Don’t Hire an Advisor Without Asking This | Ep. 61

Does your financial advisor have a clear investment philosophy?

In this episode of the Plain English Finance Podcast, Tré and Sierra discuss why your investment strategy should not be treated as a random collection of products, funds, trends or one-off opinions. The way you invest affects the rest of your financial plan, including tax planning, retirement income, corporate investing, asset location and how much risk you are actually taking. 

The key idea is that there are many valid ways to invest, but your investment approach needs to be consistent enough that the planning around it still works. A high-dividend strategy, momentum strategy, index-based strategy, active stock-picking strategy or conservative fixed-income approach can each create different tax, income and risk outcomes. That means the “best” strategy is not just the one that sounds good. It is the one you understand, can stick with, and can build a real financial plan around. 

In this episode, we discuss:

•  What an investment philosophy actually means 
•  Why there is no single perfect way to invest 
•  Why your advisor should be able to explain and defend their philosophy 
•  Why changing one part of the portfolio can affect the rest of the plan 
•  Why high-dividend strategies sound appealing but can create planning issues 
•  Why corporate owners need to think carefully about investment income 
•  How passive income rules can be affected by portfolio income 
•  Why momentum strategies can work but may create higher volatility and tax drag 
•  Why fixed income should have a defined role in the plan 
•  Why “we customize everything” can sometimes be a red flag 
•  Why your investment plan and tax plan need to be connected 
•  What to ask an advisor before trusting them with your portfolio 

The main point is simple:

You do not need to understand every investment philosophy in the world. But you do need to understand the one being used with your money.

If an advisor cannot explain their investment philosophy in plain English, that is a problem. If they can explain it, but you cannot stick with it when markets are uncomfortable, that is also a problem.

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Transcript

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Tre 0:00

Does it sometimes feel like there's so many different ways to invest that it may be a little difficult to figure out the philosophy or the approach that you should take? In this episode, we'll talk about why picking a philosophy is a little bit less important than you think. There are many different ways to approach investing-

Sierra 0:17

Mm-hmm

Tre 0:17

as you've kind of learned over the last little while.

Sierra 0:21

Year.

Tre 0:22

Yeah. Or so, yeah.

Sierra 0:23

Or so, yeah.

Tre 0:24

And it can definitely be overwhelming to a lot of people. In fact, it sometimes it can even be a little bit overwhelming to me. There's literally hundreds of slightly different approaches, and they will all kind of say that they're trying, that theirs is the best way.

Sierra 0:40

Mm-hmm.

Tre 0:41

But objectively, there kind of isn't a best way. There's not, like, a one perfect way to approach investing, and I would argue that a, a little bit Because I think there's the, the data points in a very specific direction. Mm-hmm. Uh, but even within that world, there are slightly different ways. So something that I have noticed is that especially with some some new people that I'm, that I'm working with, I guess, is that when you have preconceived ideas of the way that you want to invest, it can be very difficult to adjust the approach that you're taking.

Sierra 1:23

Mm-hmm.

Tre 1:24

Especially when it isn't objectively better than what you was doing or objectively worse than what you was doing before. Does that make sense?

Sierra 1:33

Yep.

Tre 1:34

So, I always encourage people, if you're going to work with an advisor, that you use their investment philosophy. Why do you think that I would recommend that?

Sierra 1:43

Because they know it best. Like, they probably have studied it. They've like-- I know we've talked about, like, your s- like, your specialty, your niche is corporation owners and specifically engineers, so you know them well. So since they know it well, if they have-- It's almost like they do it systematically I think, when they have a philosophy. So it's like, "This is my philosophy. This is what I know, and I do it across this wide spectrum, so I have a deep understanding of it," versus, "Oh, this client does it like this, and this tech client does it like..." There's no time to, like, deepen the understanding of it, if that makes sense. So it's like if you, yeah, if you're working with an advisor and they're like, "This is my philosophy." You should stick with it, instead of, like, trying to push them towards something else. You should find an advisor who specializes in that.

Tre 2:42

Yes. You're pretty much spot on. Is that the, especially the more planning orientated advisors like me, for instance, I'm very planning orientated. I spend a lot of time on the tax side of things. The way that you invest and the philosophy that you're investing with is what you spend your time going deep into and figuring out, okay, what's the optimal way to approach various tax situations based on the investment philosophy and what I expect to come out of that investment philosophy.

Sierra 3:14

Mm-hmm.

Tre 3:15

Does that make sense?

Sierra 3:16

Yep.

Tre 3:16

And as soon as you start adding in and deviating from that, that does mean that the rest of the planning or the other, the other part of the advisor's expertise that is very deeply intertwined with that specific way of investing is now moot.

Sierra 3:34

Yeah.

Tre 3:34

Right? So a really good example of that, I'm gonna just use my own for instance, is- I

Sierra 3:38

just want to also throw, sorry, not your example, but the cogs.

Tre 3:42

Yeah.

Sierra 3:42

That's literally it, right? Like, one thing, like this is the overall philosophy. You're looking at the board of cogs, and then you're like, "Oh, but I want to change this cog." It's like, well, you can't just change that. Everything else is now different.

Tre 3:54

Mm-hmm.

Sierra 3:54

Sorry, go ahead. Th-

Tre 3:55

that's exactly right. And then there's, an example is, for instance, let's say that I am using my Canadian core equity that I use. It is, because it's a market-based, it's an index type fund, they're, it spits off about 3% in Canadian dividends every single year is kind of what I can expect and kind of plan around in that range. If now, instead of using that approach, I choose to go down a high dividend approach where the, that portfolio is now spitting off 6% in dividends, it might seem small. It might what's 3%? Mm-hmm. But when you're looking at now passive income rules inside of a corporation on how much how much I can be receiving so that the, the the small business deduction doesn't get ground down, well, that's now all changed. Now when I am looking at, oh, how much income, how much percentage of the assets should it be in a non-registered account versus interest income versus all of that type of thing so that the elderly individual doesn't have to pay too much to support their, for their healthcare needs, that's all now thrown off purely because of what seems like a really small decision, because I've spent my time figuring out optimal paths for very specific expectations. Mm-hmm. And while, yes, you can redo all of the math around that, the reality is it's extremely inefficient and- There will be somebody out there that has built their planning and everything like that around that strategy if you want really high dividend strategy that, focuses on those type of things. So it's, that's why it's just really important to whatever you are picking to kind of stick with that approach. Does that make sense?

Sierra 5:46

Yep. Yeah. You can- And- Yeah, I feel this in the finance world overall is that because money is so tied to everything and everybody uses money and all of these other things that we've talked about behaviorally people think they should know, right? And then some people decide, like, they're using banks, advisors, whatever, planners as order takers to like- Mm-hmm a means to an end. It's like, "This is what I want, and I think I know best, so you're just like the middleman to get what I want." Whereas you unless you have that level of knowledge and that depth and understanding, like that's not the right approach. It's like we don't do that in a lot of other areas in life, like in where you're hiring someone for their expertise. You don't say like, "This is what I want and I'm sticking to it, and I'll take it to the grave." You know?

Tre 6:45

Well, you can, but you just need to pick somebody that's a specialist in that area, right?

Sierra 6:48

Yes. But again, it's like what... But are you going to listen to them? Do you know what I'm saying? It's like if you go-

Tre 6:54

You can find somebody to tell you whatever you want to tell them to tell you.

Sierra 6:58

I

Tre 6:58

guess. I, I think what you're, what you find, especially in my industry, is that the, this, I don't know a better way to say this, but the less successful an advisor is, the more they're willing to

Sierra 7:13

change

Tre 7:13

Change- Yep with each client. That makes sense, yeah. Because it's like you, you-

Sierra 7:18

You cater to because you're trying to get more business. It's a-

Tre 7:21

Yeah

Sierra 7:21

it's simple marketing as well. In the market, like people who have a niche or specialty or things like that, they- it's sometimes harder to find your clients because your net is so narrow. But then the depth of clientele that you can get is like the, that's deeper. I don't know how else to say it. I- The depth is deeper.

Tre 7:44

Yeah, I would agree. Yeah. Because it's like, oh, this is, you're the exact type of And I've built my entire system around helping somebody that looks exactly like- Yeah exactly like you. But there are definitely, the, and the, and the thing is that within the investment philosophy specifically, there are lots to pick from, right? Like-

Sierra 8:04

So, what do you mean by investment philosophy? Because I think that would confuse people. Like, what is an investment philosophy?

Tre 8:10

Yeah. Okay. So the, the best way to describe it, and like half of people listening aren't gonna have a clue, and half of them will. But- for example sports is the best way to describe it, right? And the World Cup's on, so football.

Sierra 8:24

Yes.

Tre 8:25

Not soccer, football.

Sierra 8:26

Yep.

Tre 8:27

Um, There are many different ways to attack, right? There are diff- lots of different formations that you can, that you can use to play the game of football. Okay. I keep saying football.

Sierra 8:38

Yeah. You go for... I'm so used to it, I don't even... I, I, when I read to Ariyah, like in books-

Tre 8:43

Yeah

Sierra 8:44

I'm like, "And this is football, or in America, soccer." And I call football-

Tre 8:50

Yeah

Sierra 8:50

American football.

Tre 8:51

There you go. Good,

Sierra 8:52

good. I know.

Tre 8:53

Good, good.

Sierra 8:54

I've been, uh-

Tre 8:55

Raise her right.

Sierra 8:56

What's the word? I wanna say contaminated, but that's not right. What's the word where it's like somebody's convinced you of something? Anyway, that's what I am. I'm pro-English.

Tre 9:06

It's football. It's good, good. So but then, but you're all playing the same sport. And it would apply to, I only know football as a sport I know the best, but apply it to hockey and all those type of things. Mm-hmm. That different formations, different, you can be pressing, you can man mark, you can... Lots of different ways to play the same game. And it's-

Sierra 9:24

Like more defensive, more attacking-

Tre 9:26

There's tons. There's pr- there's, there's probably an endless amount of small adjustments that somebody, some big adjustments, some small adjustments, but they're all playing basketball. They're all playing football, right? They're all playing tennis, but there's lots of variations. With investing, there's exactly the same approach. I choose to use something that's a little bit more- objective for, it's a little bit more researched, it's based heavily on, on research, and that's simply that companies that are investing in themselves to grow, companies that are profitable basically the two main- major ones, like higher quality companies will in the long term outperform companies that don't have those type of characteristics. Sounds very simple, but it's not always true, especially in the short term. When you look at companies that grow significantly, like you're talking about like these there's plenty of examples, like Bloom Energy is just an example that comes to mind. But it's just a small energy company that was providing efficient energy to data centers and things like that. Grew incredibly quickly, didn't have those characteristics, right? So the, my investment philosophy isn't to target those one-hit wonders, it's to reduce the risk of a bad outcome over somebody's lifetime, right? Mm-hmm. Like not next five years, not even the next 10 years. I have, I have no idea. It's just a good way to invest. And it allows me to then... that's the philosophy, I then apply that philosophy, I build my portfolios on it, and then I build my planning around those portfolios. Mm. So there's very few situations where I don't know how the portfolio is going to look because I have my expectations and I know

Sierra 11:12

You've planned around

Tre 11:12

it I've planned around it, right? I've looked into great detail into exactly what I'm expecting from the various parts of the way that I invest money within the planning framework that I use. So that's what I mean by investment philosophy. That there's-- So that's the one I use, but some people are diehard active managers- Right that they think picking individual stocks is the way to go, right? Regardless of what I think about that, that comes with very different expectations from a portfolio than somebody else, right? Than my approach, right? Because it's the tax drag looks very different, the tax profile. Another example is for my fixed income piece, I stick with investment grade, higher quality Canadian... because I don't want to introduce or I want to minimize the risk of currency within my, I call it a war chest. So it's, the point of that, those funds are if markets crash, world's on fire, I need them to be there. Yeah. So because that's how I approach fixed income, it means that I, from an investment philosophy point of view, I do not introduce certain types of risk. I do not want to see significant default risk where I am now lending to companies that have any real chance of not paying me back. Just because they're paying half a percent more, to me it's not worth it, right? Right. And that's my investment philosophy, and it means that I then plan around that. It means that my equity allocation may be a little bit higher than what somebody else's might be because I'm not willing to increase certain types of risk in my war chest, right? Because I just see the downside is so much greater than the upside because the upside is so limited. So things like that, part of somebody's investment philosophy. But as soon as somebody-- Let's say I was working with somebody, which I wouldn't do it, but let's say I was working with somebody and they're like, "Hey, I really want to own this Brazilian company's, tech company's bonds that they just released because it sounds interesting, and that's where I want my- my safety net to be in." I,

Sierra 13:19

The answer is no?

Tre 13:20

We're, we're now outside of my area of... I don't know how that's gonna impact. I've never looked into whether, what the impact would be, and I'm not, I'm not going to for this one change, right? Like, it's, it's just simply if you're going to work with somebody, then you really should work with- within their, their comfort zone and where they have delved really deep into. And if you're not, and the person says, you know, you walk into somebody you're interviewing people and they say, "Okay, well, we can do whatever," you know, "Our job is to adapt every portfolio all the investment philosophy to, to every individual client," I can guarantee that the advisor has no idea what... It's just there's too many different types for them to truly, truly be able to do a completely different portfolio, completely different investment philosophy- And adapt everything for every single client. It's just not-

Sierra 14:13

Yeah

Tre 14:14

it's just, you are, you're very likely dealing with somebody that's an amateur. Normally people, they'll be able to, that have an investment philosophy, they'll be able to explain it, and they'll be able to defend it.

Sierra 14:23

Yep. So then at the beginning of the episode, the intro said what did you say? Something about the philosophy and why it doesn't really matter.

Tre 14:31

Yeah.

Sierra 14:31

So then-

Tre 14:32

Okay.

Sierra 14:33

Huh?

Tre 14:33

Let me get, let me get back to that. So it matters, I'm gonna say not that it doesn't matter. I would say that it matters a lot less than what people think.

Sierra 14:42

Okay.

Tre 14:42

So for example, high dividend strategies have been like a mosquito light to humans. Uh, but like a, a draw, uh, because it, it's Because the, the thought process behind it is really comforting. So the thought process behind high dividend strategies is that you buy companies that pay high dividends. That means that the cash flow is coming off of that stock, whether that stock is up or down. And then with that money, you can buy back more stock if you wanted to, or you can spend it. But no matter what you're doing, no matter whether the stock's up or down, it's paying off this dividend. Mm. It's paying off cash flow, so therefore-

Sierra 15:21

You get money

Tre 15:22

you get money, right? And while- Sorry that doesn't hold up at all and, uh-

Sierra 15:28

I think we've talked about this in a previous episode.

Tre 15:30

Have we? Okay.

Sierra 15:31

I think so.

Tre 15:32

But- Okay. Well, it, it doesn't hold up. It doesn't truly hold up, but it does sound really good. If that is what it takes for you to stick through all the ups and the downs in the market, and you can plan your life or like your finance, financial decisions around that choice. Go for it. If that's- Yeah what it takes, then that is the way that you should invest because you're gonna have more success doing that than switching to a, a momentum strategy. So a momentum strategy is basically companies... And it's, it's proven, it's just very volatile. So companies that are going up tend to go up more. It's basically what it means.

Sierra 16:14

Yep.

Tre 16:14

So until they don't. Uh, it's the until they don't-

Sierra 16:18

You can only grow so big

Tre 16:19

that's the scary part, yeah. Uh, but that is, a legit strategy with evidence to, to show that that does work. It's extremely volatile. If you're okay with the extreme volatility Then pick that strategy. Just know there are consequences that come from that. Some of the consequences mean that, uh, you have to pick an active manager to do it, right? That's pretty much standard. And so y- it's gonna be more expensive. And they have to buy and sell stocks, which means that you could have a very high turnover inside the portfolio, which means that your tax drag is going to be significantly higher than a different type of approach, right? And that might change the investment philosophy you choose to use. Whatever it is, if you plan around those key items changing, that's fine, right? Then do that. The mistake that people would make, and you'll see it the most, and it's what happens when you have an advisor that knows one strategy really, really well and they try to adapt and all that stuff, is that they'll be using a momentum strategy b- d- using the planning framework that somebody like me would use, and it doesn't translate.

Sierra 17:25

Mm-hmm.

Tre 17:25

It doesn't translate because suddenly you're getting tax consequences that you don't expect in the corporation, or you're getting too much income in the personal. It just doesn't, it doesn't work because the foundation is just so different. You've built- Yeah the house out of the wrong material for that

Sierra 17:42

foundation

Tre 17:43

Yeah.

Sierra 17:43

Yep.

Tre 17:44

Right? Yeah. Does that make sense?

Sierra 17:45

Yep, I think so. I mean, that was quite the, quite the tangent, but you know I gotta bug you.

Tre 17:52

I'm I, yeah, sorry.

Sierra 17:53

No, it's

Tre 17:56

okay. Okay.

Sierra 17:56

That

Tre 17:56

was- It makes sense. Okay, good. Good. So that's why it doesn't... A- there's lots of good strategies that I think people, you can get behind and stick to. It's just that the investment and the planning side need to be-

Sierra 18:09

Married

Tre 18:10

needs to be looked at. Yeah. That's a great, yeah. They need to be married. And-

Sierra 18:13

Did you like that?

Tre 18:14

in order for you to do that, yeah, I, you just wanna stick within that framework.

Sierra 18:20

Yep.

Tre 18:21

Okay?

Sierra 18:21

No, that makes sense.

Tre 18:22

And, yeah, it has to be an investment philosophy that you can stick to during downs, because every single one of them has a, has a down.

Sierra 18:28

Yep.

Tre 18:29

Okay, let me rephrase that. Every single investment philosophy that works in some capacity has a down. Because I mean, it'd be a great investment philosophy if just like buy it when it's going up and sell it when it's all down, just before it all goes down. That'd be the best investment philosophy.

Sierra 18:41

I was gonna say, I'm like, "That sounds like a terrible philosophy." "Buy it when it's high, sell it when it's low, and make no money. That's a guarantee."

Tre 18:48

You'd lose money.

Sierra 18:51

That I

Tre 18:51

guarantee. Yeah. No, I mean, do the complete opposite of that. Buy it just before it goes up- Mm and then sell it just before it goes down. That is the best investment strategy you can, uh,

Sierra 18:59

Yeah.

Tre 18:59

Nobody can

Sierra 19:00

ever do. Just know the future always.

Tre 19:02

Yeah. Do. Absolutely.

Sierra 19:03

Go back in time or go ahead in time.

Tre 19:06

Yeah.

Sierra 19:07

Move time.

Tre 19:07

Yeah.

Sierra 19:08

That's the strategy.

Tre 19:09

That's the strategy. It works. I think I kind of answered that, right? Yep.

Sierra 19:14

So then it's basically like if... N- not to like create a lot, make more out of this episode, but just to wrap it up. So if somebody is looking for an advisor and they're like, "Oh, okay, I listened to this podcast and I'm supposed to ask you about your philosophy. What's your investment philosophy?" I guess if the advisor doesn't have an answer, is that a red flag?

Tre 19:37

Yeah, for sure. They, but the yeah. Absolutely.

Sierra 19:40

Yeah. If they're like "uh, uh, we adapt," okay, so that's- Yeah a bad red flag. If, then if they're like, "Here's my philosophy," as the consumer, I guess Do I have to know the philosophies and do I have to-

Tre 19:54

If it's the... You don't have to know all the philosophies, but you need to know if it's a philosophy you can get behind.

Sierra 19:58

Okay.

Tre 19:58

Because this is the way your money's gonna be invested, so- Yeah if it's something-

Sierra 20:01

So it's like I have to understand what this person is doing and

Tre 20:04

could- At least the basics, right? Like, the overall, what they're trying to-

Sierra 20:08

Accomplish

Tre 20:08

achieve and accomplish. Yeah, and you could do that through a quick Google search.

Sierra 20:11

Yeah.

Tre 20:12

Relatively.

Sierra 20:13

Okay.

Tre 20:13

Relatively easily.

Sierra 20:14

Yeah. That makes sense. And then you gotta like the person, so it's like, I guess interviewing would kind of be annoying. I feel bad for people. I'm like, I got mine so easy. Just married him.

Tre 20:25

Yeah, just marry one. Yeah, there you

Sierra 20:26

go. And

Tre 20:26

done.

Sierra 20:27

I'm like, "You can never die, please," Because I'm like, "I don't wanna do this."

Tre 20:31

But you have your instructions,

Sierra 20:33

you're just fine. I'm just gonna go back and listen to our old podcast episodes and be like, "What do I do?"

Tre 20:36

Well, I made a video for you. Tax, right? You have that, you have that video. You have the-

Sierra 20:40

Dividends. Always invest in bonds.

Tre 20:44

Yes, that is definitely. I'm just

Sierra 20:46

kidding.

Tre 20:47

Definitely. Definitely. I'm just joking. Anyway, we're just dragging this on. Yeah. Okay. Thanks for listening. See you guys in the next one.

Sierra 20:54

Bye.

Tre 20:54

Bye.