The Stock Market vs. Elections, and Incentives in Financial Planning (EP.119)

Episode Summary

Executive Summary: Episode 119 mixes show updates, investing research, and a long planning conversation. The hosts announce a forum move to Discourse, welcome new staff and merch, then dig into succession planning, mortgage shopping, SPAC/IPOs, stock return skewness, and a deep research review of U.S. elections and market returns. The episode ends with advisor Jordan Tarasov contrasting client-first fee-based advice with sales-driven mutual fund/insurance models, plus a critique of misleading high-yield ETF advice.

Main Topics: Podcast and firm updates (Priority: 5/5): The hosts announce a move from a single comment thread to Discourse, a new team hire (Brayden Warwick), soft-launch merchandise, and various listener/resource updates. Succession planning and firm continuity (Priority: 5/5): Benjamin highlights the importance of succession planning in advisory businesses, recommends a book on the topic, and stresses the need for backup, younger talent, and team-based continuity. Mortgage pricing and consumer awareness (Priority: 4/5): The hosts discuss how many Canadians accept posted mortgage rates without negotiating, using survey data to emphasize rate shopping, comparing offers, and understanding mortgage restrictions. IPO/SPAC market froth (Priority: 4/5): A discussion of the hot IPO market in 2020, especially SPACs, frames them as blank-check companies and notes their surge in popularity and capital raised. Stock return skewness and diversification (Priority: 5/5): Benjamin revisits Hendrik Bessembinder’s research showing that a tiny minority of stocks create all excess wealth, and asks how investors should translate that into portfolio design. U.S. elections and stock market returns (Priority: 5/5): A major research deep dive examines whether election outcomes affect returns. The hosts conclude short-term election effects are weak, while the long-run Democratic-republican return gap is better explained by risk-aversion and election timing than by policy causality. Advisor incentives and client-first planning (Priority: 5/5): Guest Jordan Tarasov explains how sales incentives, DSCs, segregated funds, and permanent insurance can distort advice, contrasting that with PWL’s team-based, no-sales-target culture.

Key Arguments: The old one-thread comment system was too crowded and slow; a structured forum like Discourse is better for ongoing discussion while preserving prior content. Hiring Brayden Warwick adds analytical capacity for research projects Benjamin had been postponing, including model portfolio work. Advisory firms need true succession plans, with depth across roles and younger credentialed staff, so clients are protected if a lead advisor leaves or retires. Many Canadians do not realize mortgage rates are negotiable; even small rate differences can materially affect payments and amortization. The surge in IPOs and SPACs reflects unusually strong capital demand and speculative enthusiasm, but the structure leaves investors relying on promoters to find acquisitions. Bessembinder’s research suggests broad diversification is rational because a very small fraction of stocks drive the market’s excess wealth creation; most individual stocks underperform. Election timing appears to matter less for returns than people assume; market prices aggregate opposing expectations before the result is known. The apparent long-run outperformance of stocks under Democratic presidents is likely due to high risk aversion and recessionary conditions that lead voters to elect Democrats, not because Democrats directly cause higher returns. Tight elections and uncertain policy environments can increase volatility even if they do not reliably change average returns. Sales-based compensation models can push advisors toward products like DSC funds, segregated funds, and permanent insurance even when those products are not in the client’s best interest. A planning-first, team-based firm removes the pressure to hit sales targets and allows advisors to focus on client outcomes like debt payoff, insurance need reduction, and tax-efficient planning. High-yield, closed-end-fund marketing that attacks index funds is framed as bad advice because it confuses yield with true safety and ignores the role of total return and risk. Data Points: Episode: 119 - The episode number for this Rational Reminder installment. Forum migration: 1 old comment thread moved to Discourse - The hosts say the single thread will be locked but remain accessible while discussion shifts to a forum format. New hire: Brayden Warwick - Listener-turned-contributor with a PhD in mechanical engineering joins PWL for research support. Merchandise items: 3 products - T-shirt, hoodie, and mug were launched in a soft open. Books added to website: all mentioned books - The hosts say their book recommendations are now listed on the website with Amazon links. Client feedback names: 4 listener names - Christopher LM, Christiano050, Ian A.S., and Nirin Mojo were thanked for comments. Mortgage-awareness survey: 37% - In a 2019 lowestrates.ca study, 37% of Canadians did not know mortgage rates could be negotiated. Mortgage fairness survey: 46% - Respondents who said negotiating a mortgage is unfair. Public-rate transparency support: 89% - Respondents who wanted banks to publish their lowest mortgage rates. CMHC survey sample: 1,385 - First-time and repeat homebuyers surveyed in the 2019 Mortgage Consumer Survey. Bought at max affordability: 60% - Share of buyers who paid the maximum they could afford. Debt surprise: 23% - Share of buyers whose debt was higher than expected after buying. No monthly budget: ~33% - About one-third of buyers did not have a monthly budget before purchasing a home. Mortgage broker usage: almost 50% - Roughly half of buyers interacted with a mortgage broker. Fixed-rate mortgages: 70% - Share of buyers choosing fixed rates. Five-year renewal term: 60% - Among fixed-rate buyers, the most common renewal term chosen was five years. U.S.-listed IPO proceeds in year-to-date period: nearly $95 billion - The IPO market discussion notes capital raised in the year had nearly reached this figure. IPO count: 235 - Number of U.S.-listed IPOs so far that year. SPAC share of IPO proceeds: 40% - Portion of money raised that went into SPACs. Bessembinder global-stock finding: 1.3% of stocks - Share of global stocks responsible for all return above U.S. T-bills from 1990-2018, as cited by the hosts. Bessembinder U.S.-stock finding: 4% of stocks - Share of U.S. stocks responsible for all net wealth creation above T-bills in the cited paper. Worst retirement start period: 1968-1984 - Benjamin identifies this as the worst U.S. retirement window because real stock returns were flat. U.S. market real return in that period: flat - Inflation-adjusted market returns were basically zero over the 1968-1984 window. U.S. value stock real return: 6.24% - Real return for value stocks over 1968-1984. U.S. small value real return: 8.58% - Real return for small value stocks over 1968-1984. Election-year 12-month average return: 10.6% - Average U.S. stock return in 12-month windows starting in election-year Novembers. Non-election-year 12-month average return: 11.9% - Average return in comparable non-election-year November start dates. Negative 12-month election periods: 7 of 23 - Seven post-election 12-month windows were negative in the sample. Democratic vs Republican excess return gap: about 9% per year - In the 2003 presidential-puzzle paper, excess market return was much higher under Democrats. Largest-firm Democratic effect: 7% - For the largest firms, excess return under Democrats vs Republicans was about 7%. Small-cap Democratic effect: 22% - For the smallest firms, excess return under Democrats vs Republicans rose to about 22%. Updated Democratic gap: 11% higher - The 2017 update found Democrats were associated with roughly 11% higher excess return than Republicans. Advisor compensation on permanent insurance: $250,000 sales points per $10,000 contribution - Jordan describes how insurance products generated dramatically more sales credit than mutual fund contributions. DSC upfront charge: 5.5% first year - Jordan describes the deferred sales charge schedule used in his former firm. DSC schedule length: 7 years - DSC charges declined to 0% over seven years. DSC fee discount: 1 to 3 bps - Jordan says the supposed MER benefit of DSC was tiny relative to the product’s high fees. Insurance product MER: about 3.5% - Jordan cites segregated fund MERs in the range of roughly 3.5%.

Pivotal Quotes: "In my view, it makes sense for most individual investors to use low-cost and broadly diversified index funds in a buy-and-hold strategy." — Hendrik Bessembinder: Email reply to Benjamin asking how investors should interpret his skewness research. "It was a sales organization that was doing financial planning more so than a financial planning organization." — Jordan Tarasov: Jordan explains the conflict between client planning and product-driven incentives at his former firm. "The higher risk premium and the Democratic presidency are both caused by higher risk aversion leading up to the election." — Benjamin Felix: Benjamin summarizes the Pastor-Veronesi explanation for the Democratic stock-return pattern.

Implications: Listeners should be skeptical of election-based market timing and yield-chasing product pitches. The episode reinforces low-cost diversification, careful mortgage shopping, and advisor due diligence, while showing why planning-centric firms and strong succession structures matter.