Episode 309 - Are Robo-Advisors Passive Investors?

This episode investigates whether robo-advisors are truly passive investors, focusing on their investment strategies, performance, and comparison to traditional passive investment approaches.

1. Robo-advisors, initially perceived as purely passive, often engage in forms of active management.
2. There is significant performance variance among robo-advisors, challenging the notion of uniformity in passive robo-investing.
3. Changes in robo-advisor strategies can significantly impact their performance, as seen with Wealthsimple's strategic shifts.
4. Robo-advisors are evolving, increasingly blending technology with traditional investment management practices.
5. Investors should scrutinize robo-advisors' strategies to understand the potential impacts on their investments.

1: Introduction

The hosts introduce the topic and discuss the initial promise of robo-advisors as passive investment tools. They set the stage for a deeper examination of whether these platforms remain true to passive investing principles.

• Benjamin Felix: "Robo-advisors were initially all about easy access to low-cost index funds."

2: Analysis of Robo-Advisor Strategies

Discussion on how different robo-advisors implement strategies that may deviate from standard passive investing, focusing on Wealthsimple and Wealthfront as case studies.

• Cameron Passmore: "It's fascinating to see how these platforms evolve their strategies over time."

3: Performance Variance

The hosts analyze the performance differences between various robo-advisors and discuss the factors contributing to these variances.

• Mark McGrath: "The dispersion in returns among robo-advisors can be quite eye-opening."

4: Industry Perspective

Insights into how the investment industry views robo-advisors and their impact on traditional investment management.

• Benjamin Felix: "There's a shift in how robo-advisors are perceived within the industry."

5: Concluding Thoughts

The hosts summarize their findings and reflect on the future of robo-advisors in the investment landscape.

• Cameron Passmore: "Investors need to be aware of what they're getting into with robo-advisors."

1. Review the investment strategy details of any robo-advisor before investing.
2. Compare performance history among different robo-advisors to find the best fit.
3. Consider the level of active management involved with a robo-advisor and how it aligns with your investment goals.
4. Stay informed about changes in your robo-advisor's investment strategy.
5. Discuss any concerns with a financial advisor to ensure your investment choices align with your overall financial plan.

When robo-advisors first came onto the scene, they were pitched as an easy way to access index funds. These digital platforms provide algorithm-driven financial planning and investment services, with little to no human supervision, and typically use passive investment strategies. But while this technology has revolutionized access, not all robo-advisors are created equal. In today’s episode, Mark, Ben, and Cameron sit down to discuss the role of robo-advisors as passive investors, and the performance disparity in robo-advisor returns, as they investigate different robo-advisors, from Wealthsimple to Wealthfront. Next, in this week’s version of ‘Would you rather?’, we have robo-advisors pairing off against active bank mutual funds, with each of our hosts debating the pros and cons of these two approaches. For our aftershow section, we discuss listener feedback, interesting community discussions, Ben’s addiction to Excel, and much more. Tune in for a deep dive into robo-advisors and how to navigate this technology!

People

Benjamin Felix, Cameron Passmore, Mark McGrath

Companies

Wealthsimple, Wealthfront

Books

None

Guest Name(s):

None

Content Warnings:

None

Benjamin Felix
This is the Rational Reminder podcast, a weekly reality check on sensible investing and financial decision making from two Canadians. We're hosted by me, Benjamin Felix, and Cameron Passmore, portfolio managers at PWL Capital.

This is the rational Reminder podcast, a weekly reality check on sensible investing and financial decision making from three Canadians. We're hosted by me, Benjamin Felix and Cameron Passmore, portfolio managers, and Mark McGrath, associate portfolio manager at PWL Capital. Well done, Ben. Welcome to episode 309. We're actually recording this a bit early because the three of us are actually taken off for a bit of time.

Cameron Passmore
Not sure this ever happened. Obviously never happened for the three of us before, but we're not going together. No, we're going three different directions. Next week's recording this a little bit earlier. Anyways, today's main topic.

You guys want to talk about our robo advisors passive investors? You want to queue it up, Ben? Oh, sure, yeah. Well, I think Robo advisors were pitched as a really easy way to access index funds. That's my perception at least.

Benjamin Felix
The initial thing was all about that and I don't know if that's what they actually deliver a lot of the time. Basically, there's huge dispersion in robo advisor returns. If you look at five different robo advisors in Canada, the returns for, say, an aggressive portfolio have been materially different. So we're going to talk a little bit about that. We're going to talk about wealth simple specifically, because that's one that I've looked at in quite a bit of detail, just in terms of why their performance has deviated from the market.

And then we're going to talk a little bit about wealth front, which has also done some interesting stuff. Anyway, should be all right. And then we're going to do this week's version of would you rather. And that links to would you do a robo advisor or active bank mutual fund? Yeah, I like it.

Cameron Passmore
Yeah. Should be interesting to see what that is. Caution. Then, of course, the after show, Mark tweeted our fees. He asked like, is it cool if I share our fees?

Benjamin Felix
Yeah, I think that's fine. Cameron, you agreed that. What did you say your default is? Transparency or something. And that rarely has let me down.

Cameron Passmore
So that's what it was. So Mark posts our fees on Twitter. And I think you got a pretty cool reaction, Mark, so I was hoping you could talk about that. Yeah, it's something I've wanted to do in the past and I just kind of forgot. And then as Ben said, I asked you guys, like, it would be cool if I just literally just post our fees, like, no big Runway to some big thread or anything.

Mark McGrath
So I posted, like, just a screenshot. I think you even said, that's the tweet, right? That's it. Yeah. I was like, these are our fees.

That's it. That's the tweet. And, like, that was it. And I expected, like, a lot of maybe pushback or other advisors kind of chirping us. But, like, our fees, I think, are very reasonable.

And I know you guys do a lot of peer analysis around our fees, and they're very, very competitive. But the discussion was really, really interesting. And most people just were like, hey, those are, like, really fair fees, and that's totally reasonable for what you guys do. There were a couple people that thought we were what we would call advice only planners, which is where someone pays, like, an hourly or one time rate to receive, like, a product, a financial plan, and not ongoing services. So I had a chance to chat with some people about why we do things the way we do and why we right now don't do any of the advice only type planning.

Got a lot of people reaching out saying, like, can I meet with you to see if we're, like, a good fit or if PWL is a good fit for you. So it was just really fascinating that that kind of unfiltered and, like, unadulterated, just transparency, like, blast, here's the fees. And it got a really good response. And I think a lot of it is just because people, I think in our business, fees and transparency have not really gone hand in hand for many, many years. At a previous firm, I asked like, hey, can I put our fees on our website?

And, like, the central compliance for the entire dealer were like, no, not a chance. And I just found that so shocking. I was like, don't you want to just come out and say, like, here's what it's going to cost to work with us. What company wouldn't want to do that? And so by just blasting the fees in everybody's faces, I think it removed a lot of the uncertainty and maybe fear around that first conversation.

And like, oh, they're going to lead me down this path and then hit me with this massive fee at the end. And it's like, no, here it is. Take it or leave it. And that was it. So it was really interesting.

And I posted on LinkedIn as well, and there was some good commentary there, too. So awesome. Good for you and good for the audience. Yeah, it was good. Like I said, I was prepared to kind of have to get defensive.

And it wasn't that at all. It was really quite good. All right, that is good. You guys ready to roll? Ready to roll.

Cameron Passmore
Okay, let's go. Let's do it.

Okay. Episode 309 which one of you guys Benue taking it from here? Mark. I'll kick it off. And Mark's got some stuff to say too, I think.

I'm sure we got lots of ideas around this. This is such a hot topic for so long too. If you think back to when they first came to market, what, 1015 years ago? Yeah, 2015 I think is when. That's at least as far back as I can find their portfolio data.

Benjamin Felix
I spent a lot of time on the Internet archive for this episode looking at wealthsimples old website and what they used to say. It's changed a lot. Fascinating. Yeah, I think a lot of the rope advisors have changed a lot, which is fine. They've got to adapt their business models.

We'll talk more about that. I think maybe in the after show just about that whole concept and what people thought of it at the time and how its evolved. But anyway, right now were talking about are robo advisors passive investors. I mentioned this in the intro. I think the pitch was definitely, and you can go and look at, like I said, Internet archive and see what the websites used to say used to be all about easy access to low cost index fund portfolios because at the time, in 2015, and we had Dan Bartolani on an episode recently talking about exactly this, that back then building a portfolio of index funds was not easy.

Its gotten so much easier over time. But in 2015 and even earlier, like in 2010 kind of thing, it was not easy to just say, oh, yeah, Im going to get a portfolio of index funds or a portfolio of ETF's. That was a hard thing to do. Robo advisors made it easy and that was kind of the whole pitch. But Mark, you had a post on Twitter looking at dispersion in canadian robo advisor returns.

So its five year data, the best return over that period was 8.48% annualized and the worst was 4.7% annualized. Now thats like for a service thats supposed to be, yeah, passive investing. Well make it easy for you. Why is there a 4% spread in returns for an aggressive portfolio? Yeah, it was actually quite surprising to me.

Mark McGrath
The reason I stumbled upon this is Im writing as weve talked about, Im canadianizing a book for our friend Dan Solin. Theres a chapter in there on fees and robo advisors and that type of thing. So I was looking up the returns and fees of various robo advisors, and there was just a Moneysense article that just broke it all down for me already. I was like, oh, this is perfect. I dont need to actually go and do the research.

Theyve already done it. But I was quite stunned. As you point out, Ben, the dispersion in the bottom and the top and the rest of them were kind of like middle of the pack. But yeah, the best performing robo advisor over five years was almost eight and a half percent. And from my understanding, thats the purest sort of index fund style robo advisor thats out there.

And then at the bottom, you had 4.7% annualized over five years. And that's a significant difference. Investing $100,000 over that timeframe is the difference between pretty much 125,100, $50,000 at the end of the period. I think Tierpoint robos came out as an easy way to get a global market cap index fund portfolio, and they've had to deviate from that. And you're going to talk about this, I know, but I think the big ETF providers like BMO and Vanguard and iShares coming in and just solving this problem with a single ETF probably, and I'm totally speculating here, the robos probably looked at that when, okay, well, now we need to do something else.

We need to go and do something for the fees we're charging, because they can just go and buy this for 20 basis points instead. I'm just guessing, but maybe that's why some of them started deviating from that original pitch of this is an easy way to buy a market cap portfolio. But part of the original pitch was also the use of technology, the whole user experience. It wasn't just index. And that may have been the investment value prop, but from a totality standpoint, a lot of it was user experience.

Cameron Passmore
The mobile phone based app, the slick interface, slick onboarding, that was a big part of it too, which just an ETF provider, even though they might have a one decision portfolio, they cant offer the rest of that experience. Yeah, thats true. And theyve made massive investments like wealthsimple. I can only imagine the quantum of their investment in the technology. For the client experience.

Benjamin Felix
Its great. No, its incredible. Its really good. I dont know if you guys have ever opened a wealthsimple account, but I opened one for my son just to teach him about markets and volatility. I did it all from my phone in like ten minutes and I was like oh boy.

Mark McGrath
Like this is super, super slick, right? Not the managed robo advisor portfolio. Like we basically bought XEQt, which is a global equity ETF. But the user experience is very, very impressive. And we've heard that from people saying they're more focused on that part of the value proposition, as opposed to the maybe they assumed it was the simple index value proposition on the investment side.

Cameron Passmore
Therefore, in their mind, that may be equal everywhere. Therefore, I'll go with the one that's got the better ux. You're talking to the users. Yeah, yeah, I think that's happened to a lot of people. But I also think that people have noticed that in particular, wealthsimples returns have been like not great.

Benjamin Felix
I mean, in that list of robo advisor returns, mark the lowest one. And I don't mean to pick on Wealthsimple, but as anyone that listens to the podcast regularly knows, they've come up a few times for various reasons. So I've just got a bunch of stuff that I've done on them in the past. But anyway, in this five year period that you had data on, or that moneysense had data on, while s one mple had the lowest five year return. So well talk a little bit about why that is.

But I think more generally, there are two main reasons that there is this dispersion, and actually you even have data, mark, on the five year returns of XBal and VBal, even they have 40 basis points of annualized tracking error over that period. Thats as passive as it gets. But V Bell has global bonds, Expel has canadian and us bonds only, and that's caused some difference. Expel has a little bit more in uS, a little bit less in Canada, like less home country bias, and the US has done so well over that period. So anyway, two relatively passive portfolios, relatively comparable portfolios even they can have pretty significant tracking error or tracking difference.

And I think it's the same with the robo advisors. So if you look at what's actually in their portfolios, one big difference is going to be just asset allocation. Do you think about home country bias, or even just how much is an international versus US other asset classes like reits, and how theyre allocating to that, if at all, how the stock bond mix changes. I looked at a couple of different ones, and one of them had the most aggressive portfolio, still had 6% in bonds. So that can drive a lot of that tracking difference.

And as we saw with Expell and VBAL, very similar portfolios. But those little differences an asset allocation can make a big difference even over a five year period. I looked at the BMO Smartfolio. Thats one where the most aggressive option had still 5% in bonds, and then they had 19% in canadian stocks, 34% in us stocks, 35 international, seven in emerging markets, and then modern advisor, a different robo advisor. Their most aggressive portfolio is 29% in canadian stocks, 19% in us, 21% international, 20 in emerging markets, and eleven in canadian rates.

Those are two, you sign up for. These two different robot, massive difference. It's huge. It's crazy. Yeah, and we should probably also just point out before we go on that the returns that I posted and the returns we were talking about were for what we'd call a balanced portfolio.

Mark McGrath
And if you look at the footnotes of that money cents article, they said all of the comparisons they did had between 50% to 60% in equity and I guess 40% to 50% in fixed income. So the returns that we're talking about for those particular robo advisors, and I know you're going to get into more data, but the stuff that I was talking about at least is for what we'd call a balanced portfolio. So when you're comparing to like VBal and expel, that's why you're making those comparisons, right? Yeah. Okay, now that's a good clarification because I will talk about different asset allocation profiles for wealthsimple, specifically just because I had the data on those ready to go.

Benjamin Felix
Okay, so that's one piece asset allocation is going to be different. Is that good or bad? It's neither, but investors need to be aware that when they pick a robo advisor, they are implicitly picking an asset allocation approach. And the robo advisors will tend to have different ones. And its not like youre just getting a good passive portfolio because youre using a robo advisor if you want 10% of your portfolio in reits.

Personally I wouldnt, but if you do, then hey, theres a robo advisor thats doing that. If you dont want that, then you should pick a different robo advisor. But its not like you can just pick a robo advisor and automatically get a good portfolio, although both of those are still relatively low cost ETF portfolios, which is great, I guess, maybe better than a bank actively managed mutual fund, but maybe not. And I actually have data on that too. That ill touch on in a bit.

So thats one piece asset allocation. I think that the bigger issue in particular for Wealthsimple, and again, im sorry to pick on them but its just what I have data for ready to go is that theyre engaging in something closer to traditional active management on some level. Im not saying that wealthsimple is selecting securities and doing fundamental analysis. Theyre not. But they have made changes to their portfolios in response to changes in the market environment in an attempt to improve their long term returns.

So again, im going to talk about wealthsimple and how theyve changed their portfolios over time. And theyve been very good about detailing their changes and explaining exactly why theyre doing them. Theyve been super open about it. So its not like theyre doing anything shady at all. But it is interesting to see theyve made all these changes and the outcomes have not been great.

That doesnt mean theyve been bad decisions. And I do want to talk about that. So in 2019, the big change, they added longer duration government bonds and inflation linked bonds, and they reduced their credit risk and their fixed income portfolio. They also added low volatility stocks and they increased their exposure to international developed in emerging markets. And then in Q 320 20, theyve removed shorter term government bonds and replaced them with a mix of credit, longer term bonds and gold.

And then in March of 2022, they switched up the minimum volatility equity ETF for a different ETF that incorporates other factors like quality and momentum. They changed their fixed income allocations back to what they were prior to the 2020 change, and they reduced their exposure to emerging markets. Lots of changes. I dont know if I captured all of them. Those are just the ones I was able to dig up.

Mark McGrath
Preston yeah, those are pretty big changes. The difference between picking one stock or the other. Those are fundamentally different ways to think about portfolio allocation. Yeah, they made meaningful changes. As we've said, it's tough to be a robot.

Benjamin Felix
Yeah, tough to be a robot for sure. And it's humans making the decisions. And I talk to the humans that have made the decisions and I'll touch on that a little bit, too. Now, it is worth noting also that their current portfolios, when you go on their website now and you look at the historical performance of their portfolios that they show, they show inception dates of 2016. Those portfolios are also materially different from the initial portfolios.

When the firm first launched. They were managing portfolios as early as 2015, I believe, and you can find in archived web pages the holdings of those initial portfolios. And they used to be very different. They contained actively managed funds for dividend stocks, for risk managed stocks and risk managed bonds, in addition to having low cost index funds. Do you know what that means?

Mark McGrath
Risk managed stocks and risk managed bonds. I dont remember. I read the pages for the funds. Sounds good. When I wrote this, it does sound good.

Benjamin Felix
I wrote it months ago, so I dont remember what it, yeah, it does sound good. Do you think all active portfolios are risk managed? I just wondered if it was a marketing term, if theres some actual academic term that I didnt know about called risk managed stocks? No, no, im pretty sure its a marketing term. Im sure theyre doing something to manage risk, but I dont know what it is.

Cameron Passmore
Does that imply theres risk unmanaged funds somewhere? Maybe? I think it implicitly does, yeah, I mean exactly that. Okay, so big changes from 2015 to now, but then theres been other changes since 2016 in the overall approach to portfolios. So the question is, has this been good?

Benjamin Felix
Has it helped their performance? And of course if it has, then thats great. They do post their returns, which is also very nice, nice and transparent. They post returns net of a 0.5% fee, which is the fee that they would charge on an account under $100,000, then their fees, 0.4% if youre above. And they do have lower fee tiers for larger accounts too.

So the numbers that I will talk about are net of a 0.5% fee. And it is worth mentioning that wealth simple customers may be getting something other than portfolio returns for that 0.5% fee, just as pwls clients do, although they're different services. But wealthsimple customers might get convenience, peace of mind. And if it's a large enough client to access financial planning services, then they may also be getting that. I don't know what asset level you can access.

Do you know, Mark, when you can get financial planning, I want to say. 500,000, but I also might just be pulling that number out of thin air. That is, their generation level is 500,000. So that might be right. That could be.

Mark McGrath
I can see if I can look it up while we're chatting here. I think it's also worth pointing out that from what I've heard, that like, I mean, if you think about a firm of that size and the number of staff they have, the number of clients, I think the, and this isn't a knock on them at all, but the quality of financial planning service is going to materially differ from other firms. Right. So what is being called financial planning, from what I've read from reviews, is often just a basic retirement projection in some cases, or an hour a year to discuss goals and then plotting goals. So the depth of financial planning I think is also worth noting at least.

Benjamin Felix
Yep, I agree with all that. So just to set this up, people listening, keep in mind that the returns we're going to talk about are net of that 0.5% fee, which may be paying for stuff that is valuable to people for reasons separate from portfolio returns. So were going to look at the since inceptions in 2016 return numbers through the end of 2023 for wealth simple and compare them to asset allocation ETF's from ishares as benchmarks. Now, the ishares asset allocation ETF's did not exist over this full period. So for periods when they didnt exist, ive backfilled with back tested data net of the appropriate fees for the ETF, which will give us numbers that are very, very similar to what that ETF would have earned if it did exist at the time.

But it is worth noting that it did not actually exist for this full period. The other thing I want to say is that these asset allocation ETF's are not perfect benchmarks for wealthsimple strategy because wealthsimple is doing different stuff as weve mentioned. But my idea here is that this is a reasonable alternative that someone investing in wealthsimple could have alternatively invested in to get the markets returns because its a nice easy single ticket portfolio. Okay, so they post returns for conservative balanced and growth portfolios and those roughly mapped to 35%, 60% and 80% equity portfolios. The conservative portfolio returned 2.5% annualized since inception in 2016.

The iShares core conservative balanced ETF portfolio, if it had existed over the full period, would have returned 4.6%. The balance wealth symbols balance portfolio, 4.4% since 2016 through 2023. The iShares core balanced ETF portfolio, if it exists for the full period, it didnt, 6.14% and then the growth portfolio for Wealthsimple, 6.5% annualized since 2016, and the ishares core growth ETF portfolio 7.65%. So I mean big negative differences, even if we add back wealth symbols, 0.5% fee, even if we said that someone got a ton of value from that, so were going to add it back to the returns. Ben, did you do any sort of attribution analysis?

Mark McGrath
Can you point to a specific portfolio change that made most of that difference in the returns? Or was it just a combination of things? I'm just curious if it was like one kind of, in hindsight, poor outcome, or if it was a combination of other factors because it seemed to me just from reading out what you just said, that the more conservative portfolios had a lot worse relative performance than the more aggressive ones. So it sounds like maybe that fixed income call in like 2020 or whatever it was, might have been the big impact call. Yeah, I think it was a fixed income call.

Benjamin Felix
And I did talk to wealth simple about this, and they showed me some data on, I think it was that fixed income trade, where it was just like the trade makes sense, made sense, but they just got a really bad outcome and it really hurt. I think you're right that it was the fixed income that really was a drag on stuff. It's also worth mentioning that the 2015 portfolios, which was their first full year managing portfolios, they might have been open in 2014 and the first full year was 2015. Maybe that's what it was. So the growth portfolio in that first full year returned 4.7%.

And the iShares benchmark, the iShares core growth ETF portfolio, 9.32%. And for balanced wealthsimple, 1.65, iShares, 7.69, and conservative wealthsimple, 0.71% versus 6.04 for the iShares comparable ETF portfolio. Keeping in mind, that was a different era, basically, where that's when they still had a lot of the active stuff in there and it was a very, very different setup. Sorry, that's just one year too, right? That's just the 29th.

Yeah. Calendar year 2015. And you're not accounting for any sort of tax drag that might have happened from those dispositions and switching, correct? That's a good point, yeah. No, and I don't know how they would have handled that.

I'm sure they would have been tax aware when they transitioned to the new models, but I don't know the details there. So I send my notes on this to wealthsimple, to some people that I know there. A while ago, I was going to make a video on it, and I still will, I just, I got busy with other stuff. But then, Mark, you suggested the robo advisor topic, and I was like, oh, I actually have something written on this, we can use that. So I sent everything we just talked about, I sent it to wealthsimple and ended up having a conversation with their CIO, who was great.

He was previously at Bridgewater with Ray Dalio. Hes brilliant. Talking to him was an absolute pleasure. And all his explanations for the changes theyve made to portfolios, you could easily argue that theyre sensible given the objectives that wealthsimple has, which is minimizing the left tail of the distribution of outcomes for their customers, which is a perfectly reasonable objective. And like any investment decision, a good decision which they may well have made does not guarantee a good outcome.

And even if youre going to get a good outcome in the long run short term noise, when the few years after you make a decision can make you look completely crazy, even if you've made an objectively good decision. Although I don't think that there are many objectively good decisions in investing anyway. So the big thing for investors to understand is that wealth simple, but robo advisors in general are not necessarily buy and hold passive. In passive in quotes, investors you can ask, well, simple for an ETF portfolio. They told me this when I talked to them and I asked if I could say this and I said I could, which is cool.

But I guess if you call their customer service and say I want a buy and hold index fund portfolio, apparently theyll do it, which is cool. It defeats the purpose, doesnt it? At the end of the day, youre paying higher robo advisor fees. If youre going to pay those fees to just get a sort of, again, air quote passive portfolio, you can just do so with one of the other ETF providers. Yeah, but you have to do it, right?

Cameron Passmore
Someone's got to implement it, someone's got to report on it, someone's got to do that. But you get more than that though, right? Like you do get some level of advice from Wealthsimple, and I think that they are trying to build out their advice services, especially for larger accounts, but. Even within, and maybe I'm wrong, but could you not just open like a wealthsimple trading account? I don't know if you get access to the financial planning services.

Benjamin Felix
That's a good question. I'm not sure. I don't know. I'm not sure. Anyway, someone who is using the wealthsimples managed portfolio service and is happy paying their fees for whatever reason, could request a buy and hold index fund portfolio.

And my understanding is that they would be willing to do it, but I don't think most of their customers would be aware of that. Another one on this topic of our robo advisors passive investors, a big change, wealthfront. I don't know, I mean, I don't know how big it was, but Wealthfront in 2022, Wealthfront's one of the big us rogue advisors, they made this big announcement. I don't know how big the announcement was. I thought it was big because I was like, wow, these guys are crazy.

But they pulled value shockwaves, they pulled value out of their factor tilted portfolios in 2022 and to quote from their statement they said we'll no longer use the value factor in our service as research suggests it is no longer as effective as it once was. I cant help but laugh there. I dont know if theres ever consent. Theyre talking about price to book specifically. I dont know if there was ever consensus that value stopped being effective.

I think there are obviously people who did think that for a period of time and maybe still do. But since January 2022 value has been pretty great. So I dont know whats another case of a good decision with a bad outcome? Im not sure. But if I look at the value premium measured in USD because thats where wealth front is from January 2022 to April 2024 value premium so value minus growth in the US 1% premium EV 6.7% premium emerging markets 9.55% premium since January 2022 through April 2024 Sorry, does.

Mark McGrath
International include that's IFI. I guess you have Canada as well. I didn't include Canada in there just because I don't think wealthfront cares about Canada. But I do know that the value premium over that period has been very positive for Canada too. It might actually be the highest premium of all those markets over that period.

Cameron Passmore
As we talked about. Yeah I may have that somewhere. No I don't have it open now. I do also want to say that PWL is not purely passive either, in the sense that were not just holding market capitalization, weighted index funds and doing nothing. We tilt towards small cap and value and profitability and were using dimensional funds, not index funds.

Benjamin Felix
So were doing different stuff too. And in a lot of cases it has underperformed just buying index funds because value has not done super well, although it has done very well recently, just over the last ten or so years its not done very well. But I think a big difference is that were not making changes to portfolios much over time. Ive been here for more than ten years now and weve been doing the exact same thing the whole time other than maybe adding profitability, dimensional adding profitability and more recently adding short term reversals to the strategy. But its big changes were going to overweight emerging markets or were going to materially change how we do fixed income, although dimensional has added some more credit to their fixed income portfolio since ive been here.

So there have been little changes but nothing big and nothing tactical. Nothing in response to what we think is going to happen or what dimensional thinks is going to happen. Its small updates incrementally. Based on pretty serious research, as we heard about from Weidai in a recent episode. Even look, as Covid rolled through and the markets roiled in March of 2020, if you were in a 60 40 or 70 30, that was consistent.

Cameron Passmore
Even on those days where the market moved 10% and your 60 40 became 55 45, they're automatically rebalanced, meaning you stuck to the rules. And that's where, to me, these kinds of asset allocation tools really show their value because it's automatic. It just takes the subjectivity out of the advisor's hands because it would have been very easy during that period, and we all remember it. It would have been super easy just to kind of, let's just wait and see. We'll keep a lower equity position.

We'll see how it looks. And you could have missed easily that charging snapback that happened late spring, early summer of 2020. It's so hard to do like as a human, like, it's so easy to pick that out in hindsight, right. And say, well, I would have bought here, I would have sold here like it looks, obviously, if you just look at the chart, but when you're at the hard right edge of that graph and things are down, I was opening the markets and every day it was like 10% down. And everybody has a trigger point where it's like, okay, enough's enough, we're going to rip off the band aid.

Mark McGrath
And being able to systematically take that decision out of your own hands, even as an advisor, as an investor, I think is to your point, it can save you. It's like insurance against massive potential mistakes. Clay. Yeah, I did want to throw that out there. That, I'm not trying to say that were better than robo advisors because we are perfect market cap weighted index investors, thats not the point at all.

Benjamin Felix
But I think it really just highlights that investors have to understand what it is that theyre investing in. We couldve had the same conversation just now about asset allocation ETF's or about index funds. More generally speaking, you cant just take index funds and assume that youve got a good portfolio because you could have really bad index funds. And im not saying that robo advisors bad. Im just saying that robo advisors are going to have different portfolios and theyre not passive and theyre not objectively good investments.

So youve got to know exactly what youre doing. That whole idea that a truly passive portfolio exists, I think its just a flawed premise from the beginning. Every portfolio, including index fund portfolios, as we just saw, contain a whole bunch of active decisions. That was lesson number 18, I think, in our most important lessons in investing episode that we did, theres no such thing as a passive investment. Theres the spectrum of passive and active, but nothing is truly passive.

And because everything is active on some level, youve got to understand which active decisions youre making and why. And its the same thing when youre delegating those decisions to, in this case, a robo advisor. Youve got to understand how theyre managing the portfolio, how theyre approaching asset allocation, how theyre making decisions about changing asset allocation over time. Those are all really important. Yeah.

So I think the answer to the question are robo advisors, passive investors, I would say, well, nobody is. So no, they're not. But that's not necessarily a knock against them. It highlights that even with robo advisors and with index funds and with human financial advisors and all that stuff. But I think robotizers have this image of being passive.

So you've really got to evaluate how they're approaching both asset allocation and changes to asset allocation over time. I dont know that the average investor is going to understand that either. To your point earlier as this, starting as an index fund portfolio or a cap weighted index fund portfolio, I dont think its obvious to a lot of people who are signing up with a robo advisor service necessarily what theyre getting. And the questions that you mentioned they should ask are obviously very important. But I feel like the amount of financial literacy it takes to understand that would be such that you wouldn't really want to potentially a robo advisor in the first place, outside of some of those other benefits that you talked about earlier.

Mark McGrath
Ben, if you're at the point where you're able to analyze their portfolio decisions as an investor, you're probably better off just either putting the portfolio together yourself or buying one of those one fund solutions. So I think a lot of the average investors who bought the robo experience thought they were getting that sort of broad based market exposure, and they didn't. And had you picked, say, wealth simple versus somebody else, your outcome was totally different as a result of it. Right. It's really interesting.

Cameron Passmore
You'd love to know the psychographics of the typical new client going into wealthsimple, because I'm hearing that they're having tremendous success getting new clients of late, like in the billions, which is great for them. But what is that profile? What is that key value prop that they're coming to them for? Is it the user experience? Is it indexing generic quotes?

Is it passive? Which as you guys know, I find such a loaded terminal, and everybody has a very different definition of what passive really means. While we were chatting, I did look up the pricing and features for Wealthsimple, and from what I can gather just on the pricing page, you get the same benefits regardless of whether you're with the robo side or the self directed side. I don't see a delineation between the two in terms of the services that you can avail yourself of. It looks like it's just based on assets.

Mark McGrath
So we were talking about financial planning earlier, and so if you have $100,000 in assets, you get check ins with an advisor, which is kind of like the lighter planning that I was talking about. But interestingly, at the generation level, Ben, which you said is at 500,000, you do get what they're calling financial planning, and that could be saving strategies, investment, education, tax planning, retirement planning, estate planning, and insurance analysis. So I'd be really curious, actually, if any of our listeners have gone through that financial planning experience at the generation level or not. I'd be very curious to see what they thought of it. But I think also, Cameron, to your point, like wealthsimple does a ton of cool stuff, like, if you just look at all the features and benefits and some things that are maybe just more marketing than other things, but things like stock lending, like people are going to want that.

People are going to want to see if they can, quote unquote, juice their returns by participating in stock lending programs. And they have 5% returns on their cash accounts, which act like a checking account. These are really cool things. So it doesn't surprise me that they're seeing a ton of success in that. Did they bring back the vip lounge, the airport lounge passes?

Yeah. So at the generation level, it says you get ten passes per year. We've partnered with Dragon Pass to offer you and your guests ten airport lounge visits per year available at over 1300 locations worldwide. So you need to have a half million with them. But these are really cool little perks, right?

Benjamin Felix
Very cool. Before you started talking about the services stuff, we were talking about what a low knowledge investor would expect to get and whether picking a robo advisor would have been a good thing or not. Which ties into our would you rather question? So I think we can go there now. Before we go to the would you rather question, I do want to highlight that over that 2016 to 2023 period that we talked about for the wealthsimple versus ishares returns, the RBC select portfolios, which are traditional, actively managed bank RBC, in this case mutual funds, their conservative and balanced portfolios outperformed the corresponding wealthsimple portfolio.

Wealthsimple has the edge in the growth portfolio, but the bank mutual funds, even net of their relatively high fees, actually did better. So with that context, would you rather put all of your money with a robo advisor? And I know robo advisors abroad because you could just pick like hey, the one that actually does the index fund portfolio. So maybe it's too easy of a question. I don't know.

Would you rather put your money with a rope advisor? Maybe one of the robo advisors that has a history of making these sort of tactical moves will do that. Would you rather put all your money with a robo advisor or in a big bank actively managed mutual fund robo. Advisor, hands down from me. I like the progressive nature of this, I like the value prop they're bringing, they're shaken up technology.

Cameron Passmore
I think I'd behave well in that environment. So maybe I'm a bit biased, but I think it's cool. It's cool technology, progressive, the banks, and as I said last episode, I love the bankers I work with, but they make enough off me. And now having said that, to your point, Ben, about the RBC select portfolios, I think there's some great behavior biases that can be built in if you're kind of a, because I'm sure there's a lot of people just put all the money into one of those funds and just never look at it right. And I've had a terrific long term experience.

So if you can set it and forget it, behaviors we've talked about many times will trump your returns over with the ultimate. So if someone can behave better with the RBC select portfolio, beautiful. What caused the outperformance recently? We could speculate, but it doesn't really matter. So that's what I would do.

Mark, what do you think? Interesting, that was a good answer, and I'm glad you brought up those portfolios specifically, Ben, because my answer is going to comment on the fact that a lot of these massive bank funds are basically closet index funds at this point. And I think RBC specifically, I might be wrong. I think there was a lawsuit at some point. It might have been TD, im not sure, but I think theres a lawsuit at some point against one of the big banks for closet indexing.

Mark McGrath
And I dont know that they won or lost the lawsuit, but I think its relatively well known that when you get to a certain size, the RBC select balance portfolio I think is north of like $50 billion and its hard to do much but become an index fund at that point. So from that perspective, those big bank funds, yes, they have higher fees, but if they are more traditionally really an index fund versus lower fees for active management, I think that makes the decision really, really difficult. And Cameron, you made a good point, which is these new technologies like Wealthsimple, the user experience is really, really slick, but from a behavioral perspective, it makes it super easy to just go online and make a decision. I think that's less true if you don't have that technology at your fingertips. My answer is actually probably a big bank fund, but it wouldn't be one of the sector funds or something.

I would pick probably one of these big banks. Closet index funds. Yep. I think that lawsuit, it was a class action, it was against tv and it has been dismissed in a bunch of different courts, I think, I don't know, BC, it was dismissed in BC. That was BC again.

Benjamin Felix
Yeah, it looks like it's gone to BC court a few times and has not gone through as a class action, which means nothing's actually happened. So Ben, you get to be the tiebreaker. Okay, so here we go. The closet indexing thing I 100% agree with. Thats actually what I was thinking as well.

That like, hey, if you can get a consistent equity exposed portfolio with like an RBC aggressive fund or whatever, that might be better than a robo advisor. Thats going to do a bunch of weird stuff like add gold to your portfolio. So in terms of consistent asset class exposure, I might actually prefer the bank fund. Now, maybe not for me specifically, but more generally speaking, there's a paper from a professor at a canadian university, I don't remember which university he's at. See Mark, he's got a paper to back up his answer.

Cameron Passmore
We have to up our game by the next time we do this. Sorry guys. I know we need better game. Mark, we had to gang up on him one week. Yeah, we're going to have to collaborate.

It's probably going to take both our heads to compete here. Was I not supposed to bring papers to this conversation? No, no, I'm just saying we're learning. We always expect. We're learning, we're learning.

Mark McGrath
We always expect you to bring papers to your conversations, Ben. Okay, so there's this paper, some week will catch you. There's a paper called are banks better money doctors? And it speaks to Cameron, I think what you were saying. So they look at an analysis of mutual fund flows of bank and non bank mutual funds.

Benjamin Felix
Using canadian data. Super relevant, obviously to this conversation. High level findings relative to non bank funds. Bank funds have lower flows on a monthly basis. They also have lower flow sensitivity to performance than non bank funds.

So investors and bank funds are reacting less to performance. Usually what you would see is after good performance, investors pile into a fund. After bad performance, they pile out, or not necessarily pile, but they're sensitive to the performance. The flows are sensitive to the performance. And what this paper is showing is that bank flows are less sensitive to performance.

And they find that that effect is largely driven by lower outflows after poor performance. So the bank fund does poorly, people don't bail as much. That's the beautiful part about the bank's business. Right. People are there because of the bank's brand.

Cameron Passmore
The canadian banks have been around for over 100 years. You've got that built in loyalty which just makes such a beautiful, consistent, like I'm TD green. Right? Like you're green. You just are.

Benjamin Felix
Yeah. Amazing, amazing businesses. Yeah. And this effect mostly exists in equity funds, less so in balance funds and not at all in bond funds. But anyway, if I had to pick one, I'm probably going with a bank fund too, mark, same as you.

Mark McGrath
Nice, you know, disappointment on your face. Cameron. Jason. Jason's going to be furious with us for saying this. Jason Pereira.

Benjamin Felix
Yeah. Yeah, he will. He's not going to be a prairie. We should bring on our friends to answer these questions. Would you rather game?

Mark McGrath
It'd be cool to have a guess. That would actually be pretty funny. Yeah, yeah. See if we can get Jason to come out of his shell. Yeah, yeah.

I don't think that'll be too hard. To get an opinion out of him. Oh, yeah, totally. Okay. You want to go to the show and we'll keep talking robos?

Benjamin Felix
Yep. Let's go. Sure. So do you guys remember when the robos came out? There was this wave of fear that came across the industry.

Cameron Passmore
This is something that Michael Kitts is a commentator for those who aren't in the business. He's a very high profile commentator on our space and he was in the camp that they're not going to have a huge impact, but there's a lot of fear that's going to put massive pressure on fees, especially if you're in the AUM fees based on assets business model. The reality is that the fees have not come down hardly at all over the past decade. But the amount of services and value being delivered has gone up. So people have to do more to justify the fees.

The punchline however, there is a lot of money going into this space at the robo space and kind of circumventing the independent advisory model, which I think is super interesting. But in terms of is it having a big impact? So I watched a presentation by Chip Rome of Tiburon Advisors, which is an advisory firm to advisory firms. And the scale of our industry worldwide is absolutely massive. Like over $150 trillion in size as a wealth management, liquid wealth management space globally.

So one of his points that he was making is that even fidelity, which is like the largest at what, 1011, $12 trillion in a $150 trillion marketplace is still relatively small. You're not talking about massive amount of market shares. So his point was everybody is relatively small. But certainly one of the big trends is this shift from active to passive. And if you're an active manager now, you've certainly got the headwinds against you from this massive shift towards call it passive or index type investing.

I thought that was pretty interesting. When you think about the scale, like even vanguard at what, six, seven, 8 trillion? Yeah, I think Blackrock's around ten, I think maybe just north of ten. So even between the three of them they have call it less than what, a quarter of the global market share. Yeah, far less.

Mark McGrath
Based on those numbers. Based on those numbers. And he said those along with Morgan Stanley, those are the giants. But the other comment that he made is that there's very little new money coming into the system. The whole system that we're in, there's roughly 2% growth, organic growth coming into the system.

Cameron Passmore
So most people are kind of trying to chip away at each other's clients and that's really what's going on at scale right now. Wow, that's interesting. It's funny you mentioned just the size of the market and the size of the active versus passive marketplace. And I actually took this information from, what's it called, the PWL active passive fund monitor. Ben, is that what you guys call it?

Mark McGrath
Thanks, because I was writing this for the book as well. And the US is way ahead on this. But in the US, passive index assets have now actually surpassed the value of actively managed assets. In Canada, though, 83% of the marketplace is still actively managed products. So the canadian marketplace at the time that I read the active passive monitor was just over 2 trillion.

I think it was so somewhere around 2 trillion. And passive index type products were about 310 billion versus 1.575 trillion in active funds. We got a long way to go before theres even seismic shift or a tipping point. These are fund assets. There are other non fund assets that might change these numbers, but this is like mutual fund and ETF assets.

Yeah. Well you think non fund assets would skew towards active anyway, right? I dont know if thats true, because a lot of like, if you go to the institutional world, you can very easily have an institution who is managing their portfolio very similar to an index fund, but theyre not an index fund because were holding the securities directly. Interesting. Yeah, I think there's probably more indexing than you might expect in the non fund portion of the market.

Very interesting. Yeah. Cameron, to your point, I remember in 2015 when robo advisors were the big boogeyman and there were a lot of advisors that were really scared that this was going to be so disruptive. And you'd hear it from people too, who just don't like advisors. Your days are numbered and the robots are coming for your job kind of thing.

And obviously in hindsight that was laughable. But we're experiencing it again now with AI and chat GPT, right? Like people on Twitter just chirp me all the time like a robot is taking your job, you better go apply at Starbucks kind of thing. And I don't know. And this doesn't even just apply to financial advice.

I don't think the market for human advice ever disappears completely. Like whether it's tax or financial advice or legal advice or fitness advice or whatever it is. Like, I think there's always a market for humans wanting to interact with humans. And sure, maybe the technology gets so good that at some point you can't tell. And I think if nothing else, that will focus the business into those who offer higher quality services.

So it might kind of trim from the bottom. But even with AI these days, I'm not yet worried for our industry or my own job, that's for sure. Humans are so messy and AI is going to help us better help humans. But humans by nature are messy, right? And financial planning is booming.

Cameron Passmore
That's the big shift. I think we said this a couple of weeks ago back in the day, threw in financial planning for free to manage the assets. Now effectively, Ben, as you say, investments are largely figured out and the value prop is more shifted towards the financial planning side. And that's exactly what kitsis has been saying. Super interesting.

Benjamin Felix
Yeah, I think there have been a bunch of cases where everybody thought advisors were going to be done. I think even with discount brokerages, everyone's like, well, advisors are done, but the business just evolves. What an advisor does changes. He used to play stock trades and then discount brokers show up so thats no longer valuable. So the business model shifts.

I dont know what the next shift will be. I dont know if robo advisors changed much other than maybe like you said camera didnt compress fees at all and maybe pushed people to improve their services, maybe to improve their online offerings. I dont know how much changed the actual services though. Maybe a little bit more planning. But with AI, what about the general.

Cameron Passmore
Awareness of just a non bank or non large firm option for your investments in financial planning? I think there's a lot of people don't even know that firms like us even exist, that this is possibly an option. How can you go outside of the bank in Canada or the big brokerages if you're in the US? Your experience on Twitter mark, even people that know us don't necessarily know what we do. Yeah well and that's largely Questrades whole marketing program.

Mark McGrath
Is it Questrade who's basically like, oh you're still using dad's guy questioning you didn't know that there was another option right? So I think to your point that even just letting people know that that's not the only way to have your money managed, whether it is through like discount brokerages or robos or kind of independent firms. A lot of people have been with the banks, as you pointed out Cameron, for decades, their family's been with them for decades. The loyalty is there, a lot of bank advisors do great work but maybe just educating Canadians that there are other options. I think that the robos probably helped accelerate that.

Cameron Passmore
Speaking of value prop, what's up with the new calculator? Can you give us an update? So I wanted to actually talk about that in the context of AI as well. Just to your comments, Mark, about whether AI is going to take our jobs, I think it can maybe change what we do. Like some of the other stuff that we've been talking about has, but this new calculator that I'll talk about in a second.

Benjamin Felix
Cameron, I tried to use AI to help me code it and it was absolutely horrific, like completely useless. In fact, would you use chat GPT to help you write the math and the code and stuff? Yeah, yeah. Okay. Because Jason Pereira told me to.

So yeah, I'm coding this thing in VBA. He said we just use chat GPD to do it. So. Okay, I'll try that. Tried a bunch of different prompts and the code it gave me was like a joke and maybe I was doing it wrong.

I don't know, maybe someone who does software for a living is going to tell me that it's my fault, not chat GPT's but anyway, it didnt impress me. So for that type of stuff, for modeling complex financial decisions, im optimistic. Maybe itll get there. I think technologys great but at least for now, and I know its moving fast, but for now its not there. Trey I think it can help.

Mark McGrath
A lot of basic questions that dont involve the modeling, the math, that type of thing. Again, in Dan Book, at the end of the book or at the end of one of the chapters, he basically said, I asked chatgpt this question and heres its response. And it was a very, very simple, like five questions, like should I pay off debt or should I invest and what debt should I pay off first? And these types of things. And it answered those questions really well.

So general logical reason I think is pretty good. But yeah, from what ive heard just from watching programmers and stuff on Twitter, its got a long way to come before it can do that kind of stuff that youre talking about. Preston Yep. So yeah, the new calculator, we had that breakeven calculator for personal investments. So if you own a taxable asset with the capital, again, we built a calculator that people can see online that helps you understand how long you would have to hold that asset to make deferring your capital gain more advantageous than realizing it before the capital gains inclusion rate increases.

Benjamin Felix
So that's what I know for a while. We did that one pretty quickly after the federal budget proposals were released. More recently, we added to that calculator, a little toggle button where you can switch between personal and corporate investments. So now you can look at a corporation and you can see again what is your break even horizon with the corporation. What we've left out of that model is the ability to include how you're paying yourself from your corporation.

We talked about this in a recent episode where I kind of talked about some of the modeling that I've been doing on this. We may include that later. And it does matter to the decision. Like you would make a different decision if you're taking a certain amount of money out of your corporation with respect to realizing a capital gain than if you're not taking any money out of your corporation. But it's also a lot more complicated both to model and to show what's happening in the outputs.

So we've done that modeling. We may release it in our public tool, but for now, we're just going to keep that portion of it as an internal tool. It's pretty cool, though. I've gone through the internal training on it. But yesterday, Ben helped me use that calculator in conjunction with the financial planning software that I use for a particular client who needs to make this decision.

Mark McGrath
And Cameron, as you mentioned, we're all going away, but I leave tomorrow. I come back June 24. And so I booked this trip, of course, and then they proposed the changes, and I'm like, great. I literally come back the evening before the changes are going to go into effect. So for my clients who may be affected, I've had to figure this out before tomorrow.

So Ben helped me with the calculator, and it's quite impressive, the amount of thought that's gone into it and just the way it presents where the breakeven is and how sensitive it is to some of these inputs and expectations. So it's just such a complex decision. I think for a lot of people that without this type of modeling, there's going to be mistakes made around this for sure. I think it's unfortunate how this whole thing is coming down. I'm not even talking about the policy, but it's more of the rush and the timing, the complexity around it.

Cameron Passmore
This is very complicated stuff. Also for the toxic part department, too. Very complicated. It's complicated when we have no legislation, no draft legislation to go on. So it's like capital gains rates increase, we have zero details on how it's going to work or whatever, and that can change what people might want to do.

Benjamin Felix
So it's a really, to me, it feels, I don't want to get political at all, but it feels irresponsible. But we're living it, right. Client situations, other professional situations, there's this massive rush to come up with an answer. You're basically flying blind. So, yeah, good to move on.

Cameron Passmore
Ben, you want to talk about private credit and some of the feedback you got in the community? Yeah, I will mention that. I do also want to say that we did do a money scope episode, Mark Sothe and I, on some of the stuff we just talked about. So we talked about the modeling that both Mark Sothe and I have done on capital gains and corporations. We talked about individuals, too.

Benjamin Felix
That episode came out last Friday. I think when this episode comes out. Nice, basic, easy listening stuff. Yeah, that was a pretty intense episode. Just good background chatter.

Mark Soeth was very excited to have his first 3d chart that he's ever made, because that decision requires 3d graphs to understand what is happening. So, yes, that sounds like something he'd get excited about. Oh he was excited. I was due though. We were both super excited.

Yeah, yeah. Private credit so I mentioned in a previous episode that someone had reached out who had worked in private credit for an insurance company and theyd kind of shared some of their experiences and given some feedback in the episode, somebody else in the rational minded community, they identified themselves as a private credit fund manager. Obviously theyre anonymous so I cant verify that. But based on their comments I believe it and at the very least their comments are pretty interesting. So im going to share those so they said that the payoff in private credit is like selling a deep in the money covered call.

And so he said you can refer to the prior rational reminder episode on that topic. All the points raised there when we talked about covered calls apply the same to private credit. Thats pretty interesting. Another parallel that they thought about was its like private credit can be a lot like dividend investing where the appeal is high distributions and the twisted benefits less focus on capital gain. They said that you should definitely disregard the sharpe ratio for private credit because returns are highly negatively skewed.

Youve also got limited upside which reduces standard deviation which is a double benefit for the sharpe ratio. So I had talked about the smoothing being a reason to disregard sharpe ratio, had not thought about the skewness. Thats another good reason. So that makes talking about sharp ratios of private credit even more ridiculous than I thought. Then their last comment was that smoothing as a service is a real thing.

Some investors ask for it, others are mark to market only. But I thought that was pretty interesting that some people actually ask for they want the smoothing. So the concept of smoothing as a service is a real thing. For sure it is. Dad talked to somebody on Twitter yesterday.

Mark McGrath
I was talking about volatility or something and somebody came in and commented and ill butcher the quote exactly. But it was something like oh I hate my manager. He never has those plus 30 years. He just gets me seven to 8% every single year. And I was like oh its probably a bunch of private credit and private equity and real estate and that kind of stuff.

I didnt dig into it further, but to your point that individual is obviously being sarcastic. They loved this steady seven to 8% every single year. So for them it really was a feature, not a bug. Actually, at the FPAC meetup, the Financial Planning association of Canada meet up in Vancouver a couple of weeks ago, I talked to another advisor that I know and he works for a firm that does a lot of these private assets. And so we had a brilliant guy, his background.

Hes a mathematician by background turned advisor and he fully recognizes that clients do want that return smoothing and it might lead to better decision making. And he felt like hes kind of at a crossroads, like is my obligation to the best client outcome. And if that return smoothing can provide better outcomes and better decision making, then I actually do kind of owe him a duty to use these types of products. It was either way, it was a really great conversation and I can see why some investors want that type of smoothing as a service, as you put it. This is something Morgan housel talked about with Shane Parrish on the knowledge project a couple of weeks ago was exactly that.

Cameron Passmore
I dont pass judgment. He was saying on how other people invest, if it works for you and you can stick with it, so be it. You have to find what works for you. He says, I happen to be a vanguard guy, ETF guy, 100% with a lot of cash that works for my family, but that may not work for you. You may have a need to have an active portfolio or some other type of portfolio.

Mark McGrath
Well, and that's why when I win my billion dollars, it's all going into whole life for that steady smoothing cycle, right? Right. It's a benefit to me. Someone reached out to me on Twitter today, actually, Garrett reached out to say it's been a long time, but only one episode left to go in his binge of listening to all past episodes. And the final one was our conversation with Morgan Housel.

Cameron Passmore
But his new book, same as ever, that was pretty cool to binge them all in a relatively short amount of time. Do you want to read? That's impressive. An email we got. Yeah.

Mark McGrath
I will just say it is not easy to binge. The rational reminder going back, I often tell people who are new to the podcast go back to episode one. But we're recording, what, 309 today? And some of them are long and some of them were like very deep. So kudos to Garrett for binging on them.

Cameron Passmore
And episode one was pretty rough. Yeah, things have improved since then for sure. I found a picture. Aben, did you ever see that picture of you and I in the room? I think we took that picture during episode one.

Benjamin Felix
Oh yeah. I don't know. I haven't seen it. I'm giving a presentation next week, so I'm including that picture and a bunch of other stuff in the presentation. You should share it on the forum.

Sure. People get a kick out of it. Hey, put it in the YouTube video for the episode. I'll get it to the team the. Next one's from Shomick in Vancouver via email.

Mark McGrath
As a fellow canadian, it's great to have such a nuanced, intelligent, and in depth financial podcast that has intelligent takes on indexing, CPP, financial planning, interviews with Nobel Prize winners, and the general tenure of the discussion being focused and helpful to the average person looking to do well in work and life. Very nice. So I actually replied to that email from Chummuk and he replied back with a whole bunch of commentary. I guess he's been binging episodes too, but he had notes and comments on, I don't know, five or six episodes, but stuff that he found interesting. It's just like I replied back to him saying I find it super interesting to hear people's thoughts when they've recently listened to a whole bunch of the episodes because I can't keep all this stuff in my head personally.

Benjamin Felix
And so when someone goes and binges a bunch of stuff and comes up with like based on these 17 episodes, these are the insights I have. Im like, wow, that is so cool. Theres a bunch of good discussion in the community from our last episode with Justus, my least prepared episode ever. Personally. That turned out to be a great episode that a lot of people seem to really enjoy.

Sparked a bunch of good discussion on buying versus leasing a vehicle, also on how much life insurance you need. Lots of good discussion in the community on that. Someone in the community asked why I prefer leasing, so I kind of thought about that for a bit and I had some notes that people might find interesting. I like being covered by the manufacturer warranty for the full period that I have the vehicle because if you have major repairs, you take it back and they fix it and that's like, it's it. I like having a known floor on depreciation of the vehicle.

We talked about that, I think in the last, last episode on this, too, although I did mess that up by going over my allotted mileage, my last lease, but I'm not going to do that again. I got more mileage this time. Did you have to pay a penalty per kilometer on that? Well, no. They called me because they could tell I was going to go over and so they said, listen, if you keep driving at the same pace you're driving it now, you're going to owe about $5,000 at the end of your lease term.

Mark McGrath
Sorry. How do they know that? I guess I'd taken in for a service, maybe. I don't know. Okay.

Benjamin Felix
Must be that I don't think they were watching. Yeah, there's like monitoring your driving. Okay. I don't think they were monitoring. So they wanted you to flip it while the value was still higher, even though you had term left on the lease.

Cameron Passmore
Interesting. Yeah. So it was like a reduced buyout of the negative equity based on like, I paid less than I would have paid if I kept driving the same vehicle. And they've rolled it into the new lease, which was financed at 3.99%, which like, that's like free money, basically. Today was the monthly payment materially higher and not specific numbers, but the monthly.

Benjamin Felix
Delta, it was a bit higher. The leasing rate was higher. I think it was a 1.59 in my last lease. Yeah. Okay.

Interest rate was higher. The MSRP on the vehicle has gone up since the last one. So yeah, has had the residuals. But you increase the mileage, you may have decreased your residual. Yeah, increased the mileage.

And we had that negative equity that we were rolling in. So the payment did go up. I like minimizing the negotiation of the time of purchase. Ive done two used vehicles in my life because thats supposed to be the good financial decision where you buy a used vehicle and theres less depreciation. Did that twice and youve got to negotiate twice.

Youve got to negotiate when you buy the vehicle and youve got to negotiate again when you later sell the vehicle. Whereas lease, you just take it back. Another big one is Im not a car person. You said the same thing, Mark. The information asymmetry concerns me.

I don't know what I'm doing. And a new vehicle in warranty with no end depreciation, that just mitigates me getting screwed, basically. I also like new vehicles. I mean, that could just be the argument. The new vehicle that we just got is a lot nicer than the previous one we had.

It's got great new features that I like and then maintenance issues. The two used vehicles I had, each one, they werent super old or anything like that, but each one had major issues that I had to deal with while I owned it. And ive now done two full three year leases and not a single issue. So Im sold. Yeah, right.

Mark McGrath
Yeah, sounds great. We bought our last car, as I think I might have mentioned. And to your point, I just hate cars. We have one car, its five years old. I will drive that thing into the ground, I think.

But when the time comes, Im now sold on leasing. So thank you for that. So we got notes down here. You and I, Mark, both watched separately, but we watched the Ashley Madison story on Netflix. Is that an unbelievable story?

Cameron Passmore
I didn't realize it was a canadian, you know, Toronto story. Yeah. So my wife watched it. I didn't watch it. My wife.

You didn't watch it? Okay. My wife has this tendency, bless her. I don't think she listens to the rational reminder. So I can say this safely.

Mark McGrath
She'll watch something and then she'll be like, hey, I watched this thing. And it will take her just as long to explain the thing as if I were to just go and watch the whole thing myself. Right? Like, if I watch a documentary, it's 2 hours long. I'll give you like a five minute recap.

She'll spend like an hour going through like every single detail of it. And sometimes I have to cut her off. I'm like, look, at this point, we may as well just go back upstairs and watch it together because it's going to take you 2 hours to explain the entire documentary. So she gave me like the whole nine yards, the whole play by play on it. So I didn't watch it myself, but I may as well have because of the way she explained it.

Cameron Passmore
It's crazy. Misses ahead of AI too. And you can only imagine Ashley Madison in today's world. I mean, it was manipulated massively to get more largely men on the site. And the information they would capture before the breach is just incredible.

Like, 37 million people were on that site with this dream. Life is short. Have an affair. Like, wow. I remember when the breach happened to you because it was big news at the time, and I don't know when it was.

Mark McGrath
It was probably, what, like 2015, 2016 or something like that, that the actual data breach happened. And I remember I was at a concert or something, and I saw, I was scrolling through news waiting for the main act to come on. I was with my wife, and I was just like, oh, this, like, this is bad news for a lot of people. We had a discussion about it then and there, and it was the first time she'd heard of that particular company. But she remembered that when the documentary came out, she's like, oh, yeah, Mark told me about this like, a decade ago.

Cameron Passmore
Wild. I take it you haven't watched it, Ben. No. Honestly, it's a good thing I'm going on vacation because my attachment to excel has become a problem, I think, like, legitimately. Like, I need to stop modeling stuff for a bit.

Mark McGrath
You're in love with it instead of just loving it. I can't stop modeling stuff, but I think we're at a place with our model now where there's only one big piece left. But the thing is for the capital gains stuff in a corporation that we've been talking about, but we see so many more use cases for that model to give really efficient, high quality advice to clients. And there's always just like, one more piece we have to finish to make it that much better. So plus, the three of you are feeding off each other.

Cameron Passmore
You, doctor, Mark and Braden. I mean, I can only imagine that fuel going around. Yeah. So I think while I'm off, and I'm not going to bring my computer ending, so I'm not going to be doing any modeling, but Braden's going to try and finish the last big piece. And then once that's done, it should be at a point where the rest is just like refinements and tweaking in front end as opposed to, like, the actually building the modeling engine.

Benjamin Felix
But getting to the point we're at now has been. I don't know, man, I get sucked into my work often anyway, but it's just been on a different level with this thing. I don't know why. Like, I could see the value that it would ultimately add maybe. Or maybe I was just making, like, good progress every day and it was just kind of in a good flow state, but I've not sat down on my couch in my living room for, like, weeks.

Mark McGrath
It's probably just the sense of urgency, too, right? Like, knowing that this deadline's coming up, so you've got this shrinking window of time where this is going to be of value. Right. It's crazy work that you guys have put into it, knowing that if this goes through as planned post June 25, the whole reason for this thing was to make a decision around capital gains. Today and post June 25, again, there's lots of other applications, I think, for the calculator, but this is really centering on one decision for a subset of Canadians, and you're just pouring your heart into it.

It's wild to watch. Yeah, it's an important decision, and I think it's an example of something that we can really add value on in terms of helping people make a good decision and a decision that a bunch of people have to make. But I think if we weren't as excited about the other applications for the modeling engine that we've built, it wouldn't be quite as interesting. But because it's going to help with this one acute problem that a bunch of people have, and it's going to be something that we can build a bunch of really useful derivative tools from. I think that's made it just really hard to stop looking at.

Can you say you're addicted yet? Is it getting close? I didn't want to because I didn't want to offend anyone, you know? Like that's one of those words that. Yeah, no, fair enough.

Benjamin Felix
It's like kind of sensitive, but yes, that's how I feel. It's hard to stop. I've been going to the gym because if I don't, I don't sleep well. But it's like, I'll work until eight, go to the gym and then basically go to bed, wake up the next day and open excel. Sounds like a dream world.

Mark McGrath
A nightmare for me, but yeah, it's pretty great, actually. Yeah, I've been mountain biking too, actually. I've been mountain biking every day that it's not raining. Nice. Love it.

Cameron Passmore
How's your outdoor renovations, Mark? They behind you now or still going on? No, they're still going on. They've almost got the deck done. A lot of it's like, I'd say we're like 75% of the way there.

Mark McGrath
So when I get back from my trip, everything should be done and done and complete. It's looking great. They're doing a great job. Yeah, I'm really excited to see what it looks like when they're all finished. Love it.

Cameron Passmore
You can reach us all, of course, Twitter, LinkedIn, all regular usual spots. Emails are always welcome info. Pwlcapital.com I think this is the first episode we've mentioned our good friend Jason's name twice. So he'll be very excited about that. He'll be very excited.

He didn't have that on his bingo. Card the first time you guys mentioned him. I think he said like an advisor we know. And then like, eventually it was like our friend and then eventually you used his first name. And I think we used his last name twice on this episode.

Mark McGrath
So he's gonna be very excited with the progress that he's made in getting onto the podcast. He still jokes about that, though. Cameron, you said it. It was like an advisor that we both know in Toronto or some like vague description of him, but it was obvious who you're talking about. Call him Jason.

I'm going to message him as soon as we stop recording this and he's. Going to be very, very, all the other guys. Are all the other planners going to be have to fold their names in too, I guess. With such a great community in Canada of our people, we call it affectionately, you know, there's so many great advisors and they're all kinds of different firms. They got their heart and brains in the right place.

Cameron Passmore
It's so impressive. It's a great time to be seeking out advisors like that. Yep, agreed. So, okay, anything else, guys? No, I got to go right now and finish the questions up for Antoinette Shore and John Griffin, who are both episodes that we're recording when we get back from vacation.

Benjamin Felix
But they are going to be incredible episodes, I can already tell you that. Yeah. And way die was great, too. And by the time this comes out, our conversation with Dan will have come out. Dan bought a lot of the canyon couch potatoes last week, and Dan was also phenomenal.

Cameron Passmore
Very good friend, dear colleague, and great communicator, as everyone now knows and many people already know, because his legacy in the canadian financial planning spaces. Legendary. Almost now. Okay, guys, is that a wrap? All right, thanks, everybody, for listening.

Mark McGrath
See you next time.