The PWL Capital chief investment officer discusses DFA, factor investing, the home-country bias, and investment advisory trends in Canada.
Our guest on the podcast today is Ben Felix. Ben is chief investment officer for PWL Capital, a Canadian wealth management firm. He also co-hosts the Rational Reminder podcast and is the host of a YouTube channel that covers finance and investing-related topics. He joined PWL Capital in 2013 after completing a degree in mechanical engineering as well as an MBA. He is a CFA charter holder and a CFP professional. Ben, welcome to The Long View.
“The Passive vs. Active Fund Monitor,” by Raymond Kerzerho, pwlcapital.com, Winter 2024.
“Passive Beats Active Again in 2024,” by James Parkyn, capitaltopics.com, April 30, 2025.
“Canadians Reducing Home Bias, Eh? Vanguard Research Finds That Investors Are Increasingly Going Global,” vanguard.ca, June 2024.
“Episode 169: Prof. John Cochrane: (Modern) Modern Portfolio Theory,” Rational Reminder Podcast, Sept. 30, 2021.
“Understanding Crypto 14: Prof. John Cochrane: Money, (Fiscal) Inflation, and Political Freedom,” Rational Reminder Podcast, Sept. 2, 2022.
“Episode 284: Prof. Scott Cederburg: Challenging the Status Quo on Lifecycle Asset Allocation,” Rational Reminder Podcast, Dec. 21, 2023.
“Episode 350: Scott Cederburg: A Critical Assessment of Lifecycle Investment Advice,” Rational Reminder Podcast, March 27, 2025.
“Episode 316: Andrew Chen: ‘Is Everything I Was Taught About Cross-Sectional Asset Pricing Wrong?!’” Rational Reminder Podcast, Aug. 1, 2024.
“Episode 102: Dr. Brian Portnoy: Underwriting a Meaningful Life,” Rational Reminder Podcast, June 11, 2020.
“Episode 171: Prof. Campbell R. Harvey: The Past and Future of Finance,” Rational Reminder Podcast, Oct. 14, 2021.
“The Misguided Beliefs of Financial Advisors,” by Juhani T. Linnainmaa, Brian Melzer, and Alessandro Previtero, Journal of Finance, March 22, 2021.
“OneDigital Expands Into Canada With Investment in PWL Capital, Expanding Wealth Management Services Across Borders,” OneDigital.com, Jan. 23, 2025.
“Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice,” by Scott Cederburg, Aizhan Anarkulova, and Michael S. O’Doherty, papers.ssrn.com, March 5, 2025.
The Fiscal Theory of the Price Level, by John Cochrane
Amy Arnott: Hi, and welcome to The Long View. I’m Amy Arnott, portfolio strategist for Morningstar.
Christine Benz: And I’m Christine Benz, director of personal finance and retirement planning for Morningstar.
Arnott: Our guest on the podcast today is Ben Felix. Ben is chief investment officer for PWL Capital, a Canadian wealth management firm. He also co-hosts the Rational Reminder podcast and is the host of a YouTube channel that covers finance and investing-related topics. He joined PWL Capital in 2013 after completing a degree in mechanical engineering as well as an MBA. He is a CFA charter holder and a CFP professional. Ben, welcome to The Long View.
Ben Felix: Thank you so much for having me.
Arnott: Well, it’s great to have you here. We wanted to start by talking a bit about your background. You have a bachelor’s degree in mechanical engineering. How did you decide to kind of pivot toward the finance side?
Felix: Yeah, good question. It wasn’t that intentional. I went to Northeastern University in Boston. I’m Canadian. I live in Canada but went to Northeastern on a basketball scholarship. And when I went there, I had to pick an academic program. And so I chose engineering because I kind of liked building things growing up. And it was supposed to be one of the hardest programs. So I thought that sounded cool, and it was really hard. So I did that. And then I finished that degree and left Northeastern to come back to Canada to play a little bit more basketball at a Canadian university. And then again, I was in the same situation where I had to pick an academic program, and I had no idea what I wanted to do with my life still. I figured an MBA would give me a lot of options. I didn’t want to be an engineer. I didn’t think so. I didn’t want to do a master’s in engineering. So I picked an MBA, and I picked the finance program, again because it was supposed to be the hardest path of the MBA, which it was. And that was it. So I ended up in finance, kind of following basketball, I guess. I never really had a burning passion for finance that led me here, but I’m pretty happy that this is where I landed.
Benz: We want to talk about your work with PWL Capital, where you are Chief Investment Officer, and you’re a portfolio manager. Can you talk about how you interact with the firm’s advisors, and do you work directly with clients at all?
Felix: I did start out as a client-facing advisor, so I am still involved in some of those client relationships, but it’s increasingly rare for me to be directly involved. There are still some relationships that I’m more closely involved in, but it’s not super common at this point. I do have great relationships with all of our advisors. PWL is still relatively small, and so I’m able to have those close relationships. My interactions with them are mostly ad hoc when things come up for them or if client situations come up that they want to discuss. But a lot of our advisors, I think probably all of our advisors, listen to our podcast, The Rational Reminder. And so we kind of interact asynchronously through that, and I will often have follow-up discussions with advisors based on something that they heard on the podcast.
Arnott: Have you always been a believer in efficient markets and low-cost diversified portfolios, or is that something that evolved over time?
Felix: So when I came into finance, I knew very little about investing. Like when I started my MBA, my finance knowledge was basically zero. Maybe I learned a little bit about the business of engineering in my engineering program, but I didn’t know anything about investing. And I thought like an engineer because that’s how I’d been trained in school. And so I got some experience early on through an internship program with a firm that recommended actively managed mutual funds. And I remember being super excited to understand their model and their approach for choosing the funds, for picking managers. I assumed that there was going to be some complex and really interesting analysis, but I was let down. There was really no process beyond, I don’t know, subjective evaluation, maybe a little bit of a look at past performance. And so I was really disappointed. And at that point, I was ready to leave finance and go back to engineering. But I stumbled across Dimensional Fund Advisors and their application of the Fama-French asset-pricing research, which is something that I had learned about a little bit in my finance classes.
And that just made so much sense to me. And so when I realized that there was a relatively scientific way to approach investing, I decided to stick around in finance. And then I ultimately ended up at PWL, which is a firm that’s kind of built on that type of thinking. Now, I wouldn’t say I’m a believer in efficient markets because I think belief makes it sound almost religious. But I think efficient markets is a good model for making investment decisions. But like any model, it’s not a perfect reflection of reality.
Benz: Canada’s retail market tilts heavily toward active management. Is this by choice or by prescription? And I’m wondering what will it take to move the needle to get more people into low-cost index-based portfolios in Canada?
Felix: Yeah, Canada is a funny market. We do track this at PWL in a report that we publish once a year called “The passive versus active fund monitor” using Morningstar data. For 2024, we found that the Canadian fund market is about 80% active, which compared with the US is obviously a lot more active. But in 2015, we were closer to 90%. So it is moving in the right direction, but just more slowly than the States. I think conflicts of interest likely play a role. If you look at the distribution of Canadian fund assets, a lot of them are still in commission-based mutual funds, which tend to be actively managed. I think they’re probably all actively managed. So that’s definitely one piece is the conflicts. And we’ve got some very strong financial institutions in Canada that are eager to sell their commission-based products. There’s also a pretty well-known study in the Journal of Finance, “The Misguided Beliefs of Financial Advisors.” And then they look at a Canadian sample. So it’s very relevant to this conversation, to your question.
They look at the sample of Canadian advisors and they show that advisors typically invest personally in the same way that they advise their clients. So they do the same, what I would call mistakes, they trade too much, they chase past returns, and they use actively managed funds. So that study kind of suggests that it’s not just about conflicts of interest, but that advisor beliefs are also driving the allocations to active funds in Canada. And so based on that, I think it’s probably as much about advisor education as it is about conflicts of interest. On that, I sit on the proficiency committee for CIRO, for Canada’s securities regulatory body. And I do think there’s a lot of good work happening on advisor proficiency in Canada right now. So I’m hoping that things get better.
Arnott: So you mentioned the Fama-French factors, and I’m curious if there’s any conflict between having market efficiency as a mental model and the DFA approach of tilting portfolios to try to capture higher expected returns from things like size, value, and profitability?
Felix: Well, I think, like I mentioned earlier, efficient markets is just a model. I think Dimensional’s approach can fit with that model if you apply risk-based explanations to the higher expected returns that Dimensional is pursuing. But even Dimensional doesn’t take a hard line. I think maybe they used to, but more recently they’ve really softened on whether premiums are risk-based or behavioral. I don’t think there’s a conflict, but I also think it makes sense to be super dogmatic about beliefs in finance.
Benz: I wanted to switch over to your podcast, The Rational Reminder. You started that podcast back in 2018. What was your goal in starting a podcast?
Felix: PWL as a firm had some incredible foresight. Looking back, they had incredible foresight around the same time that I joined the firm. We’d realized that we were too small to compete on ad spend, for example, with the big Canadian banks. We couldn’t outspend them, but we knew that we could compete on knowledge and on communication. We also recognized that people don’t want to hear from PWL Capital Incorporated. They want to hear from people. What PWL did back then is they empowered advisors at the firm to create content. They encouraged blogging, but then they engaged with a third party that supported video content. They basically said, any advisor that wants to make videos, they can do that. That content creation has really been a big part of our DNA for many years now. I eventually put my hand up as one of the advisors and said that I would make videos. I started a YouTube channel that had a bit of success back then. Then based on that, I approached Cameron, who’s now PWL CEO, and I said, hey, why don’t we start a podcast? He was like, awesome, let’s do it. We got microphones and we recorded an episode, and then I don’t think we’ve missed a single week since then.
Arnott: You also have a pretty active message board community associated with the podcast. How did that get started? Was that part of the same strategy of wanting to have more active grassroots communication efforts?
Felix: The podcast community came out of the fact that there was just massive demand for discussion after episodes. We initially had a podcast website, it’s the same website we have now for the podcast, where we post the transcripts as blog posts, which had comment sections, and so people could comment. The comment sections were getting so insane with discussion that it was hard to manage. We started looking for platforms that were designed to facilitate community discussions. We landed on this platform called Discourse, which is, I think, a fairly well-known forum software. We started using that. We’ve used it ever since. It’s been great. But that community has really flourished. I think there’s around 11,000 people in there now. It gets around 500,000 page views per month. I don’t think there’s anything quite like it on the internet, where all these people are very respectful, very nerdy.
I say that in an endearing way. A lot of them are highly educated. There are a ton of people in there who are either past guests or otherwise highly educated in finance. They’re engaging in just really good discussions about investing and financial decision-making. That said, community.rationalreminder.ca, if people want to check it out, you do have to apply. We ask people to write a few sentences about why they want to join. It is really heavily moderated from some great volunteer moderators. It’s a really neat thing that just emerged out of the podcast.
Benz: So that content moderation seems a little bit old school. I’m curious, why do you think that’s so important to have active moderators in there and also to qualify your group of contributors? Why is that important?
Felix: Well, discussions can go off the rails. People can get off topic. Sometimes people can just be unpleasant. Because we have volunteer moderators who are members of the community and we choose moderators who typically have been there for a long time and are active contributors, they really want to just make it continue to be the great place that it is for the type of discussions that take place there. So we do occasionally have members who join. It’s typically a new member and they aren’t contributing in a positive way, and the moderators will very quickly either correct the behavior or remove that person. And that just keeps the discussions clean and focused on the right things.
Arnott: How did you come up with “The Rational Reminder” name?
Felix: We decided we were going to start a podcast and then we realized we needed to call it something. So I texted my friend Aaron, who’s a very nerdy guy, not a finance nerd though. And we went back and forth a bit and came up with the name Rational Reminder. The idea, it sounds, it’s the R&R. But the idea behind it was that the podcast is about making good financial decisions. And even if people shouldn’t always strive to do what is rational, I think it’s useful to have reminders about what a rational person would do. And so that was kind of the initial idea of the podcast. We probably have strayed away from that a little bit because we’ve had lots of episodes on psychology and nonrational things, but that was the idea.
Benz: I’m curious about time management with the content creation and the podcast and balancing those activities alongside the other parts of your job. Can you talk about how you fit the podcast in? It seems like, with a weekly cadence to your podcast and each episode probably takes a fair amount of time. How do you fit that in alongside the other stuff you have to get done?
Felix: They are very time-consuming. But the way that I think about this is that all the research that I should be doing anyway in my role as CIO of PWL, this is the work that I should be doing anyway. And so having the podcast really just puts structure around work that I should be doing anyway in my role. The other added benefit of the podcast, so the structure is big because we have the episode every week and so I have to make sure that I’m doing the research for the episodes. But then the other really cool thing about it is that not only am I doing that research, but I’m getting access to the people who created the research that I’m often reading. So if I read the papers of Eugene Fama or Ken French or Robert Merton or John Cochrane, the fact that I have this podcast that a lot of those guys have been on makes it interesting for other top academics to come on as guests, which allows me to reach out and say, hey, would you like to come on our podcast? So then I read all the research and then I get to talk to them about it, which I think is pretty cool and probably benefits our firm and our clients.
And then the other big benefit of the podcast, as opposed to me just sitting there doing research by myself, is that I get immediate feedback from tens of thousands of listeners and many of whom are highly educated themselves. So I know pretty quickly if I’ve said something that doesn’t make sense or if there’s another avenue of research that I need to explore to better understand the topic. And I really can’t think of other ways to get that kind of access to experts and that kind of feedback loop on ideas other than doing a podcast. So it is time consuming, but I think it’s work that I would ideally be doing anyway, and I think it puts a lot more structure and has other added benefits.
Arnott: So you have a pretty extensive archive of episodes. I think there’s something like 353 on the site. And I’m curious, do you have a favorite episode or favorite guests that you’ve talked to?
Felix: It’s kind of like picking a favorite child. It’s really hard to think about. We’ve had so many incredible guests. It’s crazy to look back at some of the people we’ve had conversations with. I would say that the most impactful ones for me and the ones that I often think back to or go back and reread the transcripts of are the ones with John Cochrane. We did one with him on asset pricing and portfolio theory. And we did a second one with him on inflation, and his fiscal theory of the price level on inflation I just find it to be fascinating and very elegant. So that’s definitely one. Scott Cederburg is another one on lifecycle asset allocation that definitely struck a chord with me but also with our audience. Every time we’ve had Scott on—a couple of times now—and every time we do an episode with him, the number of comments in the community and on YouTube on those episode discussions are just enormous. And I think Scott’s research is so practically relevant, which is why I think it’s been popular. It’s got a very simple conclusion. I think we’ll talk about it later. But it’s very practically relevant to most investors.
Benz: Were there any interviews that surprised you or made you think about investing in a different way?
Felix: So I’ve never been surprised by an interview and that’s just because I only ask questions that I already know the answer to. That might sound like a weird thing to say, but I prepare for the interviews by reading literally all of the guests’ research. And if they’ve done other podcasts, I’ll listen to all their other podcast appearances. So by the time we’re talking to them, by the time I’m figuring out what questions I want to ask them, I already kind of know what they’re going to say. So I’ve never had a guest answer a question. I’m like blown away. Sometimes I’ll act like I’m blown away for dramatic effect on the podcast, but I’ve never actually been blown away. Now, that being said, Andrew Chen’s research, his answers to the questions I asked didn’t blow me away. But the research itself when I was reading it was very interesting. He basically showed that factor premiums, which is a big part of what Dimensional is pursuing, have declined dramatically after costs since around 2005, which, if true, is a big deal for a firm like PWL that’s extensively using products from Dimensional. Now, I don’t think Andrew’s research is conclusive enough to abandon that approach to investing, but it was definitely a guest that made me think pretty deeply about how we manage portfolios. And then Scott Cederburg, I mentioned that was another one that had an impact on the way that I think about investing.
Arnott: You also occasionally venture into nonfinancial topics. How do you decide when to mix things up with topics that aren’t directly related to finance and investing?
Felix: So much of the work that we do with clients is not directly about their finances. Their money and their investments are there to facilitate living a good life, but sometimes people need help designing what a good life looks like for them in order to make financial decisions. And so we were really heavily influenced by Brian Portnoy on this topic to just start thinking about this stuff and incorporating it into the advice that we give clients. I don’t really have a framework or a formula for how we decide when we’re going to do nonfinancial episodes, but if we read a book or find research that we think would be valuable for our clients and our advisors to incorporate into their financial decisions, then we’ll try and do an episode on it. And like I mentioned earlier, we’ve been pretty lucky where because we have a pretty good track record of past guests and our podcast has been around for a while, usually if we reach out to an author or an academic, they’ll agree to come on the podcast. So yeah, we’ve had some great nonfinancial guests too.
Benz: Who have been some of your favorites? And I will say Amy and I are taking some notes here as you’re naming some of your favorite guests. But how about in the nonfinancial category?
Felix: Yeah, it’s again tough to pick favorites. I think we’ve had relatively few of them and they’ve all been quite impactful in the way that we think about approaching financial advice. But Brian Portnoy has got to be at the top of the list just because he took us from not thinking about this stuff as much as we probably should have. And I think this is probably true for a lot of financial firms. He took us from there to understanding that this should be front and center in the way that we give advice. And he really put us on that path of looking for other nonfinancial guests to speak to as we sought to understand that topic. So his episode’s got to be up there, and he was a big influence on all the other episodes that we did.
Arnott: So we wanted to also talk a bit about your firm, PWL Capital. And PWL recently joined a larger firm called OneDigital. And I’m curious what did you all see as the main benefits of becoming part of a larger firm?
Felix: It’s a great question that we’ve had to answer a lot since we did the deal with OneDigital. We had a great business with good organic growth, good revenue, we were financially strong. And we grew a ton. I’ve been with PWL for just under 12 years. And we’ve grown a ton over that time. We roughly 10xed our revenue in the last decade or so. And we really figured out our advisor team structure. We figured out our organizational structure. But we still today only manage about $5 billion for Canadians. And that’s great growth relative to where we started, but we want to have a bigger impact. And I think in a lot of ways we’re positioned to have a bigger impact. We never planned on selling or joining a larger firm. And we were approached by multiple buyers out of the blue last year. We initially shut them all down because this just wasn’t part of our plan. But that experience of being approached and having people interested in joining with us or buying us really got us thinking about what the possibilities were and what could be and how we could leverage that type of situation to scale our impact. So we started thinking about that OneDigital out of the people we had talked to, they’d really struck us as unique. They were laser-focused on fit with the people at any firm that they acquire. Laser-focused on internal culture and obsessed with having a positive impact on their clients. That’s really what they aim to do. And so when they reached back out, we took the call, went to visit them at their offices. And we really hit it off with their leadership team and all of the people that we talked to while we were there.
So it really came down to two things I would say that helped us make this decision to sell. They give us access to capital, which lets us acquire like-minded advisor firms in Canada, advisor teams and firms. There are a ton of great advisors, like we know so many of them here in Canada, which is a pretty small market, who think like we do about financial planning and about portfolio management. But they’re sitting in firms that are not aligned with our approach and with their own approach. And so while we were financially healthy before joining OneDigital, the capital requirements in Canada for dealer members would have made it really hard for us to do any meaningful acquisitions. And OneDigital, with the stroke of a pen, changes that. So that was a big reason. And then the other thing is once we started thinking like that, like once we started thinking about 10xing again from where we are now and getting into the world of acquiring other firms and potentially large teams and things like that, we’re really out of our element at that point. And then OneDigital on the other hand has done, I think over 200 acquisitions. And they’ve got a leadership team that’s running a business at a scale that we can only aspire to. So we just thought between those two things and for where we want to go, partnering with them really set us up to accelerate the impact that we think we can have in Canada.
Benz: What’s your typical client profile at PWL? And I’m wondering if you anticipate that will change at all with the acquisition. My understanding of that firm of OneDigital is that they have a big emphasis on workplace, right? Of accessing clients through providing them with workplace wellness solutions but maybe talk about that.
Felix: Yeah, that’s right. So they talk about workplace to wealth. And their core business is really the benefits market in the US and 401(k)s retirement plans. And in Canada, it’s going to be a little bit different because they’re starting with, we are their first acquisition outside of the United States. And so we don’t have a workplace to wealth set up in Canada at the moment. It’s something that they’re definitely going to explore, but for now we’re focused on wealth in Canada. Right now, our average client household has about $2 million invested with PWL. A lot of dispersion under the hood on that number, though. We do have cohorts of much larger clients, and we also have a team dedicated to what we call emerging wealth. I do love the workplace to wealth idea. I think it’s very smart and serves the client well. So we’ll see where that goes in Canada.
Arnott: What does your fee structure look like for a typical client?
Felix: We have a tiered fee structure that starts at 1.25% on the first $500,000 and then it decreases pretty aggressively from there. Like at 2 million, we’re at 0.85%.
Benz: I’m curious that seems high, 1.25%. Is fee compression coming for advisors in Canada?
Felix: I don’t think it’s high. We benchmark against Canadian and US peer firms that are in many ways very similar to PWL. And we’re kind of right on target. At the lower end, 1.25% is maybe slightly on the high side of normal. But I don’t think it’s crazy high, and it does let us take on smaller clients. We raised that fee last year from 1%, and it has not affected our growth, and our existing clients were not unhappy about it. So, fee compression—we raised our fees last year and lost very few clients and have continued to grow. So that would at least in our case lead me to believe that it’s not a huge issue at the moment.
Arnott: Have you thought at all about alternate fee structures like flat fees or subscription-based fees, things like that?
Felix: Yes. It’s one of the most common discussions that we have about that topic, about our offering and how we charge for it. We’ve toyed with the idea of doing fee-only financial planning. We have not talked about a flat-fee asset management or wealth management service. The thing for us right now is that because we’re growing at a pretty good clip and we’re at capacity with that, offering alternative fee models and alternative service offerings is just not something that we feel like we need to do.
Benz: We wanted to switch over to discuss investing and portfolio management. You’ve referenced DFA a couple of times. Do you also work with products from other fund companies besides Dimensional?
Felix: Yeah, we do. So Dimensional is really the vast majority of our assets, but some of our advisors are using index funds from companies that everybody knows like iShares, Vanguard, BMO in Canada, and a few others. But it’s mostly Dimensional, and it’s all philosophically kind of cut from the same cloth. We’re either using Dimensional funds or market-cap-weighted index funds, but you’re not going to find any actively managed funds or anything like that at PWL.
Arnott: What does a typical client asset allocation look like? And do you have model portfolio that you use for different types of clients?
Felix: Yeah, we’re mainly using six core models just with different asset allocations, all Dimensional funds, and just pretty plain-vanilla stocks, bonds, and a little bit of REITs. Our average client is kind of 60% to 70% invested in stocks, but as you’d expect, there’s lots of dispersion around that. Using the Dimensional funds, we have like moderate tilts toward smaller, cheaper, and more profitable stocks relative to a market-cap-weighted index, but it’s nothing crazy. Like that the tilts are nothing crazy. We do generally have home-country bias in our models. But the main difference between any two client’s portfolio is typically going to be their allocation between stocks and bonds. Some of our advisors are using a mix of Dimensional funds, and some advisors are using exclusively cap-weighted index funds just based on their own preference or their clients’ preferences.
Benz: So the topic of global diversification is a hot one these days, and you referenced that your portfolios typically have a home-country bias. Can you talk about how you determine the allocations to Canadian securities, nonCanadian securities, and other parts of the world?
Felix: Yeah, so we have about a third of our portfolios in Canada, which is definitely a significant home-country bias. We, I think, have pretty good reasons for doing it, which I guess you’d hope if we’re doing it. But Canadian stocks are more tax-efficient for Canadian investors in both taxable and in a lot of cases also in nontaxable accounts. So that’s one big reason for the home-country bias. And then there’s a couple of interesting empirical pieces of research that suggest about the home-country bias that we have. Vanguard has one paper where they look at the optimal allocation to Canadian stocks for a Canadian investor, and they arrive at about a third. We replicated their study going further back in time using the Dimson-Marsh-Staunton data and found almost an identical result. And that’s not superstrong evidence, but it’s something to go on. And then the other input there is more recent, which is Scott Cederburg’s research, where he finds using a totally different approach that having about one third of an equity portfolio in home-country stocks makes sense. So between tax efficiency, the Vanguard study, our replication of it, and Scott Cederburg’s study, that’s kind of how we arrive at the one third in Canada. And then other than that, we market-cap weight, the remainder of the world.
Arnott: I wanted to follow up on Scott Cederburg’s research, and I think he essentially concluded that if you’re saving for retirement, you want it to be exclusively in equities and a globally diversified equity portfolio. And I’m curious if you agree with that conclusion.
Felix: Yeah. So his finding was not just if you’re saving for retirement. His finding, him and his co-authors finding was that investors should be in 100% equity portfolios for their full lifecycle, saving for retirement right through to the end of retirement, right through until death, which is a big conclusion to draw. I think they did a good job with their analysis. And then of course, the international diversification piece. So they said 100% equities with a third domestic country and the remainder in international stocks, which is very different from the typical advice that you should start out in an equity-heavy portfolio and then transition toward a more bond-heavy portfolio over time. So that’s the headline result is that you should be 100% stocks all the time. But I think the real insight from their research, which I do agree with, is that nominal intermediate government bonds, which is what they’re looking at for bonds, are riskier for long-term investors than people generally think. And that stocks are maybe a little bit safer for long-term investors than people generally think. We do have some clients in 100% equity portfolios. I’m personally invested that way, not because of Scott’s paper. That’s how I was investing before his paper was even written. But I don’t think it makes sense for everyone. And I think Scott would agree.
Like their paper shows within the specific data that they analyzed shows a certain result. But I don’t think Scott’s going to go and tell everyone that they should be in 100% equity portfolios. People are constrained by their behavioral loss tolerance and their ability to take risk. So 100% stocks isn’t going to be right for everyone. And then the other big thing with Scott’s research is that they’re looking at a specific set of data. They’re looking at market-cap-weighted equities, intermediate term government bonds for 39 countries for the period 1890 through 2023. Not all countries are there for the full sample. Some of them have shorter histories. And then they do this bootstrap simulation to create a million hypothetical scenarios. Anyway, that part doesn’t really matter too much. But the important thing is their conclusions hold within that specific dataset. But if we include things like factor tilts—like what Dimensional does—or corporate bonds, or maybe some other assets, and if we acknowledge the fact that future returns could be different from the past, I think we need to be careful taking Scott’s findings as precise advice, like literally taking it as everyone should be 100% equity with a third in their domestic country and so on and so forth. But I think the main insights from their paper that are useful are that international diversification is important, that home-country bias for countries like Canada is not a terrible idea. Countries like Canada being smaller market-cap countries. And then that stocks are a bit safer for long-term investors than people often think. And nominal bonds are maybe a bit riskier. Do I agree with the research? I wouldn’t use it as a prescription, but I think that it’s very insightful.
Arnott: So the risk of nominal bonds is that mainly inflation risk? That’s the issue there?
Felix: Yeah. So that’s what they find in their research is that when inflation happens, nominal bonds get just absolutely smoked. And one of the problems is that stocks tend to have negative auto correlation. So bad real returns for stocks tend to be followed by slightly better returns for stocks, which makes them a little bit less risky at long horizons. When you have bad real returns for nominal bonds, they tend to be followed by more bad returns, which makes them a little bit riskier for long-term investors.
Benz: Inflation is another hot topic these days, certainly here in the US. It looks like inflation in Canada has been running a bit lower than here in the US. Do you think inflation can remain low? And are there certain types of assets that you like to use with clients as an inflation hedge? I heard that the inflation-protected bond market in Canada is a little different than what we have here in the US.
Felix: Yeah. It’s a much smaller market, and it’s declining because we’ve ended our real return, they’re called real return bonds. We’ve ended our real return bond program here in Canada. So we weren’t using them before. Some people surely were, then I’m sure they were sad about it. Theoretically, I think it’s bad that we’ve eliminated that program, but I can’t say that with too much conviction because we weren’t actually using them in client portfolios. We don’t do anything fancy to hedge unexpected inflation. We’ve looked at a lot of different asset classes and strategies, and we just didn’t like the trade-offs. I don’t have specific inflation predictions. I think if you look at the Canadian bond market, so we do still have real return bonds that are still trading, so we can look at the breakeven inflation that the market is pricing in, it’s nothing too exciting.
I really like, I mentioned it earlier, John Cochrane’s Fiscal Theory of the Price Level. It basically says the price level adjusts so that the real value of nominal debt equals the present value of real primary surpluses. Basically, as long as government deficits are paired with a credible promise to repay, as long as deficits are invested in productive ways, inflation in a country can stay low. What really matters for inflation in that theory is debt relative to people’s assessment of whether the government can and will eventually repay that debt. Within that framework, I think Canada’s fine as long as we don’t start doing anything too crazy on the fiscal front.
Arnott: I’m curious about commodities. Is that something that you use with your client portfolios?
Felix: No, that’s one of the things we’ve looked at as a possibility. We just didn’t love the trade-offs. Low expected returns most of the time, and they can pay off sometimes, but it just wasn’t a trade-off that we were interested in.
Benz: We’re giving you kind of a lightning round on various assets, but we wanted to ask about crypto. What’s your opinion about the role it can play in a diversified portfolio, if any at all?
Felix: Yeah, so crypto is an interesting one. We did a whole podcast series on crypto because we really wanted to understand it. What had happened there actually is that we kind of ignored it, as I think a lot of people in TradFi, in the traditional finance did for a long time. Then we had Professor Cam Harvey on our podcast, who is a highly respected academic researcher—two-hour episodes, one of our longest episodes ever. We spent half that episode talking about traditional finance and his research in that area, and then we spent half of the episode talking about crypto. He was so passionate about it and so excited about it that Cameron and I walked away from that interview and said, OK, we better take this more seriously and look into crypto. That was when bitcoin was at $60,000 for the first time, crashed soon after. Now, of course, it’s back up again. I would say that we don’t use crypto in portfolios.
After that whole podcast series, we came away from it thinking that it’s more of an ideological innovation than it is a technical innovation. You talk to people who know software and who understand that side of the technology. Satoshi did some interesting things to create bitcoin. I don’t want to minimize that too much, but it wasn’t a massive technical innovation. But I think ideologically, it represents something that’s very important to a lot of people. It caters to a certain worldview that some people find very attractive. To that extent, it’ll be valuable for people who hold those views. But I don’t think it’s an asset. Crypto in general is an asset class with positive expected returns. I think it will continue to be highly volatile. So, we don’t touch it in portfolios.
Arnott: Another asset class that’s been attracting a huge amount of attention lately has been gold. As we’re taping this toward the end of April, I think it’s trading around $3,400 an ounce. Do you think that investors are expecting too much from gold as a safe haven asset? Is gold something that you use with your clients at all?
Felix: Gold is another one that we’ve looked at pretty closely and decided not to allocate to, which, as mentioned, has been a little bit painful recently, not having half of our portfolios in gold. That would have been great. But it’s not something that we do put in client portfolios. Its historical performance as a safe haven asset is mixed, which is one of the reasons that we didn’t use it. If it was a perfect hedge for market crashes or something, then maybe it’d be more interesting. But it has not been historically. My concern for investors right now, because as you guys know, as well as anybody, when an asset class performs well, all of a sudden investors get interested in it. But when the real price of gold is high, you can assume that gold maintains its real value at very long horizons, which it has done historically. If you believe that to be true, there’s this golden constant value for what gold should be worth. You can measure whether the actual price of gold is low or high relative to that gold constant value. Right now, the real price of gold is quite high. And historically, when the real price of gold is high, future real returns tend to be quite low. So hopefully, we don’t see the “Mind the Gap” report showing that investors underperformed in gold over the next few years.
Benz: The elephant in the room as we’re having this conversation today is tariffs. I’m curious to hear how you’re thinking about the potential impact of tariffs globally, and also how you’re handling this issue with your client portfolios.
Felix: I think that the market is pricing the expected effect of tariffs every day as we learn more information. The market’s clearly not loving what it’s seeing. I don’t think there’s a whole lot that investors can do about it in portfolios or with asset allocation other than going back in time and investing in gold, maybe. But we’ve handled it for our clients through communication. We send occasional emails to all of our clients when stuff is happening. And so we’ve done that twice throughout this tariff situation. Canada’s obviously been impacted directly by some of the stuff that’s happening there. And so we’ve really just tried to explain to clients exactly what is happening, why it’s affecting stock prices, and why we think it makes sense to stay the course. That’s been our approach.
Arnott: Do you think that the market is overreacting to the whole trade war issue, or is it really something that could create significant change to economies globally?
Felix: I think it does have the potential. It seems to be reversing a little bit today with the communications about what the plans are there. But I think anytime asset prices have big swings like we’ve seen recently, it’s always because something might change, not that it’s necessarily going to, but it’s all because there’s uncertainty. If the market knew exactly how something like the tariff situation would affect cash flows in the future, then asset prices wouldn’t change that much. They wouldn’t swing that much. And in this case, tariffs are not a new thing, obviously, but the way that they’re being weaponized and the constantly changing logic, if we can call it that, justifying the tariffs, that’s all unique. And that’s all different from anything that we’ve seen, at least as long as I’ve been around. So I think the market’s probably reacting the way that it should, based on a pretty uncertain situation.
Benz: One topic of keen interest to Amy and me is retirement drawdown, retirement decumulation. And you’ve done a fair amount of research on strategies to help retirees spend from their portfolios. Do you have a preferred one that you like to use with your clients?
Felix: So they’re really fun to model, as you guys know, and you’ve done some great stuff on this too. And I think we can get really interesting insights from modeling different strategies, like just even very generally speaking, how flexible spending affects retirement outcomes. But I don’t think spending rules are great for clients. Like telling someone that they need to cut back on their spending this year because the rule says so, even if it’s the best rule ever, that doesn’t make a whole lot of sense without understanding what is specifically going on in that client’s life. So we approach retirement drawdown by updating our client’s financial planning projections at least once a year, oftentimes more frequently and typically around periods of market volatility like we’re seeing recently. And having a discussion based on that and based on the things going on in their lives and their current priorities. So that could mean sometimes, depending on what the financial planning projection says, that could mean increasing or decreasing their spending from time to time, which mirrors a variable withdrawal strategy. But it’s really going to be based on their specific situation and what’s important to them at that time.
Like there could be a case where a variable spending policy might say a rule or a formula might say that they should reduce their spending that year, but they have the opportunity to go on, I don’t know, a once-in-a-lifetime trip or to see their ill family member for the last time. And you’re not going to stick to the rule. It just wouldn’t make sense to do that. So we just do it by updating financial planning projections and having conversations with clients to understand what’s important to them. And people will cut spending when it makes sense to do so. I don’t think you need a rule for that. People will know that, hey, the market’s down and going on that trip wasn’t that important to me anyway, so we’re going to skip it this year. But somebody else might say that their trip or whatever they were going to spend on is really important. And so they wouldn’t follow the rule. Anyway, I think it’s a very individual thing to the point that it’s hard to apply anything systematic to it.
Benz: I wanted to ask about a related issue, which is just that it seems that some, maybe especially higher net worth clients, people have an aversion to spending what might be an appropriate amount that they tend to underspend and underconsume relative to what they could do. I’m curious if you encounter that with your clients and if so, how you help coach them through that so that they are spending appropriately and maybe even doing some lifetime giving to loved ones or charity or whatever.
Felix: Yeah, it’s almost like a paradoxical thing where people who end up having a lot of money got there because they didn’t spend very much, but then it makes it hard for them to spend because that’s how they’ve lived their entire lives. It’s a challenge. I don’t have a silver bullet solution, but we do try to educate people on the fact that they are able to spend more if they want to. But we have also found that sometimes if we really push people on that, they get uncomfortable and they just say like, listen, I appreciate what you guys are saying, but I don’t want to spend more money. And sometimes that changes over time with things like children or grandchildren or causes that become important to them. But it is a challenge. I agree with you. I wish I had a one-size-fits-all solution to solve it. But I do think that educating clients on their financial situation, on how much they are able to spend, it may help in some cases, but it doesn’t always work.
Arnott: So I’m assuming that you use some sort of Monte Carlo-based retirement planning software. And I’m curious, is there a certain probability of success that you set as a threshold or does that vary by client?
Felix: That’s a very difficult question. The Monte Carlo success rates are a tricky thing. We have a soft rule of wanting to be at least 85%, but that can change a lot based on the client and their situation. And we also have to recognize the limitations of using Monte Carlo analysis and the return distributions that most softwares are able to handle. Like we talked about the Scott Cederburg research earlier. Monte Carlo typically assumes that returns are completely random, which makes stocks risky assets. A little bit riskier at long horizons for investors and makes Monte Carlo look a little bit worse than it would if it incorporated the autocorrelation, negative autocorrelation that we actually see in stocks. So there’s lots of little details like that you have to be pretty aware of. But if I had to give a, this is our benchmark, we do want to see an 85% success rate, but we also try and have a very nuanced discussion with clients about what that means and how to interpret it.
Benz: I’m curious whether you have any thoughts on the FIRE movement, financial independence, retire early. And maybe you can talk about what types of issues would-be FIRE people should be thinking about if they want to pursue this approach.
Felix: I don’t have really strong thoughts on it. I’ve talked about it on our podcast a few times, and I’ve said things that make people that consider themselves to be part of that movement very annoyed.
Benz: Like what?
Felix: Well, just saying that, why don’t you find work that you like? And I say that as someone who would not pursue financial independence, retire early because I really enjoy my job, and I like working. And I still have a very balanced life. It just doesn’t make sense to me to strive for a life where I stop working. Now FIRE people would say that they might still work, but do work that’s more meaningful, but maybe doesn’t pay as much. And that’s fine. I find my work meaningful, and it pays well. So I don’t see any reason to change.
Arnott: So for our last question, we also wanted to ask about this total cost-reporting initiative in Canada. Do you see that moving the needles for Canadians to scrutinize the value that they get from the advice relationship?
Felix: Yeah, I think that will be a positive change in Canada. So right now for context, investment statements are required to show fees that are paid to the advisor directly, but not the fund fees, like the embedded fees in financial products. So if a fee-based advisor is charging 1% and using an active fund with a 1% expense ratio, the client currently is only required to be shown the 1% fee that’s going to the advisor, but not the total 2% that they’re actually paying for the overall service and investment product. And so this new disclosure, total cost reporting, is going to require showing both sides of the fee. Now, this is a problem, I think, in Canada right now because you could have two different advisors. One’s charging 1% and using an active fund with a 1% management expense ratio. And another advisor that’s using an index fund with a 10-basis-point expense ratio, also charging 1%, right now the client only sees the 1% fee that they’re paying to the advisor for advice, but they don’t see that they’re paying an additional 90 basis points to the advisor using the actively managed fund. So I think like you asked earlier about the situation with active funds in Canada, and I think that this will likely help with that because all of a sudden people are going to realize, or at least it’ll be explicitly presented to them, how much they’re actually paying for their investment products.
Arnott: Well, Ben, thank you so much for taking the time to talk with us today. This has been a great conversation.
Felix: Well, thanks so much for the invitation. It’s an honor to be invited, and I really appreciate it.
Benz: Thanks so much, Ben.
Arnott: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts. You could follow me on social media at Amy Arnott on LinkedIn
Benz: And at Christine_Benz on X or Christine Benz on LinkedIn.
Arnott: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week. Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at thelongview@morningstar.com. Until next time, thanks for joining us.
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