Episode Summary
Executive Summary: The first Rational Reminder episode introduces the hosts’ investing philosophy: globally diversified, index-based portfolios with a Dimensional tilt, applied consistently to clients and their own money. The episode also critiques hedge funds, alternatives, and conflicted commission-based advice, while emphasizing fee transparency, simplicity, and the growing role of robo-advisors and regulatory reform.
Main Topics: Podcast mission and audience: Benjamin Felix and Cameron Passmore explain that the podcast will share their thinking on markets, advice, and real-world client issues to help listeners become more rational investors. Dimensional and evidence-based investing: They outline why they recommend DFA/Dimensional funds for clients and use them personally: globally diversified, regularly rebalanced portfolios with factor tilts and no stock picking. Behavior, patience, and factor diversification: The hosts discuss why small-cap and value tilts can be hard to hold through periods of underperformance, but can improve expected returns and diversify portfolio risk. Worst investments and market timing: Each host shares a personal example of poor investing judgment, used to reinforce the dangers of timing and the value of sticking to a process. Hedge funds, alternatives, and institutional performance: They argue hedge funds and broad alternatives often fail to justify fees and complexity, citing underperformance versus simple diversified portfolios and examples from pensions/endowments. Canadian regulation, embedded commissions, and advisor conflicts: The episode reviews CSA decisions on trailer fees, deferred sales charges, and the lack of a legal best-interest standard, contrasting industry progress with PWL’s long-standing fee-only approach. Fees, advice, and the future of robo-advice: They distinguish product fees from advice fees, argue low-cost advice is not always best advice, and discuss how robos commoditize portfolio construction while human advice remains important for complex needs.
Key Arguments: A consistent, evidence-based investment philosophy is more important than trying to customize around market noise. Dimensional funds are used because they provide global diversification and factor tilts that may improve long-term expected returns, even if they can lag for long periods. Factor diversification can reduce overall portfolio volatility while maintaining a higher expected return than a market-cap-weighted portfolio. Hedge funds and many alternatives are hard to justify because their fees, complexity, and illiquidity often outweigh their diversification benefits. Large institutions often add complexity through consultants and alternatives without improving outcomes versus simple diversified portfolios. Embedded commissions and deferred sales charges create conflicts of interest and obscure the true cost of advice. A best-interest standard would have been a positive reform, but its absence means investors must still be vigilant about conflicts. Low-fee advisors are not necessarily the best advisors; advice quality, communication, planning, and trust matter as much or more than price. Robo-advisors can lower portfolio-management costs, but they do not eliminate the need for human advice, especially for more complex client situations. Simplicity in portfolio design is a feature, not a weakness, because investors struggle to stick with complex strategies.
Data Points: Retail business scale at Dimensional: about $350 billion - They describe the growth of Dimensional’s retail business over roughly 25 years. Retail share of Dimensional business: about half - Dave Butler’s discussion of how much of Dimensional’s overall business is now retail. HFR hedge fund index return, first half of year: 0.81% - Used to compare hedge funds against equities despite a slower market environment. S&P 500 return, first half of year: 1.67% (USD) - Compared with hedge fund performance to show continued underperformance. Endowment alternative allocation: 52% - Average allocation to alternatives in a paper covering over 800 U.S. college and university endowments. Endowment vs simple portfolio performance gap: 11 basis points lower - Their cited 10-year return comparison versus a simple 60/40 DFA-type globally diversified portfolio. Endowment volatility comparison: slightly less volatility - The alternatives-heavy endowments had only marginally lower volatility than the simpler portfolio. WealthSimple clients: 65,000 - As of March that year, used to illustrate scale versus human advice capacity. WealthSimple licensed advice staff: 10 people - June data cited to question the human-advice ratio in a robo model. PWL commission mutual funds experience: 22 years / 21 years - They say they have not sold commission mutual funds in their office for more than two decades. CPP management fees: approaching 1% - They note the Canada Pension Plan’s increasing costs and complexity. Model portfolio simplification: 13 ETFs down to 3 ETFs - Dan Bortolotti’s transition from a more complex portfolio to a simpler one. Post-DSC commission example: 5% on $100,000 = $5,000 - Used to show how CRM2 disclosure makes embedded commissions more visible to clients.
Pivotal Quotes: "It's best to have a strategy, A and B, stick to it." — David Booth (quoted by Benjamin Felix): Used to reinforce disciplined, long-term investing and portfolio consistency. "If you own a DFA fund, you own more small cap and value stocks than a market cap weighted index." — Benjamin Felix: Explaining the factor tilt and why it can lead to different performance than the market. "Fees are important, but we're finding more and more people have a certain value proposition they're looking for and then deal with fees after." — Cameron Passmore: Discussing why advice quality and service often matter more than simply choosing the cheapest advisor.
Implications: Listeners should expect an evidence-based, fee-aware show that favors simplicity, diversification, and disciplined advice over product sales or complexity. For the industry, the episode signals continued pressure toward transparency, lower-cost portfolio construction, and more explicit value in human advice.
From the Episode
Would not become a client, but we treat everyone's portfolio similarly in terms of the philosophy. I think the moral of the story is we have a philosophy that we're very deliberate about implementing both for our clients and for ourselves, and we really don't stray from that at all. David Booth, the founder of Dimensionalist, says, you know, it's best to have a strategy, A, and B, stick to it. So these are regularly rebalanced, globally diversified portfolios with certain tilts, which we can get into over time, to give it a higher expectation. To return over time. So, really using what's come out of academia and applying it to portfolios day in and day out. And I think it's safe to say that all of our clients have a sense of that and what's going on, and they know the message does not change, it has not changed in.
So it's a good fit and we know from other peers that that's how they treat their clients as well. So we know we're in this pool of like-minded people. But I think we also know that, and we'll talk a little bit more about advice and all that kind of stuff from some of the topics we want to cover today. But if you own a DFA fund, you own more small cap and value stocks than a market cap weighted index. And small cap and value don't always outperform. And for the last 10 or so years, they have not outperformed. It's expected that they will over the long term. But when you go through periods like that, if you're doing it yourself and not getting advice and not talking to someone, I think that a lot of people would pull their money out of the small cap value index fund and move it into the market cap fund because that's what shows up. There's no doubt about it. That's right. Aaron Powell, we spend a lot of time educating where there's interest in terms of how markets are expected to perform. So it's all about expected return and expected volatility. Aaron Ross Powell, but instead of someone just pulling their money out because it's performing poorly, they might ask us or we might be proactively bringing it up.
But the majority of the declining fees were concentrated in a relatively small group of advisors. And those advisors who had been decreasing their fees were the ones that were losing assets and not growing in revenue. Interesting. So, Rob basically said in the article: if you find the lowest fee advisor, they may be low fee because they have to lower their fees to keep their clients because they're not great advisors. They're not maintaining great relationships and giving good advice. Fees are important, but we're finding more and more people. Have a certain value proposition they're looking for, and then deal with fees after. And I think that's a smart way to go after it. I mean, it's a competitive business, and certainly we're aware of that. And I think we're probably in many cases more sensitive to fees than many of our clients even are. We're also hyper-competitive on fees. We believe so. Certainly, in the peer studies we look at for our practice, we are at the lower end of similar service offerings. Well, that's DFA peer group, like people using, and that's in general.
About The Rational Reminder Podcast
A weekly reality check on sensible investing and financial decision-making, from three Canadians. Hosted by Benjamin Felix, Cameron Passmore, and Dan Bortolotti, Portfolio Managers at PWL Capital.