Episode 6: The Value of Advice with Dr. Preet Banerjee

Welcome to the Retire Ready Podcast, the podcast that helps Canadians prepare for all that retirement brings. I am your host Scott Sather, Founder, President, and Financial Planner at Awaken Wealth Management, and Portfolio Manager with Awaken Investments of Aligned Capital Partners in Regina, Saskatchewan. Thanks for joining me today.

In today’s episode we have the pleasure of having Dr. Preet Banerjee join me as our very first guest of the show. Many will know Preet from his time as a panelist on CBC’s the National or as a contributor to The Morning Show on Global. He has authored 3 books, his most recent being “Stop Over-Thinking Your Money” as well as has written for the Globe and Mail, Money Sense magazine & their website, and many other publications. He’s active on social media with over 120,000 subscribers to his Money School on YouTube.

I’ve known Preet for a while now, having first met on Twitter. Preet was an advisor before he took on more of the media presence he has today. In fact, he was one of the folks I had reached out to when I first changed my investment philosophy from the main stream active management style to an evidence based strategy.  We’ve been able to meet up a few times in person over the year to talk shop and I’ve always gained valuable perspective from him and appreciated his focus on putting investors and clients first. One of his current roles that impresses me the most is as the chair of the Foundation for the Advancement of Investor Rights Canada.

Today we’ll explore his recent doctoral thesis titled “A multi-dimensional analysis of the value of financial advice to households in Canada” that sheds light on the value of financial advice, a very timely topic given our last number of episodes.

With that we’ll jump to the interview:

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Scott Sather: Welcome Dr. Preet Banerjee to the podcast.Thanks so much for joining us.

Preet Banerjee: Thanks so much for having me, man. It's a pleasure to be here. I'm your first interviewee right?

Scott: That is the you are the first one my friend greatly appreciate you coming on.

Preet: I'm humbled.

Scott: Well, your timing is fantastic. We just finished the last four episodes talking about finding an advisor and talking about the value of that advice, which really ties in really well for you and your your experience and the thesis you just wrote a multi dimensional analysis of the value of financial advice to households in Canada. That's a That's a mouthful. Great.

Preet: It is. Yeah. Luckily when it comes to choosing the title, they don't care too much about marketing or clickbait. It really is.What are you talking about? And so that's Well, that's it. It's a multidimensional analysis of the value of financial advice to households in Canada.So it's nice and direct. You don't have to worry too much about making it sound pretty. Because that's a different art form altogether.

Scott: Absolutely. Absolutely. Well, we just we mentioned in some of the price podcasts, some of the research that was done by Vanguard and Russell and Morningstar on the value of advice, so to have something more on the academic side is, is great. I'm having just recently completed the thesis in January. Why don't you tell us kind of what's sent you down that road of research

Preet: Oh, yeah, absolutely. So for background for people listening, or watching. I was a financial advisor 15, almost 20 years ago, something like that. And during that time, even when I got into the industry, I didn't know anything about giving financial advice or portfolio management. And the first thought I had was man, this was way too easy to get licensed as an advisor. And I thought there was something just horribly wrong about how low that barrier to entry was. And that's something that really stuck with me. I remember in my rookie school, I had a classmate and we were talking about our scores on the exam that we had to write to get license and you know,I studied hard for two weeks, so not a lot long time, but I studied hard and I got a very high mark. And I thought, okay, that's that's great, but this one guy was bragging about getting a 60 which was the past mark. And I thought Why would you brag about that? And to Why would anyone feel comfortable allowing you to manage someone's life savings like that? Just it really sat with me wrong. And I did not like that. And that again, that stuck with me for a longtime. And I think there's a history of stories and these are the stories they get the most, you know, amplification for sure. It's the bad news stuff, right?The travels fast. And you hear these horror stories of what unscrupulous financial salespeople do. And therefore, there's a lot of people who feel a certain level of distrust you have either been burned by financial sales people or institutions, and they swear off for them forever, and maybe go on their own or what have you, or they just perpetually have a bad taste in their mouth. So at the same time, having been in the industry and working with the industry for almost 20 years now. I know that there's a lot of great advisors to and it didn't seem right that it's you know, that we look at this, this question of the value of financial advisors in such a black and white manner that you're either in the camp that hates them and thinks that they all should be thrown to the sharks or that you're in the camp that says, Oh, of course, there's value.It's so much more nuanced than that. And that that was something that I think it had been bugging me as to how do I reconcile this? How do I reconcile the fact that there are a lot of advisors who are Deadwood that are out there holding themselves out as financial advisors and at the same time, there's a lot of people where I would be perfectly comfortable sending my family members to and so I wanted to dive a little bit deeper into that. And I met the person who would end up becoming my primary supervisor through some work. We had done speaking at conferences together as part of some ongoing volunteer work with U of T. And over the over a couple of years, he persuaded me to consider doing this research as a way to define the next 10 to 20 years of my career. He said "You know, this is a big undertaking, if you're going to do it, you got to be committed and it's got to be something you're passionate about and something that you're going to use for the next 10-20 years is gonna define your life for the next while. So if you're gonna do it, make sure you have a good question that you really want to answer." And I really wanted to answer that question. So that's, that's the reason why I wanted to sort of tackle this is to try and square all the things that are out there because I'm sure there are a lot of listeners who probably feel Yeah, I don't really know how to answer that question is because it's so nuanced.

Scott: Absolutely. Yeah, absolutely. Having been an advisor, back in the day and knowing kind of you knowing some of the background, talk a bit about that evolution of the industry and where it's kind of gone from.

 Preet: Sure. Yeah. I mean, if you go really far backin time, you know, one of the things that doesn't change is that the industry always changes in terms of what his value proposition is. So, you know, 75years ago, financial advice was just going to some guy, usually a man in a suit, who would tell you whether or not to buy or sell a certain stock is all about individual security transaction. That's it. And, and people made a lot of money doing that for a long time. May 1 1975. A lot of people may not know this.It's known as Mayday in the industry. And the reason it's called that is May 11975, is when commissions for stockbrokers in the states were deregulated. Soup until that time, there was zero competition in terms of price depending on which stockbrokers you went to didn't matter. You know, it didn't matter how many shares you were buying or selling, what the size of the trade was, it didn't matter because everyone was operating off the fixed commission schedule.So it wasn't until May 1 1975. That commissions were deregulated and at the time, the worry from the industry was this is going to be the death of the financial advisor, which again, at that time, was just really just processing individual stock transactions. And they thought, you know, people just gonna goto, it's going to be a race to the bottom it spawned the growth of discount brokerage accounts so people could trade on their own. At the time you couldn't do it online because it didn't have the internet but you would phone up and talk to someone and they, they would charge you only 150 bucks to make a trade or whatever it was right. And that was a big discount at the time. And so the fear was, you know, people just gonna bypass the financial advisor, quote unquote, financial advisor. And that's not really what happened to the greed to the degree that people thought it would share. There was a growth in discount brokerage account openings, but what actually ended up happening was the financial advice industry morphed, it evolved into Portfolio Management, and because they had to, and it was all about, you know, how did the different individual components in your portfolio work together? What are the risk adjusted returns of the portfolio? What's your time horizon? What's your risk tolerance, your need for risk all this stuff? Is it so they started to provide portfolio management and again, as portfolio management is now becoming an arguably has become commoditized. At this point, the value proposition has to change and over the last 1520 years, it shifted more towards wealth management and be more holistic. And we're seeing that you know, this latest paradigm shift is towards Holistic Management looking at all aspects of people's financial decision making, not just portfolio stuff and also understanding the human component, which has always been part of it, but has never really beenclearly delineated, like it has been now, especially with the growth and popularity of the field like behavioral finance and Behavioural Economics and Psychology and financial psychology and that's really where the rubber hits the road is, you know, these relationships with people have with their money is really psychological more than it is about numbers.

 Scott: Yeah, absolutely. Absolutely. That's actually a great segue to talk a little bit into that into your paper. Right. The research that you did, I guess the first question is how do you go about putting the research together?

 Preet: Well, I mean, it's pretty standardized process, you do a literature review, you take a look at everything that has been done, and then you use that as the basis for how to explore the question a little bit further. And one of the issues was there really wasn't a huge consensus on a theory of financial advice, really. There's this one overarching theory that has been used as the basis for financial advice and measuring financial advice, which goes back to the 40s and 50s. And it has to do with the lifecycle hypothesis of savings and consumption. Basically says, you know, you want to smooth your consumption over a lifetime. And the way that you do that is you pull your future income forward by borrowing when you're young, so that you can buy a house, pay for your wedding first card, all that stuff, then you become more of a saver so that your savings can grow. So that when your income dries up, when you retire, you've got assets to rely on so that you basically try to smooth out your income over a lifetime. Right? That's kind of like the theory of how they measure financial advice before and that was all sort of rooted in Portfolio measurements. And so the academic literature had been heavily rooted in Portfolio centric measures of value. So they would look at things like what's the difference between a household that has an advisor and ones that don't have an advisor when it comes to size of the portfolio, risk adjusted returns level of diversification? savings rates, stuff like that. It's very portfolio centric in nature, which is good. You know, a lot of great information came out of that, but not super reflective of contemporary wealth management today, which is more holistic. And if you look at the practitioner journals out there, which tend to be more reflective of what's actually going on and take into account that financial advice can and possibly should be more holistic and focused on wealth management, not just portfolios. There's a disconnect. And so there's a real gap in the literature in that, you know, if you're looking at the value of financial advice you got to make sure that the yardsticks that you're using are reflective of what the industry is actually putting out there. So that was one of the one of the avenues I wanted to explore instead of having just a portfolio centric measure of success. I also included two other measures which are non portfolio centric, one is a measure of the breadth of advice that people get. So are you getting advice for service on things like managing your debt, your life insurance coverage, disability insurance coverage, emergency funding, if you have your wills and powers of attorney set up if needed, and and what have you. So that was a measure of simply of the breadth of advice. And the third one was a measure of their comprehensive financial confidence because one of there's a couple of papers that talk about this, but they say look, when we look at intermediated advice or financial advisors and the portfolios that they give to clients, in the aggregate, there's underperformance compared to sort of a counterfactual portfolio. so what is possible, There's a drag that that clients experience and it's bigger than the cost of advice. So there's this sort of negative portfolio return if you will, for using an advisor and you think well that's counterintuitive, why would people pay to underperform what they could do, they just bought a passive portfolio. And so one of the explanations put forth. Well there must be some non tangible benefits to having advice, such as reduction in anxiety, people feeling more confident, maybe other behaviours. It's true in reality. So you can have someone who doesn't use an advisor and doesn't do it themselves because they're not doing anything. Right? That's they are different than someone who's decided to invest on their own and manage their own money. Conversely, if you have someone who's using an advisor, well, there's a difference between someone who is for example, a CFP, or someone who's a full service advisor at a bank versus a branch level financial advisor versus an employer sponsored, you know, representative who just manages the route plan versus using an accountant versus using a robo-advisor or using social media as your primary channel of advice, which almost 12% of the people in my sample said that social media was their primary channel of advice. And what's even more interesting as you dig into just that 12%, who says their primary channel of advice is social media. Of those 12% There are people that actually have relationships with a full service advisors to learn theory paying $10,000 plus a year to human for advice, and don't consider them to be their primary advice giver. Fascinating stuff, right. So yeah, so looking at differentiating the market for financial advice. That was one of the contributions and then also looking at a portfolio of outcome measures to more accurately capture contemporary financial advice value propositions.

 Scott: Yeah, yeah, that's, that's really interesting.So from that, what were some of your key findings?

 Preet: So there's a lot of findings behind the thesis if people want to read it, it's 320 pages in total, including appendices. But I'll just give you a selected few that I think are some of the big ones. And this kind of lines up with what I think a lot of people have been asking this question about the value of financial advice for a long time and had been thoughtful about it. So I'm not talking about the people who have made up their mind based on a few case studies or whatever. I'm talking about people who have really thought about that idea over a long period of time. I think these results line up and the results were. If you have a lot of money, then you tend to get value out of a financial advisor relationship. If you don't have a lot of money, you don't tend to get a lot of value out of the financial advisors you have access to unless they provide financial planning, then you get a very robust sort of association with an increase in all three outcome measures. ThatI think is one of the biggest findings and I want to elaborate a little bit more on why this is important. In the literature review. One of the things that stuck out for me was, you know, what financial advice is supposed to be and who gets access to it and who gets the most out of financial advice. And if you take a look at what financial advice is supposed to be one of the theories about what it's supposed to do is reduce the number of errors people make when it comes to making financial decisions in general. And if you take a look at people's financial error rates in terms of the decisions that they make over a lifetime, it follows a U shaped pattern. And early on you make more financial errors because you don't know anything No one taught this stuff to you in school. I mean, they're starting to now but for the most part, you're not taught about how to manage money, you just kind of let out into the world and they figure it all out. And so people don't have haven't had the time to build up the financial literacy. They don't have experience making financial decisions, and therefore they've got a high error rate when they're young. As they learn a little bit more or they make more decisions and sort of look back at the decisions that they've made and see what happened as a result of that their error rates tend to go down until they reach the age of 53. And then their error rates start to go back up and that's predominantly due to cognitive decline. And so you could argue that two of the most important times where you need advice is early a lot early on to adjust your trajectory because time is your your ally and the more time you have with good financial habits, the bigger the bigger, the impact is gonna be over a lifetime. So that's a super important time. And then as you get older and you know, maybe you've built up assets and you're starting towards that accumulation phase, which can be much more complex than the accumulation phase. And this is when your error rates start to go up because of cognitive decline. That's also a very important time where you need advice if you take a look at financial literacy. What's interesting here is that financial advice is supposed to effectively be a substitute for financial literacy. If you don't know what you're doing. You go get advice, right, just like anything in life. Now, if you have a lot of money, you've got access to better quality advisors. They're more experienced, they've been around for a long time, they're more credentialed, what have you. And what some of the research has suggested is that if you have a lot of money and you have access to a better advisor, and you have high financial literacy, this is really good for you, because the quality of that relationship is going to be higher. Because you end up getting more out of that advisor, you are more discerning, you're more able to call BS on stuff. So you challenge the advisor more and they also rise to that challenge and they give you more information, because they know that you can take it and that you understand it and so qualitatively the nature of that relationship is is quite different. Because you have access to the type of advisor that is more likely to be experienced, educated and good. And you have the ability to understand what they're saying and challenge them and get more out of that relationship. On the other end of the spectrum.If you are lower asset in terms of how much money you have, and your lower financial literacy. This is again, where the real promise of advice should be is to help people who need it most people who don't have that financial literacy, but because you don't have access to the same pool of advisors, you're more likely to maybe get hooked. up with a financial salesperson who's not, you know, maybe totally above board with everything that they're doing, take advantage of you. That's what ends up happening because you're less likely to detect that someone who's taking advantage of you. And so this is a real issue and that kind of squares with what some of the antic data that we see out there. In that people get taken advantage of Far too often. I'm not saying that it's every advisor of course not that's a silly sort of broad brush to to paint the industry with but what I'm saying is that that's a clear problem. So as they're saying, tying this back to to the main findings, this kind of dovetails with Yeah, if you have a lot of money. And especially if you have high financial literacy or a lot of financial agency, you're going to be able to get more out of a better pool of financial advice that exists out there. So you're you're good, right? So I'm not too worried about people with a lot of money, nor is anyone else right? good problems to have for you. But I'm more concerned about the fact that the people who are in this lower asset category and they represent the bulk of the population, this is where the real problem is and so they are looking at the data. You know, there's no real benefit to having a human financial adviser if you don't have a lot of money unless and this is the big exception unless they give financial planning. In that case, then there was a robust association with an increase in outcome across all three outcome measures. So the moral of that whole story is financial planning is extremely powerful for anyone, but especially for people in sort of the more mass market.

Scott: Oh, that's great. That kind of reiterates whatI've been saying in the last few episodes that folks need to find a financial planner ideally and a real financial adviser, someone that's going past just selling you a product 19and actually providing that advice.

 Preet: Yeah, I kind of believe that. You know, it's people planning products. If you understand the person then you can create abetter planning experience. And, you know, let's be clear, not everyone is going to sit down and read a 50 page financial plan or they want to engage in that. That's okay. You can still engage in a planning like process where you identify goals. You assess what people have, what they can do. craft some strategies, monitor, review and adjust. Right. It's an ongoing process. A financial plan is not the end effector financial plan. I think many people listening or in the industry would agree. As soon as you write a financial plan, it B starts going stale, right. And think about being able to predict the next three or five years you realize now trying to 40 or 50 years. It's ridiculous. The point is it's about a process. So if you understand the person ,you can create a planning experience. And if you do create that planning experience, the products fall into place. Right and there should be very little emphasis on products and a good financial advisor should not make a decision on products based on products, paying them more or less. Right. And the really good advisors do a good job of putting people first and that's where I think advices is really good advice. That's what it's all about People First.Following that is the planning products is like tertiary.

 Scott: Absolutely. Well, taking up a lot of your time here. I appreciate it. One question. Well, two questions I'd like to ask before we wrap up. One is what advice would you give to our listeners on how to get retire ready?

 Preet: Yeah, it's it's interesting. You know, following on what we were just talking about, about how hard it is predict the next three or five years Good luck trying to predict, you know, when your retirement date is going to be if it's, you know, multi decades away, and then how long that retirement period is going to be and what you think you'll be doing during those 2030 years, which starts 20 or 30 years from now. So I would suggest you know, retirement readiness, I think it's in the name. You want to be ready to be in a position that you have more choice. And so doing all the things like saving more for the future, making sure your portfolio is aligned with your risk tolerance. And your goals so that you have the ability and more opportune more flexibility to retire you might find that means that maybe you could retire earlier than other people on average. But maybe you want to keep on working. And you you have other things that are going to you know fill your time and what you do in your day to day life. So having that flexibility is key. And that's why thinking about retirement planning. The earlier is better knowing that you have no idea what your retirement is going to look at, but the sooner you start planning the more options you will have later on. And if you delay, then you're sort of opportunity set of all the things you could consider down the road. They get smaller and smaller. So it's not about figuring out exactly what your life is going to look like 40 years from now. It's about maximizing the opportunities that you will have for a range of outcomes.

 Scott: Absolutely, absolutely. Well, thanks so muchfor that. As we wrap up, where can people find you? What's keeping you busy these days now that the papers are all done?

 Preet: Yeah, I wear a lot of hats with a lot of things. Probably the easiest place to go is just my website, which is Preetbanerjee.com. And from there, it will actually triage people into your industry. There's a separate section of the website for that if you're sort of like you know, in the public, there's some assets there on the website for you as well. I think my YouTube channel is where I put up most content these days.So my YouTube channels just, you can just find it by typing in Preet Banerjee, so I'll probably leave it at that. There's other things too, but you know, there's too many things.

 Scott: You're all over the place. You're all over place.

 Preet: Yes, for sure. Scattered.

 Scott: Thanks so much for joining us today, Preet.

Preet: Yeah, it was my pleasure. Thanks so much for having me.

Thanks again to Dr Banerjee for joining me today. I hope you found the insights of value. For more information on the topics and links discussed, please visit our website at retirereadypodcast.com. There you will also find the show notes and more for this episode. If you have any questions or would like any retirement related topics discussed on future podcasts please email my at info@retirereadypodcast.com . Be sure to subscribe and give us a review on your favourite podcast player. You can also subscribe to the Wake-Up semi-monthly newsletter where we share insights on various financial topics, by visiting the Awaken Wealth site, which is awakenwealth.ca.

Be sure to check back in two weeks for our next episode.

Thanks again for joining us today and I look forward to seeing you back for the next one.

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