives and the work is so important. And it was great to have you on. Jordan, Houston, thanks so much. Thank you for having us. Thank you. It's great to be here. Really great to hear from you guys. We've been critical, I guess, of regulation in many cases and seeing title protection come into place.

58:24Even if we could still criticize some aspects like the disparity in credentials and stuff like that, it's really good to see stuff like this happening. And I think it really helps to professionalize financial services, which is something that I think is badly needed. So I think you guys are doing good work. And I liked your comment earlier, Jordan, that it's a dynamic process what you guys are doing. That's really good to hear. I would say that sometimes you can't let perfect be the enemy of good. And yet the changes are slow and they may not be the ideal ones you need, but it's a beginning and you can build on it.

58:53And I think that you have to develop that patient and that perspective. But as a regulator, we're open to constructive feedback. It allows us to do our job better, frankly, particularly for people who are in the area that are respected and are by the right things. It helps us be better. And I'd say that staff on my team have actually forwarded me materials that you took that you've produced. So I think you certainly have an audience with us. As Jordan mentioned, you know, Jordan introduced me to you folks. But I realized that my staff have been sending materials to me already. So thank you. They're trying to get Houston to wear the hoodie to work, but it's just it's been he's a super guy.

59:28I love it. All right. Thanks, guys. Thanks very much. Have a great day. Okay. Really appreciate it. Thank you. Thanks, guys. All right. So we're going to kick off our Mark to Market segment with Mark McGrath. It's a bit of a niche topic. And Mark asked if it was too niche, but you know what? It is. So I want to be clear about that up front. Less than half of our audience is Canadian. And even within Canada, this is somewhat of a niche topic. It's talking about investing in a corporation and some of the nuance around that. So if that's not relevant to you, feel free to skip this segment. However, even if it's not directly applicable to you, I think it is really interesting.

1:00:00So stick around. Plus, Mark's great at talking about stuff. Yeah. And you know, I've heard from some non-Canadian advisors that have listened to this segment and they still enjoy it for whatever reason, just to learn some of the nuances, the difference between planning in Canada and the US. So who knows? To your point, it is a little bit niche, but kind of fascinating. Kind of technical. I'll try to keep it at a relatively high level. because there's a lot of nuance to this topic that I think is just too much for a podcast. And yeah, so we'll keep it high level. I'll just try to explain it. So what I'm going to talk about is something called the passive investment grind.

1:00:30I don't think that's an official name. I don't know that there's an official name, but I was writing about this last year or maybe earlier this year. As I started writing it, I realized the acronym for passive investment grind is PIG. And so I wrote this article called like how to tame the pig or don't wrestle with the pig or something like that. And I was really proud of myself for it. So the article I wrote had a bit of a kind of a wrestling the pig kind of theme and how it might best you. But anyway, so the pig, the passive investment grind. So this is specifically applicable to Canadians that are shareholders of a small business.

1:01:01So a Canadian controlled private corporation. So small businesses, a lot of professionals like physicians and dentists who have professional corporations, this is going to apply to them as well. And this is a relatively recent change in tax legislation. I want to say this came about in late 2017, maybe it was 2018, but it's in the past five or six years this came about. So what it is, or the way it works rather, is every province and the federal government has something called a small business limit. And for almost every province, with the exception of Saskatchewan and partially Ontario, that limit is$500 ,000.

1:01:35And what that means is if you have a corporation earning revenue or profits, and those profits are less than$500 ,000 in those provinces, your business is taxed at a very low rate. That income is taxed at a really low rate. In BC, it's 11%. In Ontario, I think it's 12 and a bit, I want to say 12.2, something like that, 12 and a half. Yeah. And so every province has their own applicable rate. But for the sake of the example, I'm in BC, so we'll say it's 11%. So that's income on the first$500 ,000 that the corporation earns. Income above that is taxed at what they call the general rate. And it's taxed at a higher rate.

1:02:10And in BC, that's 27%. And again, that's going to differ by province. Saskatchewan is the only outlier here. Their small business limit is 600 ,000. In Ontario, there's a difference between how the federal government applied it and how the provincial government applied it. But we don't need to get too much into that high level concept. First half a million, low tax rate, everything above that higher tax rate. So what the government did is they introduced changes to sort of dissuade companies from having too much investment income in the corporation. So I work with a lot of physicians, this is a very common issue.

1:02:42they have a bunch of retained earnings in their medical corporation they create a corporate investment portfolio they invest that in a let's just say a diversified index fund and now that portfolio is generating passive investment income and passive investment income in a corporation is taxed much differently than active business income or the the income that is derived from operating the business so the government made changes to try to dissuade people from holding too many investment assets or too high of a portfolio value. So what they did is, if you have adjusted income or aggregate adjusted investment income in your corporation that is higher than $50 ,000 per year, they start to grind down that small business limit.

1:03:23So let's say you've got a portfolio, let's just we'll throw out some numbers, let's say you've got a$2 million portfolio. And the income that portfolio generates in the form of interest and dividends and foreign dividends in capital gains is, let's say 3%,$2 million portfolio, that's$60 ,000 in passive income. Well, it's above$50 ,000, which is where this test starts. And so what happens is you've got $10 ,000 of income, investment income above this threshold. And what they do is they grind your small business limit, which is that$500 ,000 limit, they grind it down by$5 for every dollar of investment income over the$50 ,000 limit.

1:03:59I'm not sure that this is really necessary. Like it's a very complicated rule that they've added here. I don't know if it had the intended purpose. But at the end of the day, it's very, very complex. And for small business owners, it's quite difficult to understand. So here's the impact of that. With$10 ,000 of additional income over the threshold, they're going to grind it at$5 per every dollar investment income, meaning$50 ,000. Your small business limit is reduced by$50 ,000 in this case. So what's the impact? That means instead of the first$500 ,000 being taxed at a low rate, now only the first$450 ,000 is taxed at the low rate.

1:04:34And everything above that now is taxed at the general rate. So that's sort of the issue and it caused quite an uproar. And people think about this as a sort of a tax punishment or a tax cost. And I'm going to explain a little bit about why that's not necessarily the case, why this isn't really a big deal in a lot of cases, and some things you can do to try to minimize the impact of this. When you have income at those small business tax rates, so in our example here, that first$450 ,000, when you pay yourself a dividend out of your corporation to yourself, you stick it in your jeans, it's taxed as an ineligible dividend.

1:05:05Okay, we won't get into the numbers, but that's called an ineligible dividend. Anything that comes out of your corporation that was taxed at the higher general rate, so in our example, any income from the corporation that was taxed, any income over$450 ,000, when that comes out, it's an eligible dividend. Because that income was taxed at a higher rate in the corporation, when you get the eligible dividend, you get basically a tax break. It's taxed lower. And the idea here is that by the time the money hits your back pocket, it should all be taxed the same way regardless. That's the whole theme of our tax system.

1:05:36It's called integration. So the issue becomes if you have all this income that's taxed at these higher rates and it stays in the corporation, you've kind of paid a penalty. You've paid more tax than you would have prior to these rules coming into existence. If you just take the money out and dividend it out to yourself and stick in your jeans, it offsets. So it's not a big deal. But over the long run, this can become a problem. So what can you do about it? So I guess there's a few things you can do about it. You can pay salary out of the corporation, because salary is deductible to the corporation.

1:06:06So in our example, if they had$500 ,000 of income, but paid a$200 ,000 salary to themselves, now the corporate income is$300 ,000. So you get to deduct it from the corporation. So that makes it harder to hit those small business limits. So that's one option. Consider the tax efficiency of the portfolio, different types of income are taxed differently. And some types of income are more efficient than others. So capital gains, deferred capital gains are more efficient than interest income, for example. So reducing the amount of investment income that you're getting so that you don't meet these thresholds, or reducing the amount of capital that's in the corporation that is generating income in the first place.

1:06:42And you can do that by, in some cases, opening an individual pension plan for yourself, which lets you get money out of the corporation and into a pension plan. If it's relevant and necessary, you could use permanent insurance, which is owned by the corporation, which puts money into a tax sheltered insurance policy. So there's a few ways to kind of get around it. But all of those ways, costs and complexity. So the idea here is don't bend over backwards trying to get away from this from the pig, you don't need to necessarily try to wrestle the pig, like it might beat you in the end anyway. And maybe you should just accept it and kind of move on.

1:07:14Because at the end of the day, because you get the tax break on the eligible dividends when they come out, it's sort of a wash at the end of the day. So the real punishment is if you have this income taxed at a higher rate, you leave it in the corporation for a really long time. Yes, you've prepaid too much in tax, you'll get it back in the form of a tax credit on the eligible dividend. So high level, it's complex work with accountants, obviously, when thinking about these things. Don't worry too, too much about it. If you can avoid it in a reasonable way, and there's a reason to implement other planning that has the benefit of reducing this problem for you as well, take a look at it.

1:07:46I think one of the things you said near the end there is really important. This was framed by a lot of people when this change was coming into place as additional tax that people and corporations were going to pay, but it was a change in the ability to defer tax. You don't end up paying more tax overall. You just lose some of your ability to defer tax. Then the other thing is that Ontario and New Brunswick at the provincial level didn't fully adopt the changes, which caused this funny break in integration. And you can actually end up slightly better off by paying more tax upfront and then being able to pay yourself an eligible dividend because the provincial integration is imperfect there.

1:08:27I remember when this came into, you of course do too, Mark, but when this change was coming, there was a huge uproar and people were really panicking about it. But when it all kind of came through, I don't think it ended up being that big of a deal. And I remember sort of panicking about it too. And then rushing out to my client's accountants and the accountants were kind of like, it's not a big deal. Like it's just a loss of, to your point, it's a loss of the deferral. It's not a pure tax cost. And I was like, oh, like I wanted to be angrier about this. And the accountants kind of talked to me off the ledge and were like, calm down guys.

1:08:58It's complicated. It's additional complexity that I wish our clients didn't have to deal with. But at the end of the day, it's not the difference between a client meeting their goals or not are totally overpaying their tax bill. So not a huge deal, but you will find a lot of information online when you look at this that I think maybe creates a little bit of fear around it. And so I just kind of want to dispel the myth that this is really something that everybody needs to be worried about. Nice, good important topic for Canadians with corporations. All right, let's go to one episode, 60 seconds, where we give newer listeners a chance to hear some of our favorite episodes that have happened over the past five years.

1:09:28And I thought this week we'd talk about an interesting one that you and I got to do early on in the podcast, with someone who is relatively high profile, which is kind of cool. So Ted Seides is someone who I had been listening to for years and enjoyed his interviews on his podcast at Capital Allocators. And then I learned that we shared the same producer, still do. So I used that as a bridge in an email to Ted to see if he would come on our podcast. And he said he listened to a few episodes and said yes to coming on, which is pretty cool. So with that short backstory, let's jump into the quick review.

1:10:01In episode 61, we had the chance to speak with Ted Seides. Yes, the guy who famously lost the bet to Warren Buffett, the one between the S &P 500 and the collection of hedge funds. Ted is the host of the popular podcast, Capital Allocators. He also worked with David Swenson at Yale for many years. With this background, Ben, I think it's safe to say we knew that we were in for a chance to learn and Ted sure delivered. He described the environment at Yale and gave some insights on how they performed so well for so many years, the beliefs they held, the criteria they used in making decisions and the structure to implement.

1:10:35He also said, things are very different today with the proliferation of products that did not exist during his time at Yale. We also asked him about when Charlie Ellis was on the board at the Yale Endowment and what dissidents there may have been. So Ted agrees that markets are very hard to beat and only a handful might be able to do it long term and the majority of retail investors should not try to beat the markets. After interviewing Ted, I felt he gave very solid arguments about a frame rate that possibly could improve over an index and we appreciated and I remember we commented about this afterwards, Ben, we appreciated his nuanced views on active management.

1:11:11Lastly, he does share his thoughts on the bet with Buffett and I'll leave it to you to go listen to that interview. I thought his take on that bet was quite interesting and quite thought-provoking. That was Ted Seides, episode 61. Yeah, that was a great conversation. Like you said, it was thought-provoking. It's easy to look at something like the Buffett bet and be like, active management's stupid. That guy lost the bet with Buffett. But then you hear somebody who's actually in it and who actually knows what they're talking about, talk about it. And it really does change your perspective. Absolutely.

1:11:44I mean, and it's often the passive camp uses that bet to really hammer Ted, which I don't think is fair. He said both sides knew there was a range of outcomes. And him and Warren Buffett talked about that. So it's quite fascinating, actually. I think it's not fair just to dump all over Ted on that. Yeah, I agree. All right, let's go to a quick book review this week. Last year, Ben, Tim Hale reached out to us, must be about a year or so ago, ahead of publishing his fourth edition of the book, Smarter Investing, Simpler Decisions for Better Results. So he reached out to see if we would do an endorsement of the book, which we agreed to do.

1:12:21It's actually when you see the book now being published, it's kind of cool to be in there alongside people like Professor Elroy Dimson and Larry Suedro, Mark Habner, and also John Bogle and Charlie Ellis, who praised previous editions. Also, our friend and past guest, Robin Wigglesworth, wrote the foreword. So given all that, I think we knew it was going to be a pretty solid book. Tim graduated from the University of Oxford with a degree in zoology and also holds an MBA from Cranfield School of Management. After a few years with Standard Chartered in Hong Kong, he spent almost a decade at Chase Asset Management in London, Hong Kong and New York.

1:12:56So, he saw difficulties that many investors faced in trying to invest sensibly. So, he set up Albion Strategic Consulting in 2001 to help financial planning firms build out their investment propositions. He wrote Smarter Investing to provide investors with a framework to improve their chances of experiencing a successful investment experience. He lives in Exeter, UK where he and his Albion team are based. This book is a 350-page resource. I'm holding it up here now. And I highly recommend it to anyone, especially people in the UK where Tim is from. So I thought instead of us reviewing the book, it'd be kind of cool to have Tim join us.

1:13:35So that, let's go to our discussion with Tim Hale. Tim Hale, welcome to the Rational Reminder podcast. Thank you. It's great to be here. It's great to have you. Thanks for sharing your book and inviting us to be part of, a little part of it, but part of it nonetheless. And congrats on the book. It's a great book. Thank you. I appreciate that. So what drove you to write the first edition of Smarter Investing back in, I think it was 2006? That's right. Yeah. It was frustration, I think. Frustration at seeing how badly some people were investing. And I started off working in the active management world.

1:14:07I was at Chase Manhattan end of JP Morgan Chase, which is now, I guess, JP Morgan Asset Management. And it was just, I quickly sort of just saw the randomness of who was outperforming as fund managers and who wasn't and throwing a whole load of costs. And it just seemed like that didn't seem a very palatable way to go. So I had this sort of like sense that there was a better way to do things. And I was in New York, working in New York for a few years around the time of the dot-com, so late 90s and going into the local diner at the you know in manhattan and the wait telling you of all the great day trading he was doing and all the money was making and you know a few months later he didn't have the shirt on his back it just didn't seem right and absolutely crazy and then when i got back to the uk i was sort of wedded and schooled schooled in in the sort of the us you know theory and investment theory and the approach to investing i got back to the uk And it was like, just, it was, it was antediluvian.

1:15:00It was, you know, still commission base, people just putting together portfolios of stuff that sold people. It was just horrible. And I, it was that sort of frustration that people really deserve better. And I wanted to write something that allowed people to, yes, have a, have a bit more of an insight into maybe better ways of doing things. So yeah, that was, it was a bit of anger that sort of got me going and yeah, forced me to write the book. Who was your intended audience for the book? Well, at first, it was really just anybody, I mean, you know, who had a positive active interest in trying to do things better.

1:15:32And it's sort of a small subset of all the people who need to do things better. You know, now that we don't have DB pension plans, and everybody's investing their own money. But I felt there was this sort of group of people who were interested, people like my friends and colleagues and stuff. And actually, what I found was, yeah, there was a reasonable audience in there. But also, I found the financial planning community was really very receptive at that time. I think Dimensional had just come into the UK. People were beginning to think, gosh, maybe there is a better way of doing things. And so actually, I found that a lot of financial planners picked up on the book and spread the word around.

1:16:05So that was great. And it was nice to see that happening, that there was a sort of positive influence in the planning community to try and do things in a better way. So in a nutshell, how would you describe the key messages in the book? The key thing for me is start with the evidence. If you're ever going to do anything in life, I start with the evidence. People don't like evidence anymore, it seems, and truths. But I think if you start there, then it allows you to have a real sense of what you should be doing and where you should be going with this stuff. And good investing is only about doing a few really small things sensibly and doing them exceptionally well over time.

1:16:39And I think the key message for me was, for people who are reading the book, was if you sort of understand that the market does a pretty good job of incorporating information into prices. and for most of us, it's going to be a pretty tough ass to try and beat the market. Then suddenly, you get this clarity in what you do. You get a clarity in the choices you face and the decisions you need to make. And if that's the one message I can get over in the book, that's got to be the starting point. And from there, you can get more sophisticated about it. But I love the quote from Eugene Fama that he came up with in a webinar we saw, which was, you've got to be able to talk your way out of the market portfolio.

1:17:17And I think if you can keep that in your mind, that's a really great starting point. Should I really be doing this or should I just go back to the market? If I don't know, go back to the market. So that for me was really great. And then the simple messages around getting your asset allocation right, diversifying, keeping your costs, financial and emotional low, and rebalancing, those are the key messages. But if there's one key piece for me, it's like, just throw your hands up and accept that the market works pretty well. And from there, life gets so much easier. How's the book structured? Well, my wife said, why didn't I write a shorter book?

1:17:51It's a few pages. And so what I tried to do was, again, it was this balance between being a bit too thin. So for me, it's about conviction. If you really read the evidence and you buy into it, then you've got that conviction. And down the line, you're going to be able to hold firm when markets get tough. And that sort of conviction is really important. And that meant there needed to be a bit of content in there. Yeah, there's content. 347 pages. If you want content, you've got content. What I wanted to do was have a section up front, which is, look, if you can't face reading the whole book in one sitting or whatever, here are some 20 tips of how to get through this stuff and the things you should be thinking about and the things you should be doing.

1:18:32So then I try to sort of break up the rest of it into, we used a little acronym, PACE, which was how to sort of quickly get through making these sorts of decisions. And so the P was for put in place a proven philosophy. fee. So that's the first chunk of the book. The second is A, asset allocation. Get that right. Understand the risks that you may want to take in investing and maybe some of the risks that you don't want to take. And how do you decipher between the two? And then how do you mix it all together into a portfolio where you're taking sensible risks, the flip side of which should be reasonable expected returns.

1:19:02And so that was the A. The C was for clear choices. And that was really about implementing in terms of how do you go about choosing which funds you want to populate the slices the pie with. And then the E was for excellent execution. And there's lots of stuff. The little stuff that you do at that bit can be really important. In the UK, we have to pay for administration custody. So that's maybe 15, 20 bps. Well, don't overpay for that. Make sure you're on the right platform. Use your tax breaks, your pensions, and your tax-free wrappers. Use your spouse's allowances, all those little bits of admin.

1:19:36Just organize yourself to do them well. So that was it, really. And then the back bit of the book, we try to take out some of the details, so around the asset classes, and then also put in some resources. I think we mentioned you in there, great resources for people, the MoneyVator website in the UK, books that we love, Jack Bogle and Charlie Ellis and all those sorts of things. So you can sort of dip in and out of it in the structure, but it is a tone, but I hope there's some depth in there for those who really want to try and build their conviction. What do you think has changed the most over the 16 years since you wrote the first edition?

1:20:09Certainly in the UK. I mean, it's around, first of all, the opportunity set. I mean, when I first started talking about this stuff in the UK, I went to an industry conference once where I was pitched as the passive guy against the active guys. And there was about 300 people in the audience. And when I looked out there and I was talking, I could see people looking at me as though I'd landed from Mars. This was such a new story to them. I mean, when you've got a commission-based industry, you can't sell passive product because there was no trail. There was a lot of resistance to that. Dimensional had just come into the marketplace.

1:20:41Vanguard was nowhere to be seen. BlackRock wasn't around. We had one UK fund that had 100 basis point charge on it. I mean, it was just awful. So platforms are really clunky and expensive. And so from that perspective, from the execution perspective, a lot has changed. Also when I was writing the book, reflecting on it, thinking, well, what has changed in my viewpoint? I thought, well, actually, the tenants are good investing before it's been around, and they haven't changed very much. But certainly within me, the thing that really has changed over all these years working with financial planning firms and building their portfolios is my conviction that markets really do work pretty well.

1:21:18They do such a good job of incorporating information into prices. And that gives you not only as we were talking about sort of earlier that the sort of clarity and simplicity of the choices you face, but also that ability to use in Fama's phrase, again, you've got to talk your way out of the market portfolio. It gives you the facility to do that because, again, you know, if there's information in prices, you know, you can begin to think about think terms of value and size and profitability. So suddenly you have these tools to say, look, if I'm going to push away from the market portfolio, I can do it in an evidence-based manner with a lot of conviction.

1:21:52And so, yeah, I think for me, that was the wonderful thing that I, that conviction just grew and grew and grew over time. You talked earlier about how you worked in active management. Did you have a light bulb moment in your career that pushed you toward this type of systematic investing? I did really. Yeah. And it came really, really early on, which was the, I mean, I lasted a decade. I mean, tyranny of function and all that, you know, getting well paid and having fun and living in Hong Kong and London and New York and things. It was great. One of the first jobs I was given, this was like in about 1991.

1:22:22I just finished my MBA and I got this job at Chemical Bank, which then became Chase and Chase became blah, blah, blah. They said, look, at the interview, they was talking about their fantastic performance track record. When I got in, I asked, could I see the track record? And there was a bit of sort of, you know, shuffling and silence. And I was given the task of pulling together a compliant performance track record. and I searched. And computers in those days were only just new on our desk. There wasn't any nice database with all the data on. So I went through all the filing cabinets and I couldn't find it anywhere.

1:22:51I looked at everything. It was terrible. And I just couldn't work it out. And somebody said, look, go and find the pension report for this pension funds we manage and look in that. That's where the performance you'll see. And I was looking at it and there was our performance and there was the peer group and there was the market. And this fund manager, cynical fund manager, a great friend of mine, shuffled over and he said, the only way you'll find out performance in this outfit. And he just turned up the chart upside down. I said, gosh, what's going on here? And then I got into the randomness of returns and being in meetings with the fund managers.

1:23:24And when the markets went up, it was all due to their great stock picks or whatever it was. And when they went down, it was all external factors, the Fed or the economy or something that was doing it. And then one of the senior managers in New York sent me Charlie Ellis's winning the losers game. At that point, it just blew me away. And I thought, this is just fantastic. But as I said, the tyranny of function, it took me another seven or eight years to get out of the game. But I was ready by the end of it. Also, I used to do these straw polls of the fund manager and say, well, how much of your money is in your own funds or other people's active funds or in index funds?

1:23:57And they all would sheepishly say, well, quite a lot in index funds. And those were the active managers. But hey, if you're being paid a million dollars a year, to manage money. You got to keep up there. There's a lot of cognitive dissonance going on. Okay. So you read Charlie Ellis' book and then you stuck around for seven or eight more years. Did you second guess the index investing approach during that time? Were there periods where you thought, you know what, maybe active does work? That active does work? No, I sort of gave up on that one. And I became quite a sort of a passive advocate within the organization.

1:24:32I was called Mr. Passive at one point, because I used to go on about it so much. And I just got to a point eventually where you just can't drag yourself into work if you don't believe in this stuff. And so I had to leave the nice apartment in the West Village and head home to London. I'm very curious. Did others in your organization ridicule you? Or did they kind of behind the scenes say, yeah, we agree with you, but we have a day job here? Yeah, I think more of the latter. And there were a few diehards. And you know what it's like in that industry. There's a lot of big egos and lots of big salaries and things.

1:25:04So there were some difficult characters who the egos got the better of them, but most people understood. Most people knew. I think it was pretty well accepted that it was going to be a pretty tough thing to beat because they were getting beaten by the index a lot of the time. So why not just own it? What do you think are the two biggest mistakes that investors can make? I think it goes back to philosophy. That's my starting point. You see a lot of philosophy free investing, going chasing after stuff, whether it's Bitcoin or whether it's memes docs or whether it's just simply taking big macro punts and things, people just don't seem to...

1:25:39There's a whole swathe of investors, I think, who haven't never really sat down and said, how does this stuff really work? What can I do that's going to give me a good chance of a successful outcome? And if you haven't been through that process, you're always going to be in this philosophy free environment where you're going to be shaken in and out of things. living in that philosophy-free world and not accepting, my second bit would be like not accepting that markets actually work pretty well. 99.9 % of the world's population just believe in the market. What do you think is the biggest behavioral bias that affects most investors?

1:26:15Certainly from our experience, I think it's recency bias. Sometimes the questions that we get from our financial planning firms that we work with or their clients are asking, like, why are we in REITs? Why are you in REITs? Well, why are we still in emerging markets that haven't done anything for 10 or 15 years? Why don't we have... I mean, you get into this reductionist argument of why aren't we mainly in the US? Well, we are mainly in the US because we've got a global market cap weight portfolio. So why aren't we more in growth stocks, not value stocks? And you can reduce it down to why aren't we in the best seven stocks?

1:26:44And that sort of is just endemic, isn't it? That people chase returns, they chase what's been doing well, and they get despondent about other things. But I think it was, was it Taleb who said, you can't judge a portfolio by its performance. You can only judge it by the alternative histories that didn't happen. We live today, don't we? So our portfolio needs to reflect all those risks that are facing us and coming at us and market events that we don't know about. And we just need to build a really robust all seasons portfolio to get through that stuff because we don't know which of those. Sometimes we'll be a hero and sometimes we won't be.

1:27:17But it doesn't mean it's a bad portfolio. And I think that's the most important thing. And you'd have to keep on to get over that recency bias. We have to keep on taking clients back and saying, hey, you know what? In the noughties, the US market went nowhere for 10 years. You would have been delighted to be in emerging markets and international stocks. It's been the other way around in the last 10 years. And there have been times coming out of the dot-com crash when it was fantastic to be a value investor. And we've been through a time when it isn't so fantastic. But at the end of the day, if you've got conviction, and again, that comes down to why the book's not a pamphlet, was if you've got that conviction, then you've got a greater chance of seeing through these tough times, which you guys talk a lot about, obviously, in your podcast.

1:27:58I view your book as a great resource. At 350 pages, it covers so many topics and you dive in with many one-off questions. What do you think is the one thing a reader could come away with from your book, Smarter Investing? I think it comes back again to that. Just have the courage to believe that the market return is actually a really great return, as Boba would have said, and accept that the market works well. And if it does, you're going to make your life so much easier. But you've got to be convinced, because if you're not convinced, you're going to be sucked out of it and you're going to do something different as and when you go through those tough times, as all investors do.

1:28:38You've just got to have the conviction to stay with it. Now, you're based in the UK. We do have a UK contingent, but also Canada, Australia, the US, all over the place. How applicable do you think your book is for people living outside the UK? Well, for me, the tenets of good investing are universal. And the evidence that we base what we do on is global. And so I think from that perspective, it's highly applicable. And even down at the product level, some of the criteria for how you'd select a fund. And actually, a lot of the funds, we're talking about Dimensional, Vanguard, iShares, all the big players.

1:29:15They're global firms, and you've probably just got a GBT share class of a US dollar-based fund. So yeah, absolutely applicable. And I think that's the key is that it doesn't really matter where you are. Doing things in a sensible, smarter way are universal. The book is Smarter Investing, fourth edition, Simple Decisions for Better Results. Tim, it's great to have you on. Phenomenal book and congratulations once again. Thank you. It's been a pleasure, James. Thanks, Tim. All right. Welcome to the after show for the estimated three people that listen to the end. I got to kick it off with the content that Lisa and I discovered lately.

1:29:54It's called Life on Our Planet on Netflix. Have you seen it? No. You should show it to your kids. It's phenomenal. It's an eight-episode series, I think roughly an hour each. Looks back over like 500 million years of life on the planet and all the times that species went extinct. It is crazy well done. Morgan Freeman is the narrator. It's very, very good. The computer generated graphics of dinosaurs are pretty cool. Highly recommend it. Also want to mention to people that Morgan Housel was on Tim Ferriss podcast last week or two weeks ago. He has a new book called Same as Ever that was just released this week.

1:30:30Morgan will be a guest on our podcast the new year, but his interview with Tim Ferriss is excellent. Very, very good interview. I also want to mention our good friend Hal Hirschfield has a new podcast called The Behavioral Divide, which just came out this week, I think. His first guest is Professor Scott Rick, an academic and someone who will be joining us as well in the new year. He has a new book that just came out called Tightwads and Spendthrifts, navigating the money minefield and real relationships. And that's a topic of his conversation on Hal's new podcast that just came out. And lastly, I want to mention that Gerard O 'Reilly, the co-CEO and CIO of Dimensional Funds, was a guest on Bloomberg's Odd Lots.

1:31:10Again, Gerard, one of our excellent interviews we had recently, and this interview is a really good one on Odd Lots. Anything you want to add to that list, Ben? Nope. I don't have any recent content to talk about. I've been doing a lot of research on building out our financial planning framework, but that's not really content. I have so many books I got to read. I don't know about you, but I'm buried. People have been sending me books to review and read. It gets a little overwhelming at times. That's the thing that happens. People send us books and want us to read them. I do have a pile, like a literal pile of books people have sent me sitting at my desk.

1:31:48Oh, I do too. Let alone the Kindle's just backing up because I hear about a new book that's coming out. For example, Morgan's new book and I ordered it months ago and it shows up on my Kindle. The Kindle just keeps getting fuller and fuller all the time. Anyways, you want to take a crack at the reviews? Yep. So we've got Kosinovich from the United States. Says the single most valuable podcast about investing. This podcast literally changed my life. Best there is, period. That's about as good as it gets for a review, I would say. Yep. Roll Tide from the United States. financial guidance at its best.

1:32:19Ben and Cameron do a remarkable job of facilitating financial planning and investment theory discussions from beginner to advanced levels. I've listened to every episode and can honestly say their advice has completely changed the way I've used so many financial theories and investment strategies. The snippets and takeaways I have been able to share with my family from parents entering retirement to siblings setting up their first 401k slash Roth IRAs have made a tremendous positive impact on their future financial stability. Thank you for working tirelessly, which we certainly do, to gather such diverse perspectives and topics from which everyone can learn.

1:32:53And the last one, we've got Doc K. K. Ottawa from Canada. Great podcast for thoughtful discussions on personal finance. Great discussions. Enjoy the addition of Mark, great storyteller. Maybe his segment should be called Mark My Words, given we like his stories. We did consider that. That's pretty good. That was, I think, one of the final contenders, along with Mark to Market. On LinkedIn, I heard from Oliver. He reached out from Maple Ridge, BC saying, I wanted to reach out to you and Ben and thank you for all the work you do with the podcast. It's been one of the few podcasts I listen to frequently.

1:33:27The passive approach and evidence-based strategies you both preach is the main reason I switched firms. He's an advisor to get away from the high MER active funds. Coming up next week, Shane Parrish will be here. He has a new book out called Clear Thinking. Excellent book and that was an excellent conversation. And in three weeks, James Grubman is here who wrote Strangers in Paradise and also Well 3.0, two phenomenal books. As always, you can find both of us on X, on LinkedIn. But I feel like to be on a platform, you're actively engaged in answering comments and stuff like that. From that perspective, I don't know if I'm on any platforms right now.

1:34:03Still posting stuff in various places though. I did want to mention that when this comes out 279, episode 278 with Ioanni Lenaynma, that was an incredible episode on financial advisors and whether and what extent they're useful and what they're useful for part of it and then part of it on the cross-section of returns. And I'm only mentioning it because when we launched the episode, the title was wrong and then it was late getting posted to YouTube. And I don't know if it's because of that, but I've seen almost no interaction and comments on the content in the episode, but it was a very, very thought provoking, whether you want to hear about financial advisors or the cross section of returns, which are two topics that either one of those two, most of our audience would be very interested in.

1:34:49I think it was a great episode. So hopefully if people missed it because of the funny launch that it had, I hope they'll go back and check it out because it was a great episode. Absolutely. Anything else this week, Ben? I don't think so. That's good. All right, everybody. Once again, thanks for listening.

1:35:09Thank you.