Episode 373: Asset Allocation in Practice

25:47And at that point, we can increase the equity allocation if they're comfortable. It's a great point, Dan. I was thinking the same thing often with younger investors that are just starting out. They don't know what they don't know. So if they're not comfortable taking that leap of faith, maybe it's better to start a bit more conservative to ease them into what it's like to be invested with their own money. I agree with that. And a lot of people don't. I certainly heard people say things like, well, if you're young, you should be a hundred percent stocks. I'm like, well, theoretically, sure. But if you've never invested before, you've never lost 48 % of your money, like Louie just mentioned in 2008.

26:24And I don't care if you're investing$10 ,000, you lose 48 % of that. If that's your life savings, that's traumatic. So I think people need to get a sense of what their own risk tolerance is before they make that decision to go very aggressive. For a project that I'm working on, I asked all of our portfolio managers and a bunch of our other advisors who are not portfolio managers, why their clients are not in 100 % equity portfolios. And I got a bunch of great answers, but one of them is to your point just now, Dan, if they were all robots, they would be. I thought that was pretty good. That's exactly it.

27:00It's hard to argue with the theoretical 100 % equity portfolio, but as any advisor knows who works with real people, there's theory and there's practice. I think it's actually important to note though, like Ben, you brought up a couple of your clients where the equity allocation has gone up to potentially enhance investment returns to allow for a higher spending policy because of what's happened. I think it's important to note that we do stress test all of our clients' plans using Monte Carlo simulations. we're testing a thousand different scenarios of good and bad stock returns against their financial security or independence.

27:37If we were looking on a straight line basis where we're just assuming that clients get the average rate of return each year with no volatility, of course, you're going to bump them up to 70 % of their plan is going to look great, but we're not doing that. We are accounting for 2008 returns. We're accounting for COVID mini decline, whatever you want to call that. We're accounting for interest rate hikes, wars, tariffs. And I find that that brings our clients a lot of comfort, knowing that they don't need to take more risk with their portfolio to account for these scenarios that we haven't thought of.

28:10It's always going to be baked into the planning that we do. I often find the Monte Carlo simulation as a highlight of client planning meetings. Like, okay, these are great. The assumptions, you show them on a straight line basis, which basically means this is what it looks like if you get the expected rate of return year after year, but we coach clients, that's not reality. They're like waiting for the punchline. So how successful is it really? And then you show them and you see the broad range of outcomes and they can see, okay, this is in the right range. And I'm comfortable with this result and it gives me confidence that I can actually achieve this plan rather than hoping that the straight line assumption works out because sometimes it can be pretty misleading.

28:52And I know there's a lot of advisors out there that don't use Monte Carlo analysis. And that's arguably irresponsible because on the surface, we've seen straight line results that look very successful. But after doing the Monte Carlo, maybe you've got a 60 % success rate. You want to go on a hope that about 60 % of the time you're going to be okay and the rest you're going to have to reduce. That's not how I would want to build my personal plan. So I think we owe it to clients to show them how we stress test the plans. I think it's an important part of the conversation to when we have a major downturn, because that's the time when clients are going to call and say, do we need to rethink the plan?

29:31Do we need to redo those projections? And usually say to them, well, look, we can update them. But the projection did not assume that no bear markets would occur between now and the end of your life. The expectation of bear markets is built into the Monte Carlo. If you're doing a plan with a client and they've got a 90, 95 % Monte Carlo, you can comfort them that like, this is already baked into the expectations. This is not something we didn't prepare for. We didn't know when it was going to happen, but we certainly anticipated that it was going to happen. And no, we don't need to rebuild this plan from the ground up.

30:10We can certainly review it and give you some reassurance, but we don't need to reinvent the wheel because we had a bear market. We know that's going to happen and that's baked into the plan. This next step is my favorite part. It's what we call the asset allocation email. This isn't an email that we send every time. Sometimes we're just having these conversations in real time with clients and prospective clients, but it's basically the asset allocation. I'm going to say outline instead of proposal, because we're not telling clients what allocation to choose. But what that email or conversation looks like is a brief summary of why we know that clients need to take on stock and bond exposure in their portfolios.

30:50We're also going to highlight parts of their financial circumstances that might allow for more stocks, might allow for less, and the same for bonds. And just to give you a few examples of some considerations that we're thinking of, we're thinking about clients who are paying their mortgages or maybe just debt in general more aggressively than they have to. From my perspective, that is absolutely an investment decision and you are getting a guaranteed after tax rate of return equal to whatever the interest rate is. That might give you more willingness or capacity to include more stocks in your long-term portfolio maybe.

31:25You might have access to a defined benefit pension plan or you might have access to Canada pension plan or old age security if you've retired and drawn on those sources, that is guaranteed income that shows up for you in retirement, no matter what is going on in the markets. If we think about your net worth more holistically, that's like having extra bonds in the portfolio. We're going to take a look at how you are invested today and understand how that translates into potentially a new portfolio and how an investor has reacted to declines in the past. For example, we recently just started working with this family that's in 100 % stocks, but they're in 100 % stocks in 50 stocks.

32:06100 % stocks in 15 ,000 different ones because we're buying the total universe is a very different experience. So it's almost like you're taking a risk off the table, even though your allocation hasn't changed. We're also going to take a look at the emergency fund planning that I mentioned. These are all such cool ideas to help inform asset allocation. And from there, we're going going to talk about reasons after we've thought about your situation, why you should or shouldn't include more stocks or bonds. When I think about reasons to include more stocks in the portfolio, it's because you want to improve potentially when you could retire or become financially independent, prove how much you spend over your lifetime, how big of a legacy or estate you leave behind one day.

32:52When I think about reasons to include more bonds in the portfolio, my mind goes to more psychological comfort when we know markets are going to fluctuate because they for sure will. More certainty over your financial planning outcomes. And we'll always outline all of this information to our clients in writing with a PDF version of our model portfolios because we want clients to be able to track our conversation from start to finish where we've said, look at the potential upside of including more stocks in the portfolio. Look at the potential downside in the short or medium term. Here are some great reasons involved with your situation or your net worth that might justify certain decisions you could make around asset allocation.

33:35And here are some ways that you could either get more peace of mind or certainty or improve your outcomes. And from there, hopefully we've given our clients enough information to make as educated as a decision as they can, knowing that this is a process that we check in on pretty regularly with our clients. And we don't necessarily change asset allocations frequently, but we are going to check in and make sure that they're still relevant from time to time for sure. One of the scenarios you kind of mentioned was the scenario where you have a pension. I think that one's worth highlighting. Clients often separate their pension from their portfolio.

34:11I think it's prudent to look at that holistically. If you think of your pension, as Louis said, it's guaranteed income, but that's guaranteed income for a 30 plus year retirement period. If you think about the present value of that as an asset in your portfolio, it can become a pretty significant number. For example, I ran a quick calculation. Someone has a$70 ,000 pension for a life expectancy of 30 years at a 4 % discount rate, that has a present value of$1.2 million. For a typical client, that's usually a very large percentage of their overall portfolio that enables the client to take on more risk if they so choose.

34:56There's a bit of a psychological game here though, because when the fixed income asset, the pension sits outside of the portfolio, they're going to experience more short-term volatility in their actual portfolio. So they have to be psychologically prepared for that short-term volatility. But if you look at it all as one picture, you could effectively be 70, 80, 100 % equity if your pension is large enough to offset and give you that overall asset mix that you're more comfortable with. There's a flip side to that as well. That's a really common question that we get from people. If they say like, I have a pension, an employer pension, how does that affect my asset allocation decision.

35:37And as you noted, Ben, the conventional wisdom is consider it like a fixed income component. But I would say if we break down the asset allocation decision, we use Larry Swedro's terms, you assess your ability, your willingness, and your need to take risk. Having a guaranteed pension increases your ability to take risk, but it decreases your need to take risk because you're probably drawing your portfolio down at a much lower withdrawal rate than you would have if you didn't have the pension. So if those two cancel each other out, it comes down to your willingness. If you can stomach the additional risk, for sure, you have more ability to increase the equity allocation.

36:19But I would just temper that by saying if you can't take the risk, if you're just naturally a risk-averse person, you can have a more conservative portfolio than someone else without a pension because your pension is replacing most of your or is forming most of your retirement income. So it really comes down in the end to your temperament rather than your specific situation. Oh, absolutely. The other thing is it comes back to the financial plan where we project this out. If your pension covers the majority of your expenses, that's another factor to the puzzle. you're not going to need your portfolio as much.

36:58Do you have any other objectives with that money? Do you want to help your kids? Do you not care? Do you want to just spend it? Do you want to give it to charity? Those all change the potential asset allocation for each client. So maybe two final closing remarks, and you guys have already nailed these earlier as I was going through this. The first, which we actually haven't discussed yet, but it was included in Justin's asset allocation article, was making sure that when you're thinking about declines, especially to do so in absolute dollar terms. We actually had a client come see us at the office last week, retiring in end of next year.

37:35He's in 60, 40. And he said, listen, I've been a super disciplined investor for the last 10 years. I'm super dialed into the research on why it makes sense to keep more stocks in my portfolio long-term. So I want to checkout being in 70-30. So we went through this process. We got to the PDF model portfolio page and we simulated a couple of declines in dollar terms. You could see his eyes open a little bit in terms of what could happen in this potentially worst case drawdown scenario. And I mean, who knows what worst case really looks like in the future, but I think it sheds a different light on what you might actually be willing to stomach in that scenario.

38:13And the second idea is just that investing is a marathon and it's not a sprint. We've chatted a little bit about younger investors who feel the need to be in 100 % stocks because they're told that that makes sense for them or because they want to catch up on savings or returns that they didn't capture before. I don't really buy into that. I'm thinking about the daughter of one of our clients where she's in her early 20s. She's living at home. Parents are giving her a little bit of money to invest, but she's also never invested. She didn't even know what a stock or bond was before we got on the call.

38:45For me to put her in 100 % stocks and say, don't even look at it, you'll thank me later. And then she looks at it and she freaks out and that totally changes how she thinks about investing long-term. That's just such a disservice. It is so valuable to start in an asset allocation strategy that maybe has less equity to start. To your point, Dan, build confidence as an investor. And then maybe you gradually work your way up the equity ladder. Maybe you don't. But the point is that we're trying to build more educated, confident, and informed investors over time. And I just don't think that bouncing around asset allocation strategies is the right call.

39:24You stick to something that you know will bring you peace of mind and you stay there for as long as you can and you reassess. That's good advice. How much do you guys find that education throughout this process of talking to the client about all of the different things that might impact their asset allocation and the things that they should be thinking about, how much do you find that impacts what they end up choosing relative to what they might have chosen without having gone through that process? I would say that the more you try to educate people about historical volatility, the more likely they will dial down the risk.

40:01I think most people go in thinking, obviously, stocks return more than bonds. I'm going to go 80-90 % stocks. to your point, Louis, like when you not only say to them, well, look, stocks can lose 50 % of their value, even a diversified stock portfolio. And 50 % for you, let's say their portfolio is really large. Let's say it's$5 million. It's one thing to say, well, you're going to lose 20%. It's another thing to say you can lose a million dollars. That starts people to pay a little bit more attention. So there's that. I think the other thing is most people, when you talk to them don't understand how risky stocks are.

40:42They think 10 % is a severe bear market. 10 % is nothing. I think you really have to stress and remind people that stocks have fallen 20, 30, 40, even 50%. Not 1929, 2008. It wasn't ancient history. The dot-com bubble a little earlier than that. These really sharp declines happen and they don't always recover as quickly as the tariff crash in April or the COVID crash in 2020. They stay down for a long time. Not to scare people, but to say to people, do not underestimate how volatile stocks can be. And once you do that, I think people are saying, yeah, 60%, 70 % sounds better to me than 80 or 90 you're a hundred.

41:32I find more clients take, to Dan's point, risk off the table once we go through, especially building the financial plan that shows that you don't need to be in a hundred percent equity to achieve your goals. Like that's a game changer for a lot of families that we work with. I think it comes down to the goals of the clients. Like you were Dan and Louie, you're saying, but I've also seen clients, I'm working with you. I trust you to coach me and keep me in my seat. I'm going to rely on your advice. I'm willing to take on more equity risk if that's going to optimize my results. Some people have specific goals that they shoot for.

42:06Some people just want to optimize as much as they can. Some people are 100 % equity and, oh, I also want to borrow money to invest. We don't have many clients like that, but if you have the circumstances to warrant that, we can set up a plan that makes sense for you. Again, depends on the circumstances, but it's a continuous learning process. When different events come up, we're often getting questions like, is this time different? And remind me, should we be changing the portfolio? And it's always a very similar answer. But every time you give that answer, the clients appreciate it, they understand, and it gives them reassurance.

42:46We do have a sound strategy, and you're not wavering from it, that voice of consistency over years has been a very welcome approach for many clients. You're not changing because something has happened. You are sticking to what you said originally. And even through the hard times, you're giving us the same message. And I think that's pretty valuable for clients. And it's interesting to hear the different answers on that. It's been a while for me choosing an asset allocation with a client. If I think back to those conversations, my experience would have been almost the opposite of yours, Dan, where I would explain to people, here's how volatile stocks can be.

43:22You should expect these large drops. Here's why that hasn't actually mattered that much in the long run, if you can stomach it. And here's why bonds have their own unique risks for long-term investors. And then that can lead people to take more equity exposure than they would have otherwise. There's a paper on how important advisor fixed effects are in their client's asset allocations. Makes me think of that paper, which is a really interesting thing to think about as an advisor and as a CIO, I guess, thinking about how different portfolio managers might be allocating their clients' assets and how the advisor fixed effects might be affecting that.

43:58You're talking about the advisor's own biases about whether they're conservative or aggressive by nature? I don't even know if bias is the right word. Advisor fixed effects is what does that advisor think is right? If you go and hold that consonant and look at all of the clients of one advisor versus another advisor, that advisor fixed effect in this research I'm talking about, that advisor fixed effect has a bigger impact on client asset allocations than individual client circumstances. That does make sense because I think a lot of clients rely on the advisor's recommendation. At the end of the day, almost every client that I've onboarded, I feel like at some point they say, what would you do in my position?

44:40It's too much of a cop-out to just say, well, it's very individual. You can do whatever you want. Part of being an advisor means advising, not just simply presenting a bunch of options with no context. So I certainly had that conversation with a client who is in both directions. If a client says, I want to be 50-50 and they also want to retire early, we'll say, well, I think you probably need more growth in the portfolio. And then again, you don't just have to wave your hands. You can do a plan and show them this and you can talk them up. But you can also go the other direction and say, you don't need to be 90 % stocks.

45:16You saved enough. You could have a 2 % return for the rest of your retirement and accomplish all your goals. So why are you driving a Ferrari when you could drive a minivan? I think that's an important way to frame it as well. It's mostly about listening to the client, understanding their goals, and then trying to steer them towards an allocation that they can stick with for the long term. That makes a lot of sense. All right, I think that's good for the asset allocation topic. Move on to Ben Wilson. I'm super curious to hear your observations now that you've been having all these conversations with advisors that might be interested in joining.

45:53What is making PWL interesting to them? It's been a cool experience. So people that don't know when we got acquired by OneDigital in January, one of the objectives that we had and why we were excited about the idea of partnering with OneDigital was to kind of fast track our growth to attract like-minded advisors that want to be part of the same mission and ultimately serve more Canadians with better index-based fiduciary planning first advice that is unfortunately not as popular across the country that is bank dominated. A lot of advisors are reaching out to us and often when they're not even actively looking to sell, either reaching out directly or responding to a reach out that we have sent to them to say, you open to chat and compare notes.

46:45And many of them haven't even thought about succession at all. There's tends to be some themes that come up that motivates those conversations. I've compiled a few different motivators that I'm going to go through here. One of the first ones that motivates people, which is very specific to PWL, is just the reputation that we have built through the podcast, through Ben's YouTube channels, through the white papers and blogs, the expertise. Recently, we had another team member, Travis Fedema, get in the top three of the CFP marks. That is now the fourth advisor on our team that has made it in the top three in the last three years, Louis being one of them, which is fantastic.

47:28It just shows the caliber of talent that we attract to PWL. I've got to give a shout out here to Dan and Justin too, because I was pre my YouTube channel, pre Rational Reminder. You guys really made a name for PWL in a way that when we started doing other content, people were like, oh, we should listen to these guys because they came from the same firm as Justin and Dan, but you guys really charted that path for our firm. Yeah, absolutely. That comes up all the time, the Canadian couch potato and the Canadian portfolio manager content that's been out there for years. Yeah, thanks. I think we recognized early on that it's really the best way to demonstrate your expertise.

48:05Not only that, but also demonstrate that you actually care about clients. I think that comes across in the nature of the content that we've been putting out, both clients and other advisors recognize that and are attracted to it. So that's been great. It's interesting. And a lot of the conversations, there's been a few advisors that have told me, I'm interested to talk to you to hear about what PWL is up to, what the story is. But if anybody else that was looking to acquire approached me, I wouldn't even take the conversation. I think that there on its own is powerful, not committing, just open to talk, to explore what the opportunity might look like.

48:42They're curious about what there is to come or what the opportunity might be. It's a pretty cool experience so far. The second motivator is just simply curiosity. Lots of people learning to reach out, want to talk to Peterville and see what are the options that are out there. This seems like you're building something different than the traditional financial options that are in our space. we're looking to become an integrated firm, not a typical aggregator, which I'll share more about in a minute. But our goal is become the leading independent wealth management firm in Canada and change the Canadian financial wealth management space by building a better, more client-focused business.

49:28And this tends to catch the attention of many advisors out there. Another key driver is the unified investment philosophy focused on the academic evidence, the Fama-French model. Taking a planning first approach is important in the investment landscape. There's a lot of people that their value that they offer the client is the investment management. I'll build you a portfolio that can get you better returns. That's not where we focus our energy. Yes, investment returns are important, and we try to build a portfolio that makes the most sense based on all the academic data. But we're really focusing on the things that we can control, and that comes down to your financial plan.

50:08We can control your asset mix. We can look at your spending. We can look at how much you're saving. We can adjust your retirement date, help you reach some of these objectives along the way. Having that unified philosophy and approach is also very attractive. And the PWL model, we're all working as part of one team towards a single mission. It's different than what we know is out there in the landscape. I'm curious for you, Dan, you made the decision is different because it wasn't an acquisition. You were starting a practice. But when you decided to go into practice in this industry, as opposed to being a blogger, you could have gone anywhere.

50:47you had a large following. You could have built a practice probably at any firm. How important was PWL's unified philosophy and approach like Ben just described? How important was that to your decision to come to PWL? Obviously, Justin was part of that too, because you guys had a relationship. Be curious on your thoughts. Well, it was fundamentally important. It's interesting because the story I always tell is as my writing started to gain a bigger audience, It also gained a bit of an audience with like-minded advisors. And of course, PWL was the most enthusiastic backer, I think, because at that time, remember, we're going back 15 years, there was not a lot of investment firms that were advocating passive strategies.

51:32When Justin and I started collaborating a bit and hit it off as friends, I think it was over a beer one time, he just said to me, have you ever thought about becoming an advisor? I laughed. I said, of course not. Literally never crossed my mind. But once he made the case for it, it started to make a lot of sense. As good as it was to feel like I had some influence in improving people's investment, education and whatnot, at the end of the day, I didn't have any direct influence on anybody. It was all indirect. Once I started to appreciate I could actually work with people directly, it would have much more of an impact.

52:09But I never even considered working at any other firm and find it hard to imagine doing so now. I can tell you flat out, I would never do it. It would either be within the PWL structure or some independent firm. I can't see joining any other kind of firm because it's just a unique place. And I was lucky to have encountered it when I did. It was fundamental to the decision. Ben W., can I ask you this question? I'm wondering how many advisors you're encountering that truly do share the same philosophy. Because in my experience, I think there's a lot of advisors who mean really well. And I don't think there's any question that the planning first approach is far more prevalent than it has ever been.

52:56But the sort of what I would call a kind of purely passive investment strategy seems to me to still be pretty rare. And there are tons of advisors who use index-based products, particularly ETFs, but use them in mostly active ways or use them as part of a core and pay more strategy that I call it, where the index part of the portfolio, along with private equity and mortgage lending and all kinds of other things. Are you finding there's a lot of people out there who you're looking at their practice and their approach and going, you guys are basically doing 90 % overlap with what we do? Or do you think that if advisors come aboard with our team, there's going to be some changes that they implement in order to change their practices to be more aligned with what we do as a group?

53:44I think up to this point, we're focusing on the advisors that there is the 90 % of overlap. We're well connected with the DFA advisor community. We're well connected with FPAC, which tends to be more forward looking. A lot of them are index investors already or moving in that direction. So we've kind of built a good network of advisors already that know us. They're reaching out, interested in having conversations. So, so far there has been overlap, but I think there's definitely going to be an opportunity as we continue down this path. This is going to build momentum as like-minded advisors join in.

54:24those are the easy wins, so to speak. But then as we get out there in the news or in the social networks, this is different. There's a lot more movement towards index investing. And PWL is hopefully a catalyst to that as Vanguard has attracted a lot of growth in the US towards index investing. There's a lot of ground to gain here in Canada. I think there could be opportunities If advisors are more active, but see the opportunity to move to index, they haven't done it or not sure how to approach it, that could be opportunities to partner with PWL at some point. I've been to a couple of dimensional conferences this year.

55:07It's actually been fascinating. You're attached to PWL. You're almost like a celebrity in this world. It's so interesting to have advisors come up to you and ask you about how you interact with clients, how the business is structured. They're curious for some of the reasons Ben's mentioned. I just wanted to highlight that that is super cool. And that is always super welcome that I know that everybody on the team feels the same way too. The dimensional community is a pretty good source of connections for what you mentioned, Dan, people that don't necessarily use market cap weighted index funds, obviously being in the dimensional community, but people who think that way, generally speaking, and have a planning focus and have their practices set up in a certain way because dimensional has provided resources and information on all of those things.

55:52It's kind of like if you're a client, an advisor who is able to use dimensional funds, even if they're using index funds and not dimensional funds or a combination, you can be pretty sure that they have a reasonably good handle on the evidence and on what the data say about active management versus indexing and all the other things that we talk about on this podcast. And likewise, you can be pretty sure that they're going to take a planning first approach because that's a big part of the dimensional philosophy. So it's the same kind of thing for us as a potential acquirer. If we're looking for like-minded individuals, people who are within that community are a pretty good starting point.

56:29Exactly. So if we move on to the next motivator and another topic that leads people to come out is when advisors become successful and start growing a business, ironically, they end up spending less time with clients, which is what they're passionate about, what drew them to the business in the first place, but now they've got a team. So they've got to deal with HR management and issues that come up. They've got to deal with compliance supervision, vendor management for all the tools that they need for managing the team and processes, strategic planning and infrastructure that keeps a firm running.

57:05So they end up spending a lot less time doing the client work where they're bringing value to clients and helping them achieve their goals. People come to us kind of like, what does this look like? Ultimately at PWL, you're an employee of PWL. I think Ben mentioned this on an earlier episode. I made a post about this. People are afraid of becoming an employee because they're not employable. We kind of don't take that view at PWL. Like yes, technically on paper, you're an employee, but we want people to come and build the business with us, partner with us, and bring value to clients and use the skills that you have.

57:43A lot of advisors out there are such skilled advisors that we want them to spend more time in front of clients and let the business managers handle that part because that's where they're the most skilled. That's an interesting reason that brings more advisors into the conversation as well. Another motivator that comes up in Canada, there's a lot of independent wealth management firms. Most of these independent firms are what we refer to as aggregators. An aggregator is a loosely tied group of advisors who run their own businesses, but share access to tools. So there's lots of independent firms out there where you're attached to a dealer.

58:25The dealer provides back office support, such as operations, compliance support, sometimes marketing support, access to tools to help you run your business, which is a very common platform, works very well for a lot of advisors, but you're essentially plugging in, paying them a percentage of your commission and operating on your own little island. With PWL, we're taking a different approach where we're looking to have this fully integrated platform. We do have a fully integrated platform, but we're continuing to scale that based on the shared values with a quality team culture, taking the planning first approach, common investment policy, but like all working together as part of one team that leads to shared resources, collaboration, redundancy across teams.

59:11So perfect example, if Louis is out of the office, he's part of a diamond team structure so that Louis can actually fully unplug and we can be sure that the clients are taken care of. I'm the same way as part of my own diamond. A couple of years ago, I went on a three week vacation, was fully unplugged and came back almost inbox zero for anything related to clients, which is such a refreshing feeling. And if you're on your own running your own business, it's probably hard to take a vacation without having to check in on your emails on at least a daily basis to answer any requests that are coming in.

59:48Having this integrated model allows advisors to truly scale instead of staying siloed and being part of an integrated team. And I see the benefits of this daily. Our team members are collaborating regularly through Microsoft Teams, setting up calls. I've got a scenario with a client that I haven't seen before. They're just having trouble, want to make sure it's presented properly. I'll call up one of the other advisors on the team and say, can you just take a second look at this? And then we give the client better advice. We're fine-tuning our skills and each of us are becoming better advisors day after day.

1:00:24The last motivator I have on here is talking about legacy and succession. Succession tends to be one of the hardest and most emotional decisions that an advisor will ever make in their financial career. And for most advisors, it's not just about the financial payout. It's what's going to happen to their clients, what's going to happen to their team that they've built. Are clients going to follow the same type of philosophy that they've built a career on? Finding the right partner, whether that be to work with for the remainder of your career or to kind of hand the reins when you're nearing the end.

1:01:00That's important both to you, to your team and to your clients. That's something that's often overlooked. I mentioned the beginning, there's many advisors out there that haven't even thought of succession at all. I'd encourage every advisor out there, no matter where you are in your career to proactively think about succession. The earlier you do that, the better prepared you can be because you don't want to be in a place where you have some health concern come up and you're forced to make a quick decision, which could sacrifice economic value, could sacrifice suitable fit for your clients or your team, be a rushed decision.

1:01:38It's just better to proactively plan that in advance. And I was actually just talking to an advisor this afternoon who we've been talking to and we're progressing in conversations. And And this advisor said, once they got to the point in the next stage in their succession planning discussions with us, a huge weight was lifted off their shoulders. This has been weighing on this person for multiple years. And now that there's a possible solution in place, it's just such a relief and then exciting to join something that we can build together. Very cool. Cool conversations. And to sum it up, it's not always about selling these conversations.

1:02:16Like it's often just about learning, curiosity, how we can align, how we can compare notes. We're always open to those types of conversations. Sometimes people are actively looking towards a succession plan. But I think the common thread in all these conversations, the lesson, key takeaway that I would share is that having a conversation doesn't cost anyone anything, but not having that conversation could be a huge opportunity cost. could cost you a lot throughout your career or at the end of your career. So encourage any advisors out there listening that are curious to have a conversation. Cameron and I are always interested in talking.

1:02:57Ben Felix, happy to have a chat as well. Reach out. Like I said, conversation doesn't cost you anything. It's really cool how many of those conversations we are having. It's definitely been one of the most exciting parts of the post one digital acquisition chapter. Absolutely. All right. Should we go to the after show? Yeah, let's do it. Let's go.

1:03:21I just have one little anecdote, anecdata, data. I don't know what it is. So everyone knows that Nvidia stock has performed crazy well. It's been this massive story. So its annualized return over the last five years is over 70%. 70 % annualized for the five years ending August 27th, 2025. That's objectively crazy. It makes sense when you think about it that there are stocks out there that have done better than NVIDIA. NVIDIA is a really big company. It makes up a huge portion of indexes. Combine that with its crazy performance. Everybody's heard about it, but there's this massive distribution of stock returns and all this massive number of stocks What's even crazier than NVIDIA is that Build-A-Bear Workshop Incorporated has returned an annualized 97.23 % over the same period.

1:04:14Dillard's, the department store chain, returned an annualized 88.68 % over the same period. And a Canadian company, Celestica, it's a Canadian multinational design manufacturing hardware platform and supply chain electronics manufacturing services company. This is the US listed version of the stock. So this is in US dollars. All of these numbers are in US dollars. They returned an annualized 92.92 % over the same period. Interesting to show that anyone that regrets missing out on Nvidia should maybe regret missing out on Build-A-Bear or Celestica or Dillard's even more than they regret missing Nvidia.

1:04:54I definitely regret missing out on Build-A-Bear. How did we miss that trade, Dan? It seemed so obvious when you were in one. This is the next big thing. What are you going to do? I was building the bear and I was putting its eyes on and I just knew this was the trade. I'm thinking it's got to be 97.23 % annualized. Completely insane. Now, I got curious about these companies. How significant are they? Build-A-Bear and Dillard's, I think the names are known. Celestica, I honestly had not heard of. I looked at Celestica though. It's one of the top holdings in the DFA Canadian Vector Equity Fund, which is interesting.

1:05:33That fund has actually outperformed XIC, the iShares Core S &PTSX Composite Index for the trailing three, five and 10 year periods ending August 27th, 2025, which surprised me because that fund does not hold Shopify, which is one of the best performing stocks in the Canadian market. But seeing that it holds Celestica, I was like, okay, maybe that starts to make a little bit more sense just in terms of how that fund has been able to keep up while not holding Shopify. I got curious about those numbers over the last three years, over the last five years, Shopify has actually not done great because it did really well, crashed down and it's come back a little bit.

1:06:09But over the last three years, it's had really high returns. It's returned an annualized 65.88%. You look at that, it's like, how can the vector fund, which doesn't hold that, how can that keep up with the index where Shopify is one of the largest holdings. Celestica, which as I mentioned, is one of the larger holdings in the Vector Fund has returned for the last three years, 171.22 % annualized. It's just crazy. Is Celestica in the S &P TSX composite or is it too small? It is in there. I did look at the holdings. It makes up 0.79 % of XIC. But it's less than 1 % even after having returned 171 % for the last three years.

1:06:53It was a fraction of a percent and now it's a slightly larger fraction of a percent. It's not a huge holding in Vector, but I mean, nothing is a huge holding in either of these funds really. The largest holding in XIC is Royal Bank at 6.95 % and then Shopify at 5.78%. The Canadian Vector Fund also has RBC as the largest holding at 5.29%, but Celestica is 2.2 % of the Vector Fund. So it is a larger holding. And I did go back to historical holding periods, and it has been a relatively large holding for a bit going back in time. Somebody had tweeted about Build-A-Bear outperforming NVIDIA. So I just went and pulled, I did US listed first, all the US listed stocks with annualized returns above 70 % and just went through to see if there were interesting names in there.

1:07:48Then they did the same thing for Canadian. Maybe Celeste can show up in that search too, because it's dual listed. A little interesting story to show that picking stocks is really hard. It's easy to look back and say, oh man, I missed Nvidia, but nobody looks back and say, oh man, I missed Build-A-Bear. Build-A-Bear was the bigger miss. You don't know where returns are going to come from. That's one of the attractive things about just owning the index or the vector fund, I guess. Owning everything, owning a cross-section of stocks with or without moderate tilts towards small cabin value, if you so choose.

1:08:20It's worth mentioning actually that DFA vector fund, last time I looked, its number of holdings is over 500 companies, something like that, is bigger than the TSX composite index, which is more like 250, 260. I don't know if that's still the case, but certainly you've got everything in there. XIC is 215-ish holdings, 216. I'm just looking at the Excel that has all the holdings. And then Canadian Vector has 320 at the moment. So more than XIC. It is interesting. You're right. I think XIC is excluding a lot of smaller stuff. I think also So the Canadian core fund is kind of interesting. I think it has a larger number of holdings too.

1:09:10The point here just being, if you own everything, then you're going to get all the Build-A-Bears and Celesticas you probably wouldn't get even potentially in a large cap index fund. It's not the entire market. Yeah. So the Canadian core fund is 367 holdings. So even more than the Vector Fund, because the Vector Fund is excluding some companies. Another interesting thing that I came across just as I was looking at these numbers is that the largest holding in the US vector equity fund, these are all as of June for these percentages, is NVIDIA. That kind of surprised me. Yeah, not a traditional value stock.

1:09:50Certainly not a small cap stock. I know that they changed the vector weightings to be more equally weighted toward size, value, and profitability premiums. I'd have to look at, dig into the numbers, but maybe it's the profitability that's giving it a boost in there. I found that interesting. I was surprised. This whole deep dive reminded me of a conversation that I had with a prospective client a couple of weeks ago where she's interviewing a few firms. And one of the big firms that is U S based, that is a very active manager was one of those options. And the advisor there told her, Hey, did you know that the majority of stock returns come from a really small handful of stocks.

1:10:32And I was like, yeah, I haven't heard of that. And she goes, yeah. And that advisor did a review of my portfolio and saw that I owned a hundred stocks and how bad that was. And I was like, you are not going to like us then. We are in trouble. Louis, it's obvious. Just figure out which ones are going to deliver the highest returns and buy them. It's classic. And I think that you'll see a lot of active advisors will do things like that to where they just look at the most recent good performers and then put out a recommended list and people, well, I'm going to check your recommended list. Oh, look at that.

1:11:04These have all been great recent performers. It's big surprise, which one came first, the list or the performance, but that's the playbook. And like you said, the sooner a prospective client gets that that's not what we do, the easier the conversation becomes. Different world. very, very different. It is interesting though. We talked about this with Hank Bessenbender, but he talks about how his research can be used in either direction. And he's seen that. He's even careful in the podcast that he did with us to not push too hard in either direction. Yes, most returns come from a few stocks. That could either mean that you should index, or it could mean that you should pick, if you think you can, those stocks that are going to form.

1:11:47If you know going in that buying a total market index that might include, like in the US, over 3 ,000 stocks, and the majority of them are going to be losers over time, you could spin that in a way that says, well, why would anybody buy a total market index fund when it's filled with mostly losers? And then the insight comes when you realize because identifying the winners ahead of time is impossible. It's not as straightforward as that might make it sound. It's not intuitive, I don't think. No, it's not at all. All right, we got a couple of reviews. I'll do the disclaimer. Dan, you want to do the first review?

1:12:22And Louie, you want to do the second one? I'd love to. Yeah, I get to do the nice short one. We have a few reviews from Apple Podcasts to read. Under SEC regulations, we're required to disclose whether a review, which may be interpreted as a testimonial, was left by a client, whether any direct or indirect compensation was paid for the review, or whether there are any conflicts of interest related to the review. as reviews are generally anonymous, including both of these ones, because they're from MPRMT and Raging Immoderate. Those are pretty anonymous. I could not guess who they are. We are unable to identify if the reviewer is a client or disclose any such conflicts of interest.

1:13:00As I've said the last times I've read that disclaimer, we have never paid for a review, and we would not do that because that would be pretty weird. But anyway, there's the disclaimer. Well, we can pay for this one. A++ +, by far the best personal finance podcast out there. Absolutely stellar. And that's the one from MPRMT from Canada. Very nice review. Short and sweet. Second review, objective and informed. This one's a little bit longer, so bear with me. For context first, I am a longtime financial services employee, both individual contributor and leader on both sides of the balance sheet. I'm also a licensed advisor with a CFP, CIM, LLQP, that's insurance license in Canada, and some other designations.

1:13:46I've worked for big banks and smaller firms. These guys take the passion into modeling and math that I wish the entire industry did. They discuss the trade-offs in financial decisions logically and in detail. Financial literacy is arguably the most important skill every adult needs. This podcast will improve yours, whatever level you are at. Good guests, good subjects, and honest, open discussions. They point out the lack of transparency, product pushes, and all of the rest of the warts in the financial services industry has in abundance. But without sounding sanctimonious, thanks for the big word there, that was most embarrassing for me, judgmental, or with the pearl clutching you tend to find on most podcasts, regardless of the subject.

1:14:31You can tell they weren't comfortable with the industry and its focus on growth and sales without the accompanying fiduciary responsibility. The best way to help make the industry better is by having more people listen to this podcast and become informed. I fully endorse you listen to the rational reminder by raging immoderate. Strong feelings. Very nice endorsement. Great review. Yeah, that's a good one. I did want to mention, I didn't put this in the notes. I got an email from someone who works at a bank as a financial planner. Our last episode, as regular listeners will know, was about the OSC and CERA report showing through a survey of bank mutual fund representatives that there's a really strong sales culture at banks that may impede the quality of advice given to bank customers.

1:15:18We did a whole episode on that, and I got an email from someone who works in the bank, and they were not impressed with the episode, which may not be surprising, but they did raise some interesting points. So I thought it was worth addressing. They explained that there are different types of mutual fund licensed representatives at banks, financial planners being one that I think is probably a pretty universal title. There are other representatives who are more obviously salespeople who are selling all different types of products. And so the point that they were making to me is that financial planners specifically with a financial planning designation in the financial planner role at the bank will tend to be a little bit different, elevated to a slightly higher level of advice, held to a higher standard than someone whose main job is selling products.

1:16:06Now, they did say that they still have sales targets and sales pressure, but they also said that if they're doing their job well, they have not found that to be an issue. They also said that they do have access to bank index funds. Now those index funds have much higher fees than an index ETF that you'd buy, or even like a TDE series mutual fund. Their fees were on average a little bit under a percent for like a globally diversified portfolio, which is high. However, that fee is covering the cost of the product and access to the financial planner at the bank. So you take it together, it's not actually that crazy when you consider that somebody working with a firm like PWL would be in a pretty similar range for their advice and products.

1:16:50We did mention we've hired a financial planner, at least one from a bank and they're fantastic. And they had a similar experience where they were able to use bank index funds when they worked there for a period of their career, they were not compensated. The index funds didn't count toward their bonus, but that did change later on before they came over to PWL. I just wanted to shine light on the points that this person is making, that they're saying, well, hey, I work at a bank. I am a CFP professional. I think I'm doing good work. There are some of us out here. Now, that doesn't counteract the weight of the data from the Ciro and OSC research.

1:17:28I think it's still true that if you walk into a bank, the quality of advice that you should expect is pretty low. Sales pressure is an issue regardless. But I think it's fair to air the concerns that this listener raised. We may have painted banks in too poor of a light, although we did say that there are good people working at the banks. But it's worth saying again that even though that research I think is legitimate and concerning, that does not mean there are not some good people like this listener that emailed me who are doing proper financial planning, working at a bank, using index funds, doing all the right things just happened to work at the bank.

1:18:05So I just wanted to get that out there. I don't think the issue is the character or the quality of the people. It's the incentive structure. If you were to pay a financial planner a salary at a bank and their job was to deliver service to their clients, I'm sure they would do a good job of it, or at least they would do no better or worse than anybody in a similar structure at a different type of firm. But if you're going to create a structure where people's compensation is based on how much insurance they recommend, how much mutual funds they sell, whether they get people to sign up for lines of credit, you're going to get predictable results.

1:18:42The Charlie Munger quote, show me the incentive and I'll show you the outcome. That's a fair comment. I felt a little bad because this is a listener who engages with our content, who's practicing a lot of the things that we talk about. And I think they felt like they were painted unfairly. That is worth mentioning. We got our two meetups coming up in Victoria on September 15th, Vancouver on September 17th. We have 16 people signed up so far for Victoria, 32 for Vancouver. Usually more people than sign up actually come, but it would be great for us to have numbers. So if you're planning on coming to either of those meetups, we will put a form in the Rational Reminder community and the YouTube show notes, and I guess the show notes for the audio podcast too.

1:19:25If you're planning on coming and have not filled out the form, please do so. So we have accurate numbers just for booking space and stuff like that, but it should be good. Those meetups are always fun. It's also worth mentioning that Cameron, Brady, another advisor on our team and I will be at the Future Proof Conference in Huntington Beach, California from September 7th to 10th. So anybody in the industry that's attending that conference, reach out. We'd love to meet up when we're there. Very cool. All right. Anything else guys? nothing from here. It's all from me. All right. Thanks everybody for listening.

1:20:22However, each company has financial responsibility for only its own products and services. Nothing herein constitutes an offer or solicitation to buy or sell any security. This communication is distributed for informational purposes only. The information contained herein has been derived from sources believed to be accurate, but no guarantee as to its accuracy or completeness can be made. Furthermore, nothing herein should be construed as investment, tax, or legal advice, and or used to make any investment decisions. Different types of investments and investment strategies have varying degrees of risk and are not suitable for all investors.

1:20:55You should consult with a professional advisor to see how the information contained herein may apply to your individual circumstances. All market indices discussed are unmanaged, do not incur management fees, and cannot be invested indirectly. All investing involves risk of loss and nothing herein should be construed as a guarantee of any specific outcome or profit. Past performance is not indicative of or a guarantee of future results. All statements and opinions presented herein are those of the individual hosts and or guests, are current only as of this communication's original publication date, and are subject to change without notice.

1:21:28Neither One Digital nor PWL Capital has any obligation to provide revised statements and or opinions in the event of changed circumstances.