Episode 58 - Does Your Family Need a Personal CFO? with Frank Danielson
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Nicole Garton 00:00:02 Hello and welcome to Your Estate Matters, presented by Heritage Trust. Your Estate Matters is a podcast dedicated to everything estates, including building and preserving your legacy. If it's estate related, we'll be talking about it. We're having the conversations today that will help Canadians protect their families, their assets and their legacies tomorrow.
Frank Danielson is a dedicated personal CFO and wealth mentor for a select group of high-net-worth families and entrepreneurs, leading the private family office team. He focuses on meeting the complex and evolving needs of his clients, helping them preserve, grow, and manage multi-generational legacies and wealth. Since founding the Danielson Group Wealth Management in 1994, Frank has earned a reputation for exceptional client service and insightful wealth management advice. His team takes a disciplined, holistic approach to financial planning, integrating tax, legal, insurance and investment strategies to tailor solutions to each client's unique needs. Frank, thank you so much for joining us on Your Estate Matters. It's a pleasure to have you.
Frank Danielson 00:01:17 It's a real pleasure to be here.
Frank Danielson 00:01:18 And I've been super excited about this. I guess we've had a couple of false starts on here. So I'm so happy to be here. And this is a conversation that's really important to me. And it's not just about the money, which we'll find out today.
Nicole Garton 00:01:31 So we've known each other personally and professionally for years, and I've always been incredibly impressed with not just your financial acumen, but your humanity and your empathy and your very values first, and provide a real, holistic approach to individuals and families. So, I'm really excited to talk to you and hear about what some of your experiences are.
Frank Danielson 00:01:56 Thank you.
Nicole Garton 00:01:57 Tell us about your path. I understand you have an education degree, and then you built an extremely large and successful financial advising and investment management practice. And now you do sort of personal CFO and family office. Tell us about that trajectory.
Frank Danielson 00:02:13 Yeah, I guess like a lot of people my age, when I first began, I didn't know exactly what I wanted to be when I grew up.
Frank Danielson 00:02:19 My calling was definitely more entrepreneurial, and it called me out. And at that point, I began in this business more as I guess, a traditional advisor providing fee only advice. So part of the early days, I guess I was one of the Renaissance where I wanted people to pay me for my time and not sell products, which was very, very hard in the early days. So as that evolved into around the year 2000, I started getting bigger and bigger clients and more complexity. And at that time, that's when the sort of, I would say I transitioned from a traditional advisory role into more of a personal CFO or family office. And really it just sat down with two clients and I asked them, what is it they need and how can I best support them. And it just opened up all these new chapters on how I can provide advice and how we can serve them. So I think that's really the essence of who we are as a group. It's really the people before numbers. It's really being curious with families and finding out what's most important to them and not always taking the first answer.
Nicole Garton 00:03:18 So what does that mean in practice? Like a family comes to you, maybe they've built some wealth, maybe they've got, you know, investments or running businesses. Maybe they've got complexity in their families. Like, how does that value exercise interplay with what you do for them?
Frank Danielson 00:03:34 A great question. I think that starts right from the very first meeting and the very first phone call. And I think for some families, it's a bit of a surprise. I came to you about investments. I didn't come to you about all this other stuff. So for some families, it's a reframe right from the start. And for most families, it's very refreshing. Does it get a chance to really find out their why, their purpose? The meaning behind money. Money is different things to different people, and I could probably have some fun with you, but we don't have the time and find out what your money values are. I think that's a big part and that's something that evolves as the relationship evolves, right? Sometimes people need to feel safe, but I think at the end of the day, everybody wants to feel understood.
Nicole Garton 00:04:14 So yeah, money is a complex topic. I think something that Heritage Trust is. We help people protect their families, their assets and their legacies. That's sort of our purpose and our why. Yeah. And, you know, those are words. But what it means in practice is different for every individual and family. But unpacking where you want to go is as important. Then maybe just a spreadsheet or, you know, just a set budget. If it's not connected to higher value or what your purpose is or where you're going.
Frank Danielson 00:04:43 Absolutely.
Nicole Garton 00:04:44 You spend your days inside the lives of, like, extremely successful families. What are the unspoken challenges and what do you see with those families of what they're experiencing?
Frank Danielson 00:04:55 I think the biggest thing that we tend to see is the heaviest risks are in the emotional side of wealth or the soft side of wealth, not the financial. It doesn't mean that families aren't optimized. They can't do things a little bit better for us. I think it's a lot of the unspoken things.
Frank Danielson 00:05:11 It's really engaging families or next generations and conversations that they never had and they don't know how to start. And part of that recent work is I think you I'd ask you out to that event we did with Dr. Moira Summers is really to find the why behind wealth and what is, you know, wealth without meaning I think is very empty. So as much as we do all the cognitive stuff, all the analytics, all my reflective thinking side, I think that's an important piece that families, you know, for example, you know, how do families do prenuptial. So I think for us it's wealth isn't always easier. Sometimes it gets more complicated with more wealth.
Nicole Garton 00:05:50 And spoken to this is like the next generation. I think sometimes the mistake that professionals make is how do we convey wealth in the most tax efficient manner with like privacy? I think the difficulty is sometimes technical professionals do incredibly complex trusts or tax driven planning, but they've never actually looked at the underlying structure of the family or what the goals are, or what the idiosyncrasies are of the next generation.
Nicole Garton 00:06:18 Like how do you how do you bring in that next generation and build wealth stewardship or get buy in for what the goals are?
Frank Danielson 00:06:27 Wow. I think that could take the rest of the podcast. So I think it really starts with engaging all the stakeholders. That's really the starting place and that doesn't always work. Sometimes the parents don't want to engage with the next generation. They don't want to have the conversation and it goes back the other way. Or as you might know, if you have three kids in the family, two are fully engage, one's disengaged and sometimes that disengaged child can run amok, a good succession plan or a good estate plan. So I think really at the end of the day, it's about engagement. It's reaching out and it's starting those small conversations.
Nicole Garton 00:07:01 So you as an advisor, what does that look like in practice? Like do you facilitate family meetings? Do you recommend education? Do you do family charters? Like what? What does that mean in practice?
Frank Danielson 00:07:13 I think for every family it's a little bit different.
Frank Danielson 00:07:15 We like to work with everyone in the family. So if we have a first gen that has a mom and a dad and there's two kids very early on, we like to reach out and sort of begin a conversation. Usually that sort of starts out on the estate plan or some communication or sharing of values. Sometimes it evolves into a family meeting where we all hang out in the boardroom and we have some fun together, and sometimes it's a little less fun. But at the end of the day, you have to start somewhere. So in summary, it's usually working with the next gen separately one on one, so they have a safe place. It's not a two-way conversation. They need to know they feel safe and they have a chance to voice what's important to them. So sometimes we'll also have team members that are, let's say, millennials. So they're not sitting down with somebody that's like mom and dad. And I think that really helps ease the conversation. And you have to look at this as a multi-year conversation.
Nicole Garton 00:08:08 So what does success look like. How do you know that a family's done it?
Frank Danielson 00:08:12 Well, I think the families that really thrive are the families that communicate and the families that have a plan. So it's really intentional and they have a purpose. I think it's also something that tends to evolve, like I said, over time. And for a lot of our families, just they feel like they never have got it figured out. But when you look back over three, five, 10 or 15 years, the progress they've made is unbelievable.
Nicole Garton 00:08:36 Let's get practical. What does a personal CFO mean for a busy family or a founder or the wealth generator? What does that mean?
Frank Danielson 00:08:44 I can take two sides to that. The first thing I would say is a personal CFO is really somebody that stands at the center of your whole financial life, Somebody who can see the whole map. It's just not the territories and the provinces, if we use Canada's analogy. A lot of folks in our industry and our profession work in silos.
Frank Danielson 00:09:02 So the accountants will work with the client. The lawyers will work with the client, the financial advisor, the client. The insurance agent will work with the client, but nobody steps back and see how it all works together through a plan. So I would say that, you know, we stand at the center of a client’s financial life and also the heart. So like I said, we want to get really clear about what's most important and what their biggest challenges are.
Nicole Garton 00:09:25 So a family starts working with you. What changes? Like what does it feel like when someone works with you? And I'd say they're a year in what? What would they notice?
Frank Danielson 00:09:35 I think the first thing they noticed is they can breathe. They finally have a place where, I guess in my language, they've never really understood where they stand in relationship, all their goals, or more importantly, they've never even had written goals and a plan. So I think that through that clarity, that builds confidence and confidence that builds a peace of mind.
Frank Danielson 00:09:55 So I think really at the end of the day, it's an emotional shift more than a financial shift.
Nicole Garton 00:10:00 So, you know, I know a little bit about your practice. You've got founders, you have physicians. And my experience with working with physicians is like highly intelligent people. Often blind spots are avoidance around money. Like, what does that look like for you when you've got these clients?
Frank Danielson 00:10:20 The first thing that they all have in common is they're all time starved. Right? And time starved people. It's like table scraps. They're just, you know, going from one thing to the next. So I think at the end of the day, it's important to kind of, you know, put everything on a table, have a systems view of everything. At the end of the day, they want their time back. They want to do what's most important. They're scared of these things. They're an expert in their own history. And we do also have financial professionals that are a bit do it yourself.
Frank Danielson 00:10:50 And sometimes their eyes get open a little wider, that there's more things than they were thinking. That they need to look at or address.
Nicole Garton 00:10:57 Like, what about that driver founder personality? Like the wealth creators like. They often have incredible skills that have like built an enormous amount of wealth, but they're often a little bit autocratic or, you know, not the most collaborative individuals. Like, what do you how do you manage that?
Frank Danielson 00:11:15 Yeah. Maybe I can share a story. We have a process that we have. Most families sit down called financial DNA. And you might recall that back in our early days, and this is to help us accelerate and really understand who it is we're working with, how they see the world, how they communicate, how they make decisions, how they think of risk. And I would say a lot of these drivers or entrepreneurs might have a little bit of ADHD, right? And they create a big wake. So there's nobody really behind them that's sort of managing the wake, so to speak.
Frank Danielson 00:11:43 It takes a little bit of time to earn their trust. But again, these are the people that could benefit most from a little bit of structure a little bit of pre-planning, some proactivity, somebody that corrals the troops and all the professionals, but also holds them accountable to the things that are most important. And sometimes some of these individuals in the past have never really had any accountability. And you have to do that with love and a little bit of care. But, you know, that's how we show up.
Nicole Garton 00:12:08 So what's your example? You're going to tell us the story.
Frank Danielson 00:12:12 Yeah. So the example I might share is maybe around the year 2005 was introduced to this family by a friend and said, you know, this is somebody that actually a family office client that was one of their best friends and a golfing friend of theirs. Well, why is that? I said, well, you know, super successful entrepreneur, fantastic at creating things, but not very good at managing things. So that relationship started off where everything was closed chested, didn't really want to let me see the whole map.
Frank Danielson 00:12:42 Just wanted to sort of, you know, piecemeal. And as we got through that relationship in about six, six months, eight months. I kind of got to the place and said, well, if this client's not going to open up and not going to allow us to see the whole picture, it's probably not a really good fit and sort of shared them. And that was a tough conversation to have. I was still pretty young. This would have been one of my biggest clients at the time and just sort of shared, I don't think this is a fit and this is why it's not a fit. And that was the first time, I guess I got to use one of our C's, which is courage to help families. So at the end of the day, we need to be courageous and loyal champions for clients and their family. And at the end of the day, if they're not willing to be courageous for themselves, then they're probably not fit for us either. And this individual had built up six businesses.
Frank Danielson 00:13:27 They had tons of venture capital, tons of private equity. Fast forward a couple of years, the great financial crisis comes. This whole business has now turned upside down. There's no liquidity. All the venture capital was illiquid. So now they were in a real mess. If they had not have sat down with it at this time, they wouldn't have had that $1,015,000 of liquidity and would have lost two of their businesses or half their wealth.
Nicole Garton 00:13:53 You basically said this isn't a fit, and then they decided to be more open kimono like what happened?
Frank Danielson 00:13:59 It wasn't more open kimono. It was totally dark and no communication vacuum for about two months. And then I can't recall exactly what had happened. But it started with an email communication that led to another meeting, essentially a reset on the relationship. And I and I think it was the most powerful reset that if I think back over 20 years. You know, the impact of that family, the two kids, one has mental health issues. The other one doesn't have a very good relationship with the mom and the dad.
Frank Danielson 00:14:33 Now, if I look back today, in 20 years, that family is thriving.
Nicole Garton 00:14:36 That's wonderful. So let's talk about the logistics. So how do we coordinate the rest of the team? You talked about the fact that professionals often work in silos. So you've got tax legal insurance, investment strategy. Like, how do you quarterback those individuals. So they're rowing in the same direction.
Frank Danielson 00:14:56 Very good question I'm going to I'm going to slow down and ponder that. The very first part is to engage with each of the professionals in a way that helps everybody understand that we're not here to take any part of their job. We're not here controlling the process. We're all standing on the same side of the table as the client to support them in their best interests. I use the analogy a lot of times with accountants that we're your foot shoulders. We may see the client more often, we may have more information. That doesn't mean that your part isn't the most important part. You know, the tax part is a big part of clients planning, including people and helping them see that, you know, we're not there to take over their job and that one plus one equals three.
Frank Danielson 00:15:37 And if we include the client in that one plus one plus one equals six. The second part of that is having a structure where everybody can kind of see the whole picture. So that's where my technology or systems thinking and ability exchanging information, collaborating. If they want the latest client goals, they want access to the financial plan. They if they want to understand proactively how the portfolio and distributions are going to affect the tax plan next year, that we map out a client service plan for those professionals, it's not often it's very rare. In fact, if I look back that we get all the stakeholders around the table, but there are these micro conversations that go on throughout the year.
Nicole Garton 00:16:17 And so would you think of yourself as like center of the wheel, the spokes, or how does.
Frank Danielson 00:16:22 You might recall, that's one of my favorite ways to start. So if you look at a personal CFO, and I'll be hesitant to use the word family office because I think as much as we might say, you know, we're a family office light.
Frank Danielson 00:16:33 And unless you're a single family that has three full time, salaried people, that's a family office where there's 100% alignment. You're paying the bills versus a multifamily office or something like we do where we provide some of these services for, you know, two dozen families. But really, if we look at the spokes of the wheel, there's 3 or 4 that we do very, very well. The accountants might do a couple, the insurance agent might do 1 or 2, the estate M&A lawyer, etc. the teams can be quite broad, and the multitude of our clients, if they don't have an executive assistant or somebody in their business, we will hire them, because that is almost or even more critical than the piece that we provide. Who's making sure that things don't slip through the cracks?
Nicole Garton 00:17:15 And so does that assistant report to the family unit or the business unit, or.
Frank Danielson 00:17:20 A lot of times it's both okay. And for the most part, it's it's hired through the business. But another a whole big conversation is this what do you do when the business is sold? And that's a whole nother host of issues.
Frank Danielson 00:17:32 They have all this infrastructure, all these people that ran the operation. So what do you do now when you sell your business for $150 million and you've lost your whole team and you've lost your identity. So that's a whole nother conversation.
Nicole Garton 00:17:44 And is that when you see people setting up family offices, and.
Frank Danielson 00:17:49 That tends to be when they're more open to that. I think if I go back 20 years ago, that was new language. People didn't even know what that meant. If we look back the last five years, you're seeing more of those things. They might understand a personal CFO a little bit better than a family office. But every family is unique. So one family might require 15 or 16 services, one family might need three and have a very simple life.
Nicole Garton 00:18:14 One thing I've noticed in the industry is the family office. Word has become really diluted because it's been used as this sort of marketing lingo, arguably, that people are using to sell products. And so if we think like what is a family office? I think it's unique to every individual.
Nicole Garton 00:18:32 But it's basically like the family chooses to consolidate wealth. Like if you've got the golden goose that's laying eggs, I think the idea is, do you want to keep the goose together, or do you want to cut up the goose into disparate parts? And I think if a family wants to remain cohesive continuity, they're going to have to have some sort of family office structure. And that's, you know, usually a financial person, sometimes legal, you know, an administrative person. And then as the bigger the wealth or the complexity of the family, you can add, add, add services. I know at Heritage Trust, we do have some family office clients in it, but I do sort of recoil at the word that it sounds overly fancy or ambiguous, but like sometimes it's just arguably bookkeeping. Like it's not sexy bro payment.
Frank Danielson 00:19:22 Yeah, it's the simple things.
Nicole Garton 00:19:24 But I mean, it can include a lot of things. So it really depends on the amount of wealth, the complexity of the family and how much consolidation they want or whether they want to go their own ways.
Nicole Garton 00:19:34 And, you know, it's funny, they've got that shirt sleeves data where the majority of businesses don't successfully transition. But I think the question is, well, is that really success anyway? Because if you're transferring wealth, it could be the net sale proceeds of the business. And if you're building stewardship in each of the Gen two or Gen three or doing their own successful things, maybe that is success. You don't necessarily have to stay together. It depends what the family wants.
Frank Danielson 00:20:02 And absolutely, I think you brought up two really important parts there, Nicole, is if I'm fully objective and fully honest, you know, we do provide services and we are paid through investments. We also have fixed fee arrangements for some families that we don't manage the assets for. But there's a lot of product sales, you know, whether it's through insurance, investment management. So I'm also very hesitant to use the word. I think it's become highly dilutive, which comes back to the personal CFO piece. Right. And another part I might add to this, if I may, is the CPO is the chief problem solving officers.
Frank Danielson 00:20:39 So a lot of times we see in families whether it's mental health, health, you know, the services we provide just or I provide around health because it's my passion about engaging private medical services, concierge services around the world. I might take up two days a month solving those problems or helping a child that has mental health issues find the appropriate services or professionals. So really, when you say personal CFO, you might look at the left side, but there's this whole that right family side, you know, what are the most important problems pressing that family. And that's more important than the rate of return or anything else. Right.
Nicole Garton 00:21:15 So let's talk about you've got a business owning family. What is a successful transition. Is it transitioning the business? Is it exiting and transitioning wealth. Like tell me about that.
Frank Danielson 00:21:27 Succession and transition. You're talking about two distinct issues. So if I kind of not pull us back too much to that right brain again, but your individual transition of selling a business, the majority of our founder's identity is tied into that business.
Frank Danielson 00:21:43 Their daily structure, their sense of control, their willingness or unwillingness to address those issues. Can be a really big roadblock. So I think for the most part, it's this willingness to address some of those issues, because historically, what we found is, you know, there's two times and I'll turn this question back to you. So when do we tend to see higher risk of divorce when the kids leave the house. So first seven years kids leave the house or when you sell a business because when the husband or wife comes home and they were the founder, they want to boss around their spouse. They have no daily structure. Things become very tense. They go, I haven't seen you for 35 years, so maybe I'll turn that back to you. You know, one of the things that you see.
Nicole Garton 00:22:29 I think it can often be subconscious. I'm. I'm thinking of one individual we're working with right now who is in their early 70s, has run a successful business for 40 years. Has built a lot of personal wealth as well, and the person says that they want to exit.
Nicole Garton 00:22:49 But every time a prospective purchaser approaches them and they get close to the finish line, there's a reason why it can work.
Frank Danielson 00:23:00 It's called sabotage, right?
Nicole Garton 00:23:02 So I think there's a subconscious. I don't even think it is conscious. But I think this person says on one hand, oh, I do like I'm working too hard. This is so stressful. I want to spend time with my spouse. You know, what's the point of building all this wealth if I never get to enjoy it? You know, time is finite. I'm in my early 70s, right? You know, I'm getting up at 4:00 in the morning to work on this stuff. This isn't sustainable. Like, this is real within a very valid prospective purchaser. Well, I can't do that. Well, no. Absolutely not. Clearly there's some sort of dissonance between what is being said and then what is happening for them. Personally, your heart and brain aren't aligned.
Nicole Garton 00:23:46 Yeah. So I think in that individual, you know, the other thing about that driver founder is they're not often the most reflective people. And, you know, they didn't grow up where people went to therapy or talked about their feelings or, you know. So it's funny with this individual, I will email them questions and I will get one word answers. No, they're trying to communicate. So I mean it's a little bit of a stereotype. And that's when there's people like us that are technical advisors. And you know, we go to school for years. We spend years becoming competent technically. And that's really important. But it what it what in practice, it seems like 90% of our success is something often we've never been trained in, which is like understanding the human experience and dealing with the soft piece and the EQ and it's like, okay, I'm not going to be successful in servicing this client and this I can get in touch with that. And, you know, I've like for me, I've been a lawyer for 25 years.
Nicole Garton 00:24:50 I have, you know, undergrad law degree and masters of law. And nobody said one word about how to manage.
Frank Danielson 00:24:57 Being a coach or you know, somebody who's having developmental life barriers and doesn't want to talk about them and stuff like that. So it is a very interesting, fascinating piece. And I enjoy working with people like you and multidisciplinary teams to do the technical piece, but then also get underlying what's going on for that family. And, you know, it's one thing I can talk about, like Emily Griffiths as a speaker and has written books and she's we can talk about her because she speaks very openly about this, but how succession doesn't work. So she talked about her father, who was this incredible entrepreneur and built all this wealth and had beautiful, beautiful technical planning. But the family wasn't necessarily on board, and there was sort of two older kids and two younger children. And because there was a big age difference, they had had really different life experiences.
Nicole Garton 00:25:53 And a lot of the beautiful planning got really undone, basically because there wasn't buy in from the family and they had really different goals. And she speaks about her own family, where they are actually saying no to technical complexity and really focusing on building wealth stewardship, entrepreneurial stuff for the next generation, but not trying to be too technical and tax based and more the human part. She talks about something called a family bank. Anyway, we can talk.
Frank Danielson 00:26:25 Well, I think if I were to distill that down to one word, it's alignment, right? Right. And the best laid plans, if there's no alignment, don't happen. And the majority of the clients that we've actually brought on. I'm helping those families 3 to 5 years prior to selling the business to help them get across that finish line, getting prepared mentally, financially and emotionally for that big decision. Standing around the table when the going gets tough and they're fighting for the last $10 million and they know it doesn't make any difference if you get 100 million or 90 million, it's just a scorecard.
Frank Danielson 00:26:58 But if you don't close the deal, you don't get it done. Then it might be seven years until you get another chance based on economic cycle or the business just disappears.
Nicole Garton 00:27:07 Yeah, you might lose the window, right? So I think the statistic is the majority of Canadian employment in GDP is small to medium sized business. The majority of these businesses are family owned and are going to transition in the next ten years with the aging of the baby boom. And I think like nobody's planned. So like, what do we do about that? How do we how do we communicate with people better?
Frank Danielson 00:27:31 Yeah. And it's interesting, you and I probably see the same stats. I felt like we had that conversation ten years ago, and 90% of those families have just moved the needle another ten years and still haven't dealt with it. So it's interesting.
Nicole Garton 00:27:43 But people, I guess, are living longer so they can. Yeah they can.
Frank Danielson 00:27:46 Absolutely.
Nicole Garton 00:27:47 Okay. So let's just talk about risk management. Let's get a little bit more technical, like okay, you've got a family that comes to you.
Nicole Garton 00:27:54 How do you assess risk and what are some of the strategies you do. I mean, we're in a highly volatile, uncertain and fast changing time. How do you how do you help families deal with that?
Frank Danielson 00:28:06 Yeah, I wouldn't say risk is a four letter word. If I can start off with that. And what I mean by that is when you think of risk, you have to look at human capital risk, right. And that's just not your intellectual capital. And do you have all your eggs in one basket called a business. That business disappears. You've worked your whole 50 years in that business and you don't have enough financial assets. So that's a huge risk. So concentration is a big one. So people tend to have been successful in real estate as a perfect example. So I can think of like a half dozen families that have built up, you know, north of $100 million in real estate. And that was extraordinarily successful for 30, 40 years when interest rates were low, cap rates were different.
Frank Danielson 00:28:48 You fast forward the last five years. It's been a bit of a disaster for families. So they might think that they're diversified as well. So, for example, an entrepreneur sold their business for $85 million. They netted out about 70 million in tax. Prior to calling us. They found four financial advisors. Each of those advisors got a quarter. And when I looked under the hood and looked at the portfolio, they had expensive diversification. They owned a lot of the same stuff. It truly wasn't diversified. It wasn't built to weather the storms that are coming or occur on occasion. And the clients were paying 3 or 4 times more in fees than they should have probably been paying. So, you know, risk comes from so many different levels.
Nicole Garton 00:29:32 How are we managing risks? Like there are some people that are saying AI is going to if we ever get to AGI, like artificial general intelligence, and there's wildly different predictions about whether that's going to happen and what the time frame is. But the economic disruption and enormous potential job loss and huge changes in our economy, like nobody knows what's going to happen.
Nicole Garton 00:29:58 But I think we all know there's going to be enormous change. Like, how are you helping people navigate that?
Frank Danielson 00:30:04 It's a very small question. You hit the nail ahead. The future's unknowable. I don't know the future. No one knows the future. So you have to start with that premise. Second of all, technological change. You know, we can look back through history. There's industrial revolution. There's farming. The biggest shift that I can think that was more slower motion to draw some parallels to today. If you look in the United States of America, just under 20% of people were involved in farming, in agriculture. You look back today and it's less than 1%. So you get these huge shifts in the underlying sectors or parts that are driving the economy. I think this is going to be a fast. A faster change. So how will governments adapt? I think capital markets are quite efficient at how they allocate capital. So I think that'll happen in real time. But as a society, I think we're going to have to be dealing with some bigger issues.
Frank Danielson 00:30:55 Do we have universal funding of, you know, hundreds of thousands of people in Canada that have lost their job but can't replace it based on training and other things? So I, I think we're in a situation where, you know, broad diversification is extraordinarily impossible. You can't always think that, hey, put all your money in equities that's going to work out or, hey, let's concentrate all our money in AI stocks. And I could start a whole nother conversation about the risk with that. And one of the most dangerous words and finances this time is different because usually history rhymes. So, you know, does this lead into something where the benefits don't quite come true. Those stocks are repriced and they're worth two thirds or three quarters of their value. Is there another debt crisis coming? So diversification, owning bonds, fixed income, other asset classes and not just concentrated to the winners or what's doing well now I think is really important.
Nicole Garton 00:31:50 But how are you advising people when there's really like ten companies that are carrying the market.
Nicole Garton 00:31:55 Like what do you what do you say to people in terms of diversifying?
Frank Danielson 00:31:59 Diversification is always your friend. Right. So, I could go back and show you a composite of 100 years in the year 1900. The US stock market composed 19 or 15% of the world market capitalization. Great Britain was 24%. Fast forward to 1950. The United States is at similar levels 65%. Fast forward to 1970 to 1989. The United States goes from a capitalization of 65% to 26%, and Japan took over the world. So just because US has been this success story, I think it provides a bias. It doesn't give an accurate window into the future for expected returns. So valuations matter. The cost of capital is the expected return. And right now US stock's cost of capital is extraordinarily low. And that usually means unusually low rate of returns going forward.
Nicole Garton 00:32:57 One more not easy question like Kuzma is coming up. Trump saying he's wants to try to turf the deal. We've got incredible competition from China. Like is Canada in decline.
Nicole Garton 00:33:10 What's going to happen to our standard of living. We can't get projects done. Our standard of living and productivity is plummeting. What's going to happen to Canada?
Frank Danielson 00:33:18 You know, I don't know if I can answer that, but I can use the past as an example. So if you go back to the early 90s in Canada, we were a bit of a disaster, right? The amount of debt highest to GDP. Our currency was getting crushed. Bond markets were asking for higher yields based on the risk. Fast forward what happened over the next ten years. Canada was one of the lowest debt to GDP. We brought this thing called GST. Very unpopular. It was supposed to be a temporary. It's still here today. Economies adapt. People adapt. Maybe Mark Carney is part of the answer here. This productivity in Canada has been an absolute disaster. How we reinvest or lack of reinvest in our the economy over the last ten years or 15 years.
Frank Danielson 00:34:02 And I won't shift my political view on that, but it's been an unmitigated disaster. So again, you can't look at the past and say, that's the expectation of the future, because capital markets will enforce discipline, capital markets will enforce change, the cost of capital will increase and bond rates will increase, and that will cause governments to make change. There's three ways you can grow out of a debt crisis, right? The first one is you can grow your way out. That tends to be the most popular. The second one's austerity. I don't think there's any will of Canadians of us for that. And, the third one is some level of debasement of currency. And maybe that's the future for the United States, but I think it's pretty unlikely.
Nicole Garton 00:34:44 So if you could give Canadian families like one step that they could, do, you know, before the end of 2025 or Q1 26, what is one thing that they can do to move themselves forward financially?
Frank Danielson 00:34:59 This gets back to the conversation piece, which I think is a big one.
Frank Danielson 00:35:02 So hold a 30 minute family future conversation, right? Start with small conversations. Find some way to engage your kids or your kids to engage your mom and dad. That's been a big thing that I see is different. Today's generation is very different than we might have been. You know, if you look back 34 years, you might say that they're entitled, they're not engaged. But at the end of the day, you know, they want to inherit wisdom. They don't want to inherit the money.
Nicole Garton 00:35:33 That's a great way to leave it. Thank you so much, Frank, for spending time with us.
Frank Danielson 00:35:37 Absolutely. It's been a pleasure to be here.
Nicole Garton 00:35:38 This podcast is for informational purposes only and should not be considered individual, legal, financial, or tax advice. Make sure to consult the advisor of your choice to advise you on your own circumstances.
Nicole Garton 00:35:53 Thank you for joining us for this episode of Your Estate Matters. If you like this podcast, make sure to follow it on your podcast platform of choice.
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