Rob Townsend: The $10M Advisor Who Thinks You’re Investing All Wrong

[MUSIC PLAYING] It's an opinion we hear pretty commonly on this show. And actually, it's one that I've expressed in the past, which is that using a financial advisor is a bad idea. Rob Townsend doesn't agree. I think financial advisors get dunked on a lot. And a lot of that is justified. But the old guard is moving out. The new guard is moving in. Rob is a part of that new guard. And he's got some hot takes on the industry. I think there's a huge opportunity for the influencer space to use their audience to build a wealth management firm. It's the sales focused people that survive. If you have $100 million, and you go to one of the big investment shops he has for a financial plan, it's literally a 75-page BDF report that I as a financial professional and nerd can even read. But Rob's not just here to defend the advisor world. He's also got a personal story about falling in love with money and how that love has evolved a lot over the years. Turns out, money can bring you happiness, just not how you may have imagined. Which, of course, we'll cover in more detail. Because as you know, I'm Harry Morton, and this is MoneyWise of Podcasts. Not about making money, but about what happens next. It's made for the Hampton community, which both Rob and myself are a part of. It's a network of high-network founders doing at least $3 million in annual revenue. And I'll talk more about it in a bit. You can find it at joinhampton.com. But first, let's get to the good stuff. We've already teased some of Rob's hot takes, and he's got some more on things like crypto and private deals. And he even actually pushes back on the large young controversial idea of just keep it in boring index funds and be safe. However, before we decide whether he's right or just biased, we should at least get to know the guy. Although, because this is MoneyWise getting to know him, mean, you know what it means. What is your personal net worth today? - Oh, what's that? Have you seen the gambler, Mark Wahlberg, John Goodman, the fortress of solitude? - Yes. - You get up to 2.5 million liquid, and then house with a 25-year roof, an indestructible shitbox economy vehicle, and then you've reached fuck you money. That's your base. No one can tell you what to do. I think there's a lot of actual wisdom in that. It's enough to have an SDG and be able to say, "No, it's not enough to really do nothing." That kind of fortress of solitude is there, maybe 3 million liquid and two houses with 2.5-year roofs. My business would obviously be that more impactful part for me. Private equity is very active in our space, and the multiples are literally seemingly insane on these businesses that are being gobbled up. And so for us, that would be well into the eight figures. - What's your monthly burn, personally? - Probably around 30,000 a month or something like that. Two houses, that's not cheap. Kids aren't cheap, expensive to maintain these things, but we don't have a, we do these sabbatical trips, which is something we really love, and we buy nice things that are built well, but nothing extravagant in any way. Just trying to use money to stress less. Life is hard enough. So I want to use it as a tool. People don't buy drills, they buy holes. I want to use money as a tool and not let it become the master. - Also, I'm sure you can tell by now, 'cause of the accent, and I'm referring to his not mine, rural Canadian to be vaguely specific. - I am from Saskatoon, Saskatchewan, which is a small kind of prairie city, farming city in the middle of Canada. But my business after the university moved up to Calgary, Alberta, which is kind of a city in the Rockies, and then in the summers, we spend our summers on the other side of the country in Nova Scotia, which is a very different way of life than it is out in Calgary, where we spend most of our time. - Yeah, but so tell me about growing up, what was money like in your family growing up? - I'd say my childhood was just knowing that, I never felt like I was wanting for anything very normal middle class upbringing, in a very prairie people, farm people, they're formed by the depression, so that kind of way of life, they live a little bit differently, and so you don't really talk about money around the dinner table, at least where I was from and brought up, but really what changed, I guess, for me, about thinking about the world and thinking about business was coming to your side of the world. So my dad was a veterinarian at the University of Saskatchewan, really a veterinarian, but worked with the university as a research scientist, and when I was about 10 years old, he came into the room and he's like, we're moving to Cambridge, England, for a one year sabbatical. - Cool. - And that was really formative for me, because you think the world works in a certain way. You're supposed to drive on this side of the road, and you go to England, you drive on the other side of the road. And so that really opened up my mind to like, perception becomes reality, and these lived experiences can be carried with you, and networks change you, you know, and that's something that we've tried to continue on is this like way of living these sabbaticals to kind of change up your perception. - It's interesting that you say that money was something that you didn't talk about much at home, and yet here you are on a podcast literally to talk about money. Like how do you think, how did you feel about that as a kid, and how do you feel about that today? - I was always kind of fascinated by it. My immediate family didn't talk about money. In our household, it was really about science and quite an academic kind of household. So conversations were meaningful in academic, but not on the money in business side. So maybe because it was that forbidden fruit that I liked it, but I had an uncle that was a very wealthy, entrepreneurial guy. And so, and he would talk about money all the time, and it was just a very different contrast from how it was being brought up. So when we would go and visit him, it would be out at a ranch, riding horses, amazing cars, parties, all these things going on. And so that kind of changed my view on, well, there's something going on here that maybe we're not participating on in this more kind of humble, hardworking, academic pursuit family. - So tell me about the impact your uncle had on you. - Well, he was one of these magical characters that some people get fortunate to live with, but like you walk into a room and cheerly would change, his energy would change everything. And everything was more fun when he was around. And sometimes now I do the activities that we used to do, and they're like terrible and miserable activities. But when he was around and you were doing it with him, they were absolutely amazing. And good things to happen. And even when bad things happen, they'd be the stories that you'd go back and tell afterwards. So I always just wanted to be in that tailwind, a little bit apart of that magic. And yeah, he kind of really mentored me into getting into business and thinking about markets. And thinking about investing. And he had started a wealth management firm and investment banking firm focused on my own gas. And so that really kind of shaped my trajectory from a pretty, pretty young age. - So with his uncle's guidance and hard work, Rob found himself in the industry making more money than he knew what to do with at just 21 years old. A whopping $55,000 salary. - Is it kind of a poor kid from Saskatchewan and no real cash working for like $675 at a bike store and ski store? Going to $55,000, I literally thought I was just the richest person in the world. And it felt really good. But then that salary immediately drops off a cliff and you go to 100% commission. And the whole thing is you kind of need to bring in $10 million in assets within 12 months so you get fired. - What happened there? - Well, that was an interesting trajectory because probably 10 months into the program, I was still at a goosey. I hadn't brought in anything. Any of the typical strategies weren't working for me. I think because the traditional model is, meet with someone, have three meetings and then tell them to bring all their retirement assets over and go after 50 or six year olds. So 10 months in and then at zero. Finally I meet this entrepreneurial guy. I go down and meet with his office and he's like, Rob, I don't know what you're talking about, but like you seem like you're a good kid. Like I'm gonna write you a check for 100. What's your minimum that you can take? Like a hundred grand. He's like, I'm gonna write you a check for 100 grand. And he wrote me a check right there for 100 grand, which again, being from Saskatchewan, I thought was totally amazing that he could do this. And I'd never seen that much money in my entire life, like right there in front of me, but also I was thinking, this is more money than I've ever seen in my entire life, but I am so far away from that $10 million. But that started the flywheel, gave me the confidence and I realized the kind of people that I would have a connection with and able to get to that, into that 10 million surviving and keep going. - You say the attrition rate is super high. What is the consistent thing, do you think, or the consistent things plural, that is true of the folks that do survive of yourself and other people that do make it in this world? - Unfortunately, and I think that leads to a lot of problems with the industry, it's the sales focused people that survive. And so those people aren't necessarily students of financial markets and financial planning best practices. So it kind of weeds out some of the people that are really strong professionals and really study the craft of financial management because they don't have that sales skill. So I think it's ultimately just those tenacious, hungry people that just beat themselves into the ground to make it and some of the more practice practitioners actually don't make it, which creates this disconnect within the financial advisory industry. - You saw a lot of mistakes around you. Like what were those mistakes that people were making? - I just don't think they're often not doing the basics, fully utilizing those basic best practices is a big one and they over complicate things instead of simplifying. And then the big one is making emotional decisions. The really best stuff that we see is, you know, people buying whole life insurance 'cause they're trying to save tax, so that's a total scam. Buying private equity funds that have a 20% IRR, well, if you put that into a model with the actual cash that gets deployed in the tax inefficiency and those strategies, you're getting a risk 10% return at best if you can even achieve that. You got a huge cash drag, you have concentrated positions which just opens you up to huge idiosyncratic risk in these strategies. And a lot of time people, I think founders, are wasting time and energy trying to optimize something which is very hard to optimize. Investing isn't like most things in life. You wanna get better at tennis, play more tennis. You wanna get better at investing. Effort isn't positively correlated with outcome. So you have to really be careful with all that time and energy and what is that opportunity cost that could be put into a different avenue that where that outcome is directly relevant. related or that effort is directly related to that outcome. So those are the big mistakes at a high level that I kind of see observe over and over again. What were the mistakes you were making back then? Personally, I was buying individual stocks, which I think is a common behavior that people that have studied finance are interested in investing do. And I just wasted a lot of time and energy and stress on that just because I didn't understand the simple base rates of investing. We go back to Buffett's rule. What's the rule number one of investing? You don't lose money. What's rule number two? Don't forget rule number one. And I think what he's saying is it's important to study losing before concentrating on winning. And when you look at the losing, the data is quite astonishing. I look at this report, the agony and ecstasy. It's by JP Morgan. It looks at the US stock market. It looks at the Russell 3000s. Bay 3000 stocks are the US stock market, quite big sample size. Of those 3000 stocks over a long course of time, they study catastrophic loss. And they define catastrophic loss as a 70% decline in stock price that is never recovered from. It finds 44% of stocks have a 70% decline that is never recovered from. So every time you're buying an individual stock, you're staring down the odds of a 44% chance of buying a stock that goes down by 70% or more and doesn't recover from. And if you go down by 70%, the odds to get back to break even are very good. You got to go up by 233% just to get back to break even. So when I look at the risk that people are taking on by buying individual stocks, which is something that I was doing, I think they don't always know the probabilities. And maybe they think the probabilities don't apply to them that they have inside information, that they know the company very well. They do unspecific research, maybe they even work there. But JP Morgan report looks at this and it basically finds that that catastrophic loss usually comes from complete Black Swan events. COVID, 9/11, technological change, government change. These are things that, even no matter how well you know the company could still disrupt that profitability, which creates that catastrophic loss. So I look at the loss first, which I didn't understand when I was first getting into this. And then the upside statistics aren't that good either because you have positive student's and the data. So there are winning stocks, but there's many more losers than there are winners. So there's a great report, do stocks outperform Treasury bills. And it looks at the entire US stock market, 25,000 stocks from 19, 26 to 2016. So have those 25,000 stocks. 3,000 go to 0. 9,500 just match the return of T bills. 11,500 do a little bit better than T bills, but when you mix it together with the 9,500 other stocks, it actually matches the T bill return. And so all the wealth creation in the US stock market over time has come from 1,000 stocks, 1,000 out of 25,000. That's 4%. So that's the downside and upside statistics that you're looking at, making an individual stock selection pretty hard. Yeah. And I also think at a higher level, individual stocks create this kind of misguided notion. People think if they buy right, they'll never have to buy again. That all their worries around money and life is going to go away. But that doesn't turn out to be true. So I've really tried to shift my focus less from those winning moments and more to the days after. You saw the young people in wealth management making mistakes. You were indeed making mistakes yourself, picking those individual stocks and so forth. What made you think you could do it better when you were younger? Oh, kind of just blind confidence. I just kind of didn't know when you better. So I just went for it. I'd seen other people. You kind of get the survivorship bias, you think, because other people are going to succeed that you're going to be able to succeed too. So I was just riding on that high and thought I could do it and turned out all right. Did it do the-- So when did you switch from being a broker to doing your own business? Yeah, that was kind of a form of a dream. So I had the big shops for about 10 years. And I kind of knew what they were all about. And I was just uninspired there. They say you become the average of the five people you spend the most time with. Those are not the people I wanted to be spending my time with. And ultimately, they weren't students of the craft. I would say, they would say, oh, I have 30 years of experience. I'd say, no, you have one year of experience that you've just repeated 30 years over. I wanted to build things. We know about the big problems in wealth management. So again, just going back to the math. An outperforming manager, if you look at stock return data, an outperforming manager, even if you can pick them, which were both recommending that you don't do, go with more of an index approach. Well, those outperforming managers perform by much less than people think. So the excess return that they provide is about half a percent to 1% of those outperforming managers. Financial planning can add 3% a year to improve performance. And financial planning examines all the variables that are in someone's control. So investing outside of your control, half a percent upside, financial planning, 3% upside, and all control variables. That seems like something that should be studied and modernized. But today in Canadian wealth management, if you have $100 million and you go to one of the big investment shops, he has for financial plan. So literally a 75-page PDF report that I as a financial professional and nerd can even read. So there's no way my parents, as teachers and nurses and doctors, like these people can't read this stuff. So I just thought there was a tragic misstep in the wealth management industry, where they have all this endless capital. And all they're trying to do is make a better bounce out on the investment side, something that we know that they can't really do very well. And in this huge, beautiful opportunity, all these things that really make up your whole financial life that are outside the investments are not being attacked and being modernized. So that's what gave me the motivation to start my own thing. All right, money wise listeners, here's the deal. On this podcast, we talk about money, and that's great. But the one thing that's even more important than money is your health. And a few years ago, I made a change. So I made a change to get fit. I wanted to get fit for vanity reasons. I wanted to look good, but I also wanted to feel awesome and hopefully live a long time. And the way that I made this change after years of struggling was I hired a coach and it changed my life. I went from being like 25% body fat to 13, sometimes 12% body fat. It changed my life. And that's why today's sponsor is Daily Body Coach. It's a premium online coaching service for ambitious entrepreneurs and executives looking to achieve their dream body and perform their best. Daily Body Coach is run by an exited software entrepreneur and Hampton member. And in fact, a bunch of other Hampton members are using Daily Body Coach. And they hook you up with a super personalized exercise and nutritional roadmap to help you achieve your goals. Their expert coaches are available seven days a week. So you can rest assured knowing that you have someone to hold you accountable every single day and to keep you on track. You can have it all. They offer a 100% money back guarantee within 30 days, no questions asked. Make a change, check them out. Dailybodycoach.com/moneywise. Again, that's dailybodycoach.com/moneywise. - He said it first, so I'll say it, Rob's a nerd. More than making money for solely monetary gain to Rob, it's his art. Fortunately, it's an art that's pretty easy to monetize for obvious reasons. - So our first calendar year, 2020, we would have done just under a million dollars in revenue and 2025 will do about three millions. So we've been able to double the business twice in five years and really build out a lot of cool stuff. - Do you think there's some big opportunity? Do you think more people should be building companies like yours? - I do. I really do. I think there's a huge opportunity for the influencer space to actually build, to use their audience to build a wealth management firm. The hard part is getting distribution to getting people in. There's no real way to build a business other than by slogging, which takes a lot of time. But if you're kind of in these influencer platforms, you have that trusted audience. There is so much science out there that isn't being applied. So you can take this index kind of elevated approach, which would match with, you know, if you've got all the data to back that up. And then it's so easy with technology now to build these customized screens that are just allowing you to communicate people's money back to them, like personal finances personal. So it's not all about the math. All you're trying to do is take unstructured data, your data hairy, take it, put it into a mathematical model of a dedicated financial planning software and then give those choices back to you. Should you pay off the mortgage or keep that money in the market? I mean, that's a personal decision, but it doesn't hurt to have the math and it doesn't hurt to have someone take those blinders off. So I actually think there's a massive opportunity for people who have audiences to create these side vehicles and say, look, I struggled with the wealth management industry for years. These guys are piranhas. I hated it. I had all these bad experiences, but I read the literature and I realized, oh, you actually can do indexing, but then just kind of tweak it just slightly. It's still low cost. It's still diversified, but it gets you a much better result and it's backed up by these noble laureates. And that seems like a pretty good idea, but where we really focus this on the financial planning and we've built this cool software and it ties in the little things that I say on my podcast or that's part of my brand and I think that could be a massive, massive opportunity. By the way, I know that you want to know what his own personal portfolio looks like and that is coming. But at this point, we've heard Rob basically agree that the financial advisory industry is a bit broken, but that doesn't mean that he doesn't believe in it. So it's time for the defense. By the way, whether or not Rob's argument that he's about to give convinces you or not, it's pretty hard to argue that not talking about your finances with other people is a bad idea. That might not mean talking to a financial advisor for you, but that might just be talking to trusted people who are in a similar situation as you that get your dynamics, get your business, understand the market that you're in, understand your level of wealth, understand your priorities in your life goals and the things that are going on for you right now. And that can be really hard to find. And one place that I found it that I really get a huge amount of value out of and would recommend to you and it's the reason that this podcast exists is a community called Hampton. It's at joinhampton.com. It's a network of high network founders, CEOs doing north of 3 million in annual revenue. And you get matched with people that are in similar situations to you in similar locations so you can hang out together in person and really get into these topics that you just don't get to discuss anywhere else. And so like I said, you might not want to work with a financial advisor with that, but like a trusted group of people who really get you can be just tremendously valuable. And it certainly has been to me when I make decisions about the real estate that I'm going to invest in or the portfolios that I put my cash into. all these things like I've had conversations with them and it's all happened inside of Hampton. So if that sounds like something that's going to be also interesting to you and you're doing at least three million and your revenue, you've got to go and apply. It's at joinhampton.com and not only will you be doing yourself a favor, but you're also going to make sure that this podcast keeps existing. So if you enjoy this show and you want it to keep existing and you are a founder doing this kind of level of revenue each year, go and check it out. Joinhampton.com. Okay. Now for real, defense time. I think financial advisors get dunked on a lot and a lot of that is justified. Sales culture, misaligned incentives, a lot of these firms are foundationally set up for people not to be giving the best advice to their clients that they should be. A lot of that is true. I'll be on a strob because like, sorry to interrupt, but I'll say like a strong percentage of the folks that are on here that are founders of companies made lots of money. They kind of, okay, how am I going to manage this money? They speak to wealth managers like, if that, like, I don't, you know, I'm going to look after this myself or I'm going to go about it in a different way. That's not to say that they say, wealth managers are all horrible people, but they're just, you're right. It doesn't get a great reputation, honestly. Totally. I still to this day kind of hate telling people what I do, but I do love it. And I do think the right ones can create more value than they capture. And the industry is starting to clean up. So I think you're getting better and better from an industry and regulatory perspective. You do have in the US quite a few younger, better firms. And it does a bit lower on that ranking. We still have a lot of work to do. But ultimately, I do think in any endeavor, people with good coaches are going to have better results. It's interesting to me that Morgan Housel, who's like the voice of our generation when it comes to investing in finance, who's sold over 8 million copies of his books. I mean, he needs to know help on financial management, but yet he uses a financial advisor. Ken French who wrote a 1993 paper like the Common Respectors in Sox and Bonza. That was one of the most cited papers ever in finance. He needs no help structuring the portfolio. He uses a financial advisor. So I think there are these right ones out there. And I do, I guess, want to push back in some ways. When I hear the guests on these shows, I hear a lot of things that I would actually take the opposite side of what they're saying or finding those inefficiencies. You've said that most people are wrong about advises. So Housel. Well, let's take an 80/20 portfolio. So that 80% would be in VTI, the Vanguard Total Market Index, and 20% in bonds. And I think most people would look that way. Well, why should that person pay a 1% fee? And I'd push back and say, well, maybe they need a fee, maybe they need a advisor, maybe they don't. But for number one, I think just with financial planning software, you could run a bunch of scenarios to show that that 20% is not protecting anything. Long term, it's actually just hurting your returns and making you a much bigger customer to the tax man that you need to be. And that you could, in a very diversified, no-leveraged portfolio, there's been, again, built by noble laureates with 12,000 stocks across country. Unless the world ends, this portfolio is going to recover. Yes, you're going to experience volatility, but you've been through volatility before. And if you didn't panic so, then you can probably move yourself up. That's probably two or three percent just in performance increased right there. Then if you're in this VTI, well, again, there's these basic index funds. Then we've known about the structural inefficiencies of index funds for 20 years. Publish research by Harvard professors that show you that's costing you 40 basis points a year. You could put that into a more sophisticated vehicle like using dimensional fund advisors. That's going to pick you up that 40 basis points. So now you've more than covered that fee or more they have to feed their right there. Plus, getting rid of that bond ledge. And then within dimensional fund advisors, they kind of tilt towards higher expected returns, meaning we know that there are these risk premiums within SOC, systematic risks. Basically, small companies do better, large companies or long periods of time value companies do better than growth companies over time. Again, this is from the data is undisputable, ASCChat GPT, look it up in the literature. And that makes sense. You should get paid more for owning a small crappy company than some big established company. Markets aren't stupid. There's a pricing mechanism there. And so that risk premium is something that you can earn. That's another 50 to 100 basis points. It's right there that you've more than covered the fee of a financial advisor. Just on that 80/20, I just indexed portfolio. Now, I bet when you actually look, are they actually keeping all that cash invested? Have they actually maximized all their little government programs? Oh, it's only $7,000 a year. Okay, all of that stuff, all of those little tax inefficiencies that your account is missed because your account is looking back one year, not looking forward through a compounding lens for 40, 50, 60 years can correct. All of that goes in your favor. Then you have this sparring partner. Ultimately, you have these big life decisions to make. I want to buy a bigger house. I want to smell my business. How should I structure it? If you have an independent advisor, they don't have a dog in the fight. They're not bringing an emotional baggage. They're just taking your data, structuring it, and porturing it back to you and trying to cover those blind spots for you. You get to have those discussions on these big pivotal moments. The decision that you make at those pivotal times is going to have a big impact over the future trajectory of your wealth. Then you have an administrative team. You can call them up. All these crappy tasks, you have to do something in finance, multiple tasks in finance, every year to keep it optimized and efficient. Those are yucky tasks. You can dedicate a team to do that for you. You need to find your tax returns. They will help you do all that stuff. All of that mental energy can go in towards your actual life goal, where your input and your effort is actually going to lead to a bigger business, something better going on for you and whatever you're trying to sell for and your objective. I think that's there. That's not even discounting all of the big mistakes that people make. Everybody knows the market goes down, but it goes down for different reasons. There's always a narrative attached to it. You see very political people all of a sudden when the market goes down from Trump, they want to sell, but they were okay in COVID. Doctors or health professionals, they have a harder time in COVID because it's attached to a story. If you sell at those market downtrefs, you can never really recover that return. You have some protection from that. Your buddy at the tennis club pitches you in whole life insurance, if you talked about as a total scam. Your financial advisor can put that into financial planning software that's not trying to sell you anything and just show you, "Oh, the counter example of that is low cost index funds. Actually, do a lot better than putting in this super high fee, complicated strategy." They can talk you out of these two big speculative investments. Yes, do you want to take 10% of your capital, put it in crypto, put it in your buddy's business, whatever, that's totally fine, but making sure that those are measured bets and that you're not getting yourself into financial difficulties by going too hard. There's only two ways to go. Broke concentration and leverage. So financial advisor should be protecting you from those things. You're not compounding, but then isn't that cash flow a nice thing? In terms of an income to be able to have and sustain your lifestyle to no cash is coming in, but you don't want cash coming out of your portfolio. You want to dictate when you sell down your portfolio. What you're interested on the investment side is total return, which is capital appreciation plus the income. You shouldn't care how that pie is made. What you should care about is the largest total return on a net basis, so after fees after taxes. I think a lot of people get persuaded into thinking, "Oh, if I get cash and it comes back to me in my pocket, I'm doing better." That's actually very inefficient way for the investment side. I'm sure it's inefficient, but if a big portion of your income is coming from your investments, that's different. If that's how you're making your money, or should I just have something that's constantly compounding and then just take my 4%. I think this is a big misconception in investments is that dividends are free. If a company is worth $100 million and they pay a $10 million dividend out in cash, what is that company worth? It's worth $90 million. It has to be. Dividends are not free. That is no different than having $10 million in a stock portfolio and selling one million. Net net, those things are the same. When you're taking dividends or distributions, you're actually selling down that position. A lot of people are like, "Oh, I want a big enough portfolio where I can just live off the yield." That's just a flawed way mechanically from thinking. This is actually leading you to have a less efficient portfolio from a total return perspective. Definitely from an after-tax after-feet perspective. Why should anyone think about over-complicated and not just buying a bunch of index funds, field oversafied? Buy a couple of mag seven if they want to get a kick out of buying an individual stock, relatively safe kind of thing to do or see that, come and wisdom would suggest that and stop there. This is super layman's question, right? I want to ask a basic question here. Tell me about the, what's wrong with that? Index funds are very interesting. What I do now looks a lot like indexing. I find it funny that on these interviews, if people say I just index, that seems to end the conversation. As if I index doesn't have a million different permutations of what that could look like. Acid allocation, rebalancing protocol. Are you doing international diversification or not? If you are, how are you managed in the currency? Are you going for any kind of style drift in terms of factors, size, premium, value premium, growth premium, whatever you're going after? I think there's, and these ideas and these questions, they've been studied by people for their whole lives and they've written papers about it and had that research published and then they've added other people recreate these experiments. There's ways to have more efficiency within index funds. I think in health-based, you have people like Peter or Hugh Berman. When they look at a subject, they do a deep dive on the literature and then they talk to a bunch of experts. Well, if they did that kind of exercise on investing, I don't think they would be recommending basic index funds. Just leave too much money on the table. Index funds. Okay, they leave too much money on the table, but it's also like zero. If I just go by VTI, which I don't know, what was it? It's 6, 7, 8%. Maybe. going to get worth, like sure, I'm not going to like get to nine figures doing that super quick, but like it's like zero thought and I'm not, it seems and you can tell me if I'm wrong, I'm extremely unlikely to lose a great deal of money, right? Like I'm probably going to outperform inflation and maybe that's not the loftiest of goals, but it's also like zero thought, zero stress. Totally. I just think there are a bit more sophisticated options that have all those same characteristics. So a self-driving car from a management perspective, a passive approach, low cost, highly diversified, you're not going to lose that capital, no leverage, anything like that that would result in significant losses, but just corrects for some of these inefficiencies in index funds. Again, index funds, what's the goal of an index fund to match the index? So if the VTI goes down by 30%, and they can match that minus 30%, those people are cheering. They'd actually get punished for any kind of outperformance. So what's the goal of an index fund? It's to match. Well, what's your goals and investor? Your goal is an investor is to maximize returns, minimize risk, minimize taxes, minimize trading costs. And so index funds were created, like the S&P 500 index was created 20 years before an index fund ever replicated the S&P 500. And so they're just not built foundationly for return optimization. So there's just ways within how they trade because their goal is just to match. And this has been studied by Marco Salman at Harvard. It's a published paper in the Journal of Financial Economics that shows that these trading inefficiencies with index funds is costing investors 40 basis points. Well, 40 basis points compounded over 50, 60 years. That's meaningful. So I'm not saying that you can go from a market return of say 10% and get 15%. I'm just saying there are ways within having a more sophisticated and hands index fund correct for some of these inefficiencies that we've known about for 20 years and are well documented in the academic literature. Okay, interesting. Cool. I'm just interested in what your thoughts are on people's kind of psychology. Like why do you think people are into risky private deals? I think they sound good at cocktail parties. I think it goes against conventional wisdom that something so simple to set it and forget it can actually outperform. But it's all about what you're optimizing for. I mean, the people talking about TV on TV about business and investing. A lot of those are fund managers. Well, their goal poster on a one-year basis, if they're able to create a return that does better than X-Benz Marco for one year, they get paid for that. That's what they're optimizing for. I think what we need to realize is as investors, what we're interested is duration of capital, being able to have that permanent sustainable vehicle. And through that lens, you're looking at a 50, 60-year timeline for your investments. But whenever I talk to people about performance, they're always talking to me about one or three years. And I think, well, what does that matter in a game that's 50 or 60 years long? Everyone's thinking they're sprinters when we're actually running a marathon here. And that's the other thing. I mean, in this day and age, hype and virality is valued higher than sustainability. What's the trade off between more returns versus less stress? I think contextualizing returns is interesting. Most major markets, if you go back, you're looking at a return of about 10% just for overall markets. Yeah. The highest sustainable return that we've ever seen is Warren Buffett at 20% per year. So anytime you're getting pitched on anything that's more than 20%. You should think, "Oh, geez, that seems unlikely." Because if you could just get 20% a year for 80 years, which is what he's done, you're the richest person in the world, outperforming managers, which only about 14% of money managers outperform their benchmark, the vast majority of those managers that do outperform do it by half a percent to 1%. So we don't know what the future market return is going to be. Let's say it's 10%, because an outperforming manager is only going to be able to add half a percent to 1%. And that's why I think all of my clients as a wealth manager have any of them become rich by trading stocks in their basement or fancy investment vehicles or private deals. No. They've all done it through either these really high salaries at these huge corporate jobs or most commonly through building equity. And I think if you bet on yourself and you put all that time and energy, you can deliver those outperforming returns for yourself. You can get to that 15%, 20%. But again, I think most people think, "Oh, I can get 30% 40% returns." And it's just going to like, well, you got to look back to the history books to realize the high sustainable pace we've ever seen is 20%. And again, because you're trying to do this for so long, what you should be more interested in is that sustainable pace versus just a one-year blip or two-year blip or three-year blip. What does that really matter when the game needs to get-- The AI Search is quickly becoming one of the easiest ways for companies to get in front of customers right now. And the best way to take advantage of it is with mentions.so. It was built by a Hampton member and it gives you one simple dashboard that shows you exactly how your company ranks inside LLMs like ChatGPT. And more importantly, what you need to do to get ChatGPT to recommend your product or service to potential customers. Every 10 years or so, a new growth channel is born. 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People can look at them, I people can buy them on their own. But Dimensional has a cool story. So we started by this guy named David Booth. David Booth now if you go to the University of Chicago it's called the Booth School of Business. So he's done all right but he had humble beginnings. He started in academia at the University of Chicago as a PhD student but realized that the professors that he's working with were just so on another level and that happened to be kind of an interesting time in finance because computers had allowed us for the first time to really put financial science to markets. We could finally kind of digest all this data, clean up the data sets and actually run experiments and have those experiments repeated and peer reviewed. So he's going through this time and he's realizing all these great ideas have been figured out. This stuff is amazing. I can't compete with these guys in academia but then he looks around at the products that are available in the shelf for retail investors and he's like well this doesn't exist for the everyday person. So he just productized these great ideas that had had already been figured out. And so he actually got these academics to all work on the portfolios and they've been building those portfolios the same way for the last 40 plus years making them better and better and better. And he turned out to be pretty right about those academics as they are now known as the father of modern finance. They've all gone on to win the Nobel Prize. Eugene Pharma, Efficient Market Hypothesis, probably the most cited economic, one of the most excited economists in history. You know, Myron Schroles, Bob Merton, if you've ever done Black Sholes for me for options pricing, that was them. I mean, all these heavy hitters work at this firm and have just one goal of making this one portfolio better and just turning into the ultimate compounding machine. So other than a little bit of Bitcoin, I've got all my money with them, to measure fund advisors. What percentage of is in Bitcoin out of interest? And is it just Bitcoin or crypto broadly? No, just Bitcoin in 2017. We talked a little bit about sabbatical. So I like this idea of going on these sabbaticals. So when I got married, we did a six month sabbatical to South America and we traveled around and I was the investor in residence at a VC firm, which is part of the capital stack that I, you know, day to day don't spend a lot of time in super interesting experience, got really into crypto, went down the rabbit hole and just wanted to have a position and it's just something, I don't know, that I just hold and never want to sell. It's one of those interesting assets because it was a small investment at the time. It's become quite significant investment now. But, and this is something I talked to people about who have these big wins is like, what would hurt more to sell it and for it to go continue like skyrocketing or to hold it and for it to go down? And for me, on that Bitcoin side, who knows what's going to happen, all of the financial science in the world is all done around intrinsic value. Those are things that have cash loss. So there's no, I have no professional opinion on whether Bitcoin's good or not. So it could very likely skyrocketing could go to the, I have no idea. But I would be mentally much more satisfied with it going to zero than selling it and having it skyrocket. Me too. Yeah, same. I'm with you there because yeah, same for me. I put in what was about 5% a while ago and it's now a bit more than 5%. But it's fun to just watch it and just know that that's it. It's just there and it's never going anywhere else. I can just kind of enjoy the ride without the pressure of like, should I should? And I'm just like, no, that's where it lives and that's it. That's a big thing about money too that I do find interesting that I see like sometimes these big winners aren't that emotionally fun. And I've seen people, you know, they put a hundred thousand dollars into something and it goes to 10 million, but that they don't sell and then they end up selling it when it's worth 5 million and they're like emotionally distraught and they can't really get over that. And when you zoom out, you're like, well, you turn to a hundred thousand to 5 million. That seems amazing. But, you know, they hide benchmark to that 10 million. - Totally. - So again, these investment, these speculative investments that can really go, I think you gotta know what you're getting into because they can cause a lot of stress and we see that on the financial advisory side all the time. (upbeat music) - Now, this podcast was made around one central idea. And that is how do you leverage your money to live the happiest life possible and not let it control you? The answer always seems to come back to one simple thing and that's not letting the pursuit of more money just for its own sake be your main driver. Ironically, Rob's passion is money maths and you can tell how excited he is and all the numbers that he's lifting off to us. Yet still, he's found that wealth is far more to him than a healthy spreadsheet. - I think a lot about if money were no object, what would your life look like? And then what do you need to do to underrate that kind of life? For me, that's building something that I'm really proud of. I want to kind of be the willy-wonka of financial products and building things that are totally against industry standard. That's what gives me energy to do. I wanted to walk into an office that I've designed that I think's beautiful and I want to be able to walk there from my home after spending the morning drinking coffee with my kids and my wife. And then I want to go on these sabbaticals, these movable feasts that I can kind of carry with me through my life and I want to be able to keep a focus on knowing that money is a tool and not allowing it to just be this scorecard that I'm trying to compete against other people with. - Okay, I'm going to throw a massive spanner in the works now. What you should do with your money from an investment perspective and your personal happiness are not directly correlated. Getting the absolute highest percentage return over a 50 or 60 year run doesn't have to be the goal. If it brings you a sense of calm to know that your investments are safe and secure and great, but if you have $20 million in the bank, from what we've learned on this show after lots and lots of interviews, having 30 instead is not going to change your overall happiness or life satisfaction. I know this is an argument that's outside of the question of our financial advisors are bad or a good thing, but it is connected, right? Because if you're looking at the objective numbers and you're wondering if you can get better returns with an advisor versus on your own, then it's a lot easier to listen to this information and make a call. But it shouldn't be lost on anyone that the point of money is not to just make more money, right? It's to use it as a tool to build a happier and more rewarding life, like to just make a good life yourself. That's what we all want, right? And that can look like a lot of things to a lot of different people. Rob's goal for his business is obviously to get clients to trust him and his team to maximize their returns. Yet still, he also admits that more often isn't better. I would say our happiest clients are the clients with kind of four to six million net worth. Okay, why? I don't know. They don't feel-- Like happiest in life? In life. They seem more balanced. They seem divorced, left soft, and their kids seem more put together. I would say you get over that 25 million. There's a lot more problems. There's a lot more kind of anxiety about the money. I think when people go from cash flow to lump sum, they become very worried about that nest egg and that we've seen that come out in a lot of stress. So almost having a little bit less, but having cash flow seems to be maybe a nicer way to go. But yeah, it's actually just giving a little bit lower that people seem happier. 100 million plus, then you get into some really interesting issues. And we all know of these things from a high level. But it's interesting to see on the inside that, yeah, it can be a burden for the kids. Yeah, this is kind of the subject this entire podcast is about, right? It's like happiness. If our goal is entrepreneurs oftentimes, we're trying to optimize for the best life we can. And the story that we tell ourselves, or certainly the story I tell myself, is once I get to X, then I'll be happy. Then I won't be worried anymore. No one can come and get me. No one can take my house away. No one can whatever. Then I'll be able to do all these things that I want. Then I'll be truly free. And it's interesting to see that some of the people who've spoken to get well beyond those numbers and that's not always true. So it's interesting to me that you're seeing that on your side as well where you have access to maybe a broader pool of kind of data on this stuff. Oh, we see it all the time. I don't know if it's a Harvard study, but there's a study that shows family offices and they ask them how much they would need to feel more relaxed about their money. And the number across the board is double. And oftentimes if you're able to build to those kind of crazy, crazy numbers, you don't really have that spending muscle built in yet. And so we have $500 billion clients that won't stay in a hotel, that cost more than $180 a night just because they physically get repulsed by that feeling of guilt of a wasted capital. You can talk them through it and they know that they can totally afford it. And they know that their portfolio is going up and down and value by millions of dollars every day. And that doesn't seem to bother them. But you can talk to someone through that and then that doesn't change how they actually feel. And they go right back to that super-oat hotel every night. Out of the people that are, let's just arbitrarily say, high eight figures. So I don't know, like 75 million plus, right? Like I think that's what most people would consider to be fuck you money. Certainly nine figures. What percentage of those people do you think are happy, well-balanced, relaxed, not stressed? I don't see too many of them. Right. Not many. If they've made it and they're continuing to make it, they like to build, but I feel like they're always feeling like people are trying to take it from them, which causes just these trust issues. And once you don't have trust in people in humanity and seeing the best side of things, I think that's just like a tough lens on the world. And then if you've been inherited the money, you've been given the money and you haven't earned the money, then that just comes with all this kind of stress. So from what I've seen anecdotally, it isn't a great overall place to be. So I want to hear from people that are listening that are worth more to see. I want this myth busted or not, you know? Because I assume there's people listening to this that are going, no, I aggressively disagree. Like I will be happier when I get, when I double from where I am today. Or I am happier than I was when I was half, you know? Yeah, I just think it's much less than people think. And I think there's certain ways that you can correct for that. You know, if you go in bigger circles, if you get to 50 million, but you're always hanging out with $100 million guys, then you start to feel like, you know, you're not really there. And there are things that you can do. And there's definitely a distribution for these things. And I bet there's tons of people out there that have that kind of money that they're enjoying it well. But I'm just, I guess, saying, at least from my experience, we've seen that it oftentimes is more of a burden than people would, yeah, would maybe think. You had to hear first folks give it all away. I mean, this is the fascinating, I mean, that honestly is the thing I'm obsessed with is just what is the right number. And I don't mean for everyone. There's no one number for anyone, of course. For me, you know, I'm really interested like, you know, what should my goals be? I'm a goal-oriented person. And that goal post is moving all of the time. And I don't want to get carried away. And I mean, carried away, not assuming that I will get there, but carried away with like just like assuming that the next threshold is the one that I need to get to or whatever and having an attitude towards it that is created in the right way, rather than just sort of false assumptions of like, I imagine, you know, that guy or gal over there, oh man, they look happy because they got 25 million. Do you know what I mean? Totally. I think what's that throw, quote, "I grew rich without ever needing money for I had sunny hours and summer days and I spent them lavishly?" It's something I'm trying to think about for myself too. So I'm in Nova Scotia. I'm with my family. I'm on the other side of the country. I'm grown vegetables and living on a farm. I'm watching my kids run around. My parents are coming to visit who are still healthy. My sister comes. They're all healthy. My wife and I are badly in love. We're still healthy able to do exercise every day. We're making meals together. Our kids still want to hang out with us. And I just kind of think, I don't know. Is it ever going to get better than this? Like my parents and her parents are always going to be around. Maybe we're not always going to have the best relationship where everything is in a really good place. So I'm trying to measure back more to that and the health side and the fitness side and being able to move the body and still be able to play some competitive tennis and do some of these things with the loved ones and trying to get a little bit less off the money markers. Because yeah, that's something you can never have enough of in some ways. Here's something related that's really interesting. I asked Rob to tell us a financial move that he'd like to redo and he thought about it really hard. But it didn't come down to a specific play or an investment that changed anything for his balance sheet one way or the other. Instead, he reflected on an investment he makes routinely that he says is invaluable one that everyone should be making. I've kind of talked about these sabbaticals a little bit and getting away from your life. And I think spending time in a place allows you to strip out your daily routines and kind of the unnecessary. It allows you to get into a different culture in a different way of being and kind of play with maybe the person you want to be or things you wanted to spend more time on because you do create more time and space for yourself. And so anytime we have spent money on having these sabbatical, these extended away experiences, I've always come back with a lot of great insights and learnings and feelings about that. And it also carries in a bunch of great energy of, I really like where I live, I really like what I do. I really like the home that I'm in and the family that we've created. But sometimes you need to come away from that in order to realize just how good things are. And then you pick up a few things along the way that you can weave in. And I think it's a way to create a nice break in this living. So we don't become these like memetic machines that are just doing things for other people for our networks or for the people that know us. Being a stranger in a different land can teach you a lot of stuff. ♪ I swear you've got gold I've been running for ♪ ♪ Honey, I got hope, I've been one to drop, bro ♪ So yes, Rob came in with a mission, not just to rebrand financial advisors, but to reshape how we think about money altogether. Because sure, we all want to be responsible. responsible to grow and protect what we've earned, not just for ourselves, but for our kids and our grandkids. But at the end of the day, what is money but a tool? If the question is, can a financial advisor get you better returns than doing it by yourself? Well, Rob gives a strong case that challenges a lot of what past guests have said on this show. But just as important is the question behind the numbers. What kind of life are you trying to build? Your relationship with money, how it connects to happiness, risk, and peace of mind matters just as much as where you get your advice. And as always, you can get advice about where to get advice from the Hampton community. I'm a member, so is Rob, and honestly, I can't recommend it enough. If you're doing at least three million in revenue, check it out at joinhampton.com. And if you're into podcasts or thinking about making one of your own, check out my company, it's LoaStreet. Find it at LoaStreet.com. Thanks for listening, see you next week. (upbeat music)