Transcript

This podcast is intended for audiences who reside in the province of Ontario. The products, services, and Securities referred to in this podcast regarding RBC Dominion Securities Inc, as permitted, are only available in Canada and other jurisdictions where they may be legally offered for sale. The information presented and discussed should not be construed as an offer by RBC Dominion Securities Inc to sell specific securities and/or services in any jurisdiction outside of Canada.

All opinions and views expressed by the speakers are not representative of the views and opinions of RBC Dominion Securities Inc. All information and opinions provided in this podcast are in good faith, but without legal responsibility.

This is Capital Insights, a podcast from the Chapman Private Wealth Group. Here's Paul Chapman.

Thank you. Welcome to the first edition of our podcast. It's currently January of 2025, and hopefully, we'll be doing this with some regular cadence every few months at the least. But we want to make things relevant and pertinent for listeners, and we'll touch on various topics around wealth, wealth management, investing, capital allocation, et cetera. But we thought we'd start the first one step back and think about things at a higher level.

I've thought about this a lot over the last few years and it's something that defines what I'm trying to do with wealth management and our business. And so the theme around this one is what makes a good advisor, not only advisor but investor. And those are not necessarily exactly the same thing. But let's dive into that.

If you're listening to this, at least you're somewhat curious as to what makes a good investor, and by extension, a good investment advisor. There's much more to being a good advisor than simply risk, returns, and investments, because as we all know, money is personal. Money matters. Most of us recognize, or at least try to that success isn't defined only by money.

We often hear that money isn't everything, but we have to admit that money is always deeply personal and emotional to all of us. So the question is, what price did you have to pay to gather this money, so to speak? And this is where we begin to discover the meaning of money.

Numbers and facts tell us what clients have, what investors have. But they don't tell us how hard they worked, or what they sacrifice, or the risk taken, or the failures endured, and the journey that was taken that all those numbers represent. Investment advisors aren't about selling a simple product or service anymore, I don't think, or at least they shouldn't be. People want you to understand the depth and meaning of their money. And most advisors, I think, in my humble opinion, fail to get at the heart of what is really important to people and what their money really represents.

But what makes a good investor, and what makes a good advisor, as I noted earlier, aren't necessarily the same thing. There are many advisors who are not necessarily that strong or sophisticated when it comes to pure investing, actually. And even fewer actually add value on what I call risk adjusted basis. And there are many facets that go into that. But you can show portfolio returns with actual analysis and empirical analysis. But that's a larger topic that we'll dig into on another podcast another day. And I'll probably write an article on that sooner than later.

But trust is the million dollar word, I think. And that's the cornerstone of any advisor or client relationship and is, obviously, paramount here in what we're talking about. And trust is established out of vulnerability, actually, and risk because all of our relationships, all of human relationships, entail risk and vulnerability to a point. And we derisk through greater intimacy, communication, and instinct.

It's why I truly believe that a person considering working with me, for instance, as an investment advisor, as a wealth advisor, and our team, Chapman Private Wealth Group, we want to be doing the right thing, we want them to be doing the right thing, and we want clients and prospects to take their time in evaluating and speaking to others who know us and work with us. This is why we're happy to supply references. And anyone should be who you're speaking to on that front. But you want to work with an advisor who will tell you the hard truths.

The answer isn't always what you want to hear in many things in life. If, say for instance, a financial plan is relatively ugly longer term, and you potentially run out of money, and we've seen that, and there are ways to deal with that. But you need to know that, and to hear what the goalposts are, for example, and what the options are. If I believe some of your investments even currently are not suitable, you need to hear that. Or things are riskier than you maybe perceive, that's something that needs to be communicated to a client or a prospect without question.

A good advisor at least will tell you things that you don't want to hear. So you want you want a quote unquote "financial advisor," not a salesman. Many firms too talk about this AAA client experience. But in my experience, we have a few hundred clients now and growing very quickly, I don't know that there are many advisors out there who actually deliver on that promise, per se.

The fact that investors today need integrated services in their wealth management experience. They need a solid and holistic financial plan, which requires multiple accounts and sophisticated solutions, portfolio solutions, strategies, tax efficiency, estate planning, tax structuring, and insurance plays into that, will planning, just to name a few, and all the specialists in ecosystem that go along with that.

An account filled with a few stocks or ETFs, are a printout showing you the date that you run out of money in your financial plan, is not really considered wealth management anymore. I think for all intents and purposes, this need for greater sophistication in the resources of your firm that you're working with, and their partners, that's not going away. That's only getting deeper.

So importantly, there absolutely needs to be an alignment of interest. If your advisor is a quote unquote "paid salesman" who receives compensation that you don't know about, which is more common than many think, there's a conflict that you need to know about here, I think. And in my experience, this is more common than many realize with a number of Canadian wealth providers, including those that claim to be "independent." And I put the air quotes around that word.

You hear people's sentiment about working with banks or independent firms, and I think that's a gray area, that term independence. I've learned that many are in fact, far from it. Many of these may pedal their own products or have financial stakes or ownership in supposedly independent investment funds or products that they're actually selling.

So taking a step back, I'm as independent as an advisor could possibly be in this business, even though I work at RBC, I don't actually currently have any RBC product across my client model portfolios. I'd like to frame it as owning the best of the best. And given my experience on the institutional side for the last, almost, 25 years now, I have a pretty good finger on the pulse of who those are. So the best of the best managers and strategies and portfolio managers, regardless of the name of the supplier or the fund or the strategy, should be the cornerstone of one's portfolio, I think.

If your advisor is held to a fiduciary standard of care and is paid by you, then they work for you and not someone else whose interests are at odds with you. I think that's the bottom line. It's really quite simple. Your advisor should work for you and have a daily incentive to work for you, with no conflicts of any.

And finally, your relationship and business must be terminable at will. [LAUGHS] Meaning you can walk away at any time. That's a hallmark of this business. Many firms have actual proprietary product that can only be held at their firm and is not transferable to another firm without selling and thus incurring major tax impacts, potentially.

I actually wrote an article on that, which is on our website. And that's a conflict that I see and have made some noise around, and I'm not sure why this was allowed when it was created many years ago. But it's a hallmark of the industry and something that you have to be aware of.

I'm going to get into the investment side of things a bit more now, which is the cornerstone of wealth management in your money, of course. In my 25 years in the industry, working firsthand with some of the world's top investment managers, I've had the opportunity to observe a handful of great investors, and a number of, in my opinion, not so great investors, but you see all kinds over that period. The good ones all have something in common, and some common traits, unsurprisingly.

Firstly, of course, they're all very smart. This isn't surprising. But the correlation isn't as high as you may think on this front. Lots of smart people can't get out of their own way, and multiple biases take over even the smartest of us, especially when things go arie, as we know. There are lots of biases that we have on the investment side, and that's usually the reason for underperforming.

I actually saw an article recently from one of the largest money management firms in the world that showed, and I'm not going to get these numbers correct, but something like, say, the average balanced return was somewhere around, I believe it was 7% or 6% or something like that over the last, say, 25 years or something like that, and the average of their client's portfolio returns were many points under that, something like two or three. So it just shows you that was only caused by biases of the investors. But going back within this group of super smart folks, we need to look for reputable and repeatable performance. A long track record with minimal risk and small drawdowns to take luck out of the equation, really.

There are some pretty bad investors, frankly, who can look good and look smart for short periods of time, and we all know who those are and have seen that before. So remember the bubbles we've all experienced by now. Lots of us looked and felt smart for a while during the tech boom. Or maybe some with crypto, which is ongoing, and Bitcoin which is ongoing, and we'll see if that ends up being a bubble or not, and I'm not espousing a view there. But we all know a few folks who bought some say, weed stocks early on in that run and seemed to make astronomical returns, at least for a while. And these things work well until they don't. So there's bubbles and pockets of speculation that it's easy to get FOMO. And that's often a driver of an emotional bias.

But as with most professional occupations, experience is a must have. A lot of investors and advisors get into the money management business when they're young, and they haven't seen a whole cycle quite yet. There's a heavy crop of current advisors and institutional managers as well, who started in the markets post 2008, the great financial crisis. And I've heard something that's somewhere on the order of 60%, 70% of professional money managers got into the business after 2008. So they haven't seen a real serious, other than 2022 which was quite noisy, but haven't seen a serious crisis.

The up part of the cycle is considerably less instructive than the down part, of course, and many learn that in 2020, 2022, so you remember the pain you feel when you get burned. I'd say the list to quote unquote, "get through the door" in my books as a money manager that you need to have experienced the following to some degree. And this list is partial, but it's still fairly long.

You should have experienced bouts like the tech bubble, the Russian financial crisis, both of them in recent history, the housing bubble, the European debt crisis, the S&P downgrade-- sorry, the debt downgrade, flash crash, one devaluation, zero rates, negative rates, oil at high numbers like 140, oil being negative, if you remember during COVID, COVID, Bitcoin, cannabis bubble, SARS, 9/11 even. Argentina has had its bouts, European banks, the list goes on.

But I always felt like I was the young guy in a number of my endeavors through the years in my professional life, but it seems I'm not really anymore. I guess I've experienced a few of these events by now, but if you get heavily positioned the wrong way for any of these, your capital can become permanently impaired. Meaning you take a serious drawdown, then you enter a cycle of trying to gain back your losses, which is a dangerous place to be both financially and mentally. Because you have to remember it takes 100% gain or double in your capital to earn back a 50% loss. So that can hurt. So we have to try to minimize the drawdowns and that the tenet of our portfolio management business in my business.

But as we get older, we usually get more careful, which speaks to emotional fitness more than anything, I think, which I find the greatest investors in the world possess in spades. A big part of emotional fitness is humility. There's nothing more dangerous than overconfidence. Even though we generally love people who speak with supposed certainty, we often tend to forget how often those may have been wrong in the past.

So the "balanced forecasts," I use again in quotes, that some will utter nervously with numerous disclaimers and qualifications tend to be the most right. But oddly enough, many people would rather be right than make money, believe it or not. So I think many fear embarrassment more than they actually fear financial losses. Which also speaks to why you only hear about your friends winners. [CHUCKLES]

By emotional fitness, I refer to one how they may truly manage risk, which is key in portfolio management. It's managing risk, not necessarily going for the home runs over time. So that's all to say a truly great advisor, I think, needs to possess many of these traits and help you identify and manage your biases and strengths as well.

Many will say, in my business, you're part psychologist as much as you're part wealth manager, which I think rings very true. But we need to coordinate best in class resources and professionals for your unique situation, both inside the firm and with external professionals and advisors like your lawyers, accountants, tax specialists. And finally, which I think is important, you need an unrelenting work ethic, which is harder and harder to come by these days. But those with this combination are few and far between.