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Know Your Client Explained: What Can That Form Stop You From Buying? | Canadian Investing · How Canadian Markets Work

• 0:00
  Welcome to the deep dive. You know that habit
• 0:02
  we all have of Scrolling to the absolute bottom
• 0:07
  of a software update and just immediately clicking
• 0:09
  right without reading a single word of it. Exactly
• 0:11
  Well today we are unpacking a stack of sources
• 0:14
  detailing Canadian market mechanics and regulations
• 0:17
  to show you why Doing that with your know your
• 0:20
  client form is honestly a disastrous idea. It
• 0:23
  really is I mean we are looking at a document
• 0:24
  that literally every investor signs but almost
• 0:28
  no one actually respects. Right. So our mission
• 0:31
  today is to pull back the curtain on this form.
• 0:34
  We want to move past the idea that it's just,
• 0:36
  you know, a tedious onboarding hurdle or some
• 0:39
  bureaucratic box to tick. Because in reality,
• 0:42
  it is the ultimate legal contract that dictates
• 0:45
  your entire financial future. Yeah. And I think
• 0:47
  understanding the mechanics of this form is the
• 0:49
  literal difference between being protected during
• 0:52
  a massive market crash and finding out you legally
• 0:55
  signed away your right to complain. Precisely.
• 0:58
  The regulatory framework in Canada operates on
• 1:01
  a really highly specific set of documented instructions.
• 1:05
  And a Know Your Client or KYC form, that is the
• 1:08
  foundation of that entire structure. So let's
• 1:10
  look at the anatomy of this form. Because the
• 1:12
  information it's legally required to capture
• 1:15
  Before anyone can recommend even a single investment
• 1:18
  to you is actually incredibly revealing Yeah,
• 1:21
  it starts by establishing the legal boundaries
• 1:23
  of your identity mostly for anti money laundering
• 1:26
  regulations and your insider status. Right. They
• 1:30
  need to know if you were a director or like a
• 1:32
  significant shareholder of a public company.
• 1:34
  Exactly. Because that legally constrains what
• 1:36
  and when you can trade to prevent insider trading.
• 1:39
  OK. So after identity, where does the document
• 1:41
  go? From there, the document shifts into establishing
• 1:44
  a mathematical ceiling on what you can legally
• 1:46
  afford to lose. Regulators require firms to document
• 1:50
  your financial circumstances and objectives.
• 1:52
  And they aren't just asking for your net worth
• 1:54
  out of sheer curiosity, right? They are calculating
• 1:57
  a baseline. Right. They look at the composition
• 1:59
  of your existing assets, your debts, your timeline,
• 2:02
  really just to determine if your money is meant
• 2:04
  for capital preservation or high -risk speculation.
• 2:08
  Which brings up the most heavily scrutinized
• 2:10
  section of the entire document, which is risk.
• 2:13
  Oh, absolutely. This is the big one. Because
• 2:15
  the KYC form uses one word to describe two entirely
• 2:19
  different concepts. And this is where people
• 2:21
  really trip up. The industry asks you to evaluate
• 2:24
  your risk tolerance and your risk capacity as
• 2:27
  if they are the exact same thing. And we really
• 2:29
  have to separate those two concepts clearly.
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  So risk tolerance is purely psychological. OK,
• 2:34
  break that down for us. It's your emotional ability
• 2:36
  to live through a 20 % market drop without panic
• 2:40
  selling, losing sleep, or just abandoning your
• 2:43
  long term strategy entirely. Right. But risk
• 2:46
  capacity is totally different. Exactly. Risk
• 2:48
  capacity, conversely, is purely arithmetic. It
• 2:51
  is how much financial loss your actual mathematical
• 2:55
  circumstances can absorb, regardless of how brave
• 2:57
  you feel. Let's make this tangible for the listener.
• 3:01
  Picture two different people filling out this
• 3:03
  form. First, you have a 64 -year -old living
• 3:06
  on a fixed pension. OK. Pretty common scenario.
• 3:09
  Right. They have no other major assets, but they
• 3:12
  have A bit of a wild streak. They love the thrill
• 3:16
  of the market and they tell the advisor to just
• 3:18
  put them in high -growth speculative stocks.
• 3:20
  Well, in that scenario, their risk tolerance
• 3:23
  is extremely high. Psychologically, they are
• 3:27
  totally ready for the roller coaster. But structurally?
• 3:29
  Structurally, their risk capacity is incredibly
• 3:31
  low. I mean, if the market drops 30%, they do
• 3:35
  not have the time or the income to rebuild that
• 3:37
  wealth before they need it to pay for basic groceries
• 3:40
  and living expenses. So the math simply does
• 3:43
  not support their psychological bravery. Exactly.
• 3:45
  Now, contrast that with the 28 -year -old. OK,
• 3:47
  so this person has a stable income, zero debt,
• 3:51
  and like decades before retirement. Right. But
• 3:53
  every time the market dips by even 2%, They are
• 3:56
  glued to the financial news, sweating, totally
• 4:00
  convinced the economy is collapsing. That 28
• 4:02
  -year -old is the exact inverse. They have very
• 4:05
  low risk tolerance and are just psychologically
• 4:08
  miserable during a downturn. Yeah, but their
• 4:10
  risk capacity is massive. They have 30 years
• 4:13
  for the market to recover. and the cash flow
• 4:16
  to buy more assets while prices are depressed.
• 4:19
  It's kind of funny sitting in a safe, comfortable
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  living room, filling out a multiple choice question
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  about risk. It's basically like taking a skydiving
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  quiz on the couch. That is a perfect way to put
• 4:30
  it. People naturally give aspirational answers.
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  You want to look ambitious. There is no social
• 4:35
  prize for checking the box that basically says,
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  I would curl into a ball and panic. Right. But
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  when the door of the plane actually opens at
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  10 ,000 feet, the arithmetic of gravity takes
• 4:45
  over. Yeah. And the regulatory framework actually
• 4:49
  anticipates that exact human flaw, doesn't it?
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  It does. Legally, the firm is required to govern
• 4:55
  your account by whichever of those two metrics.
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  Tolerance or capacity is lower. The lower of
• 5:00
  the two always wins. And that makes a logical
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  sense when you really consider the mechanics
• 5:04
  of a market crash. Because if that 64 year old
• 5:07
  is allowed to invest aggressively just because
• 5:09
  they feel brave, the sequence of returns risk
• 5:13
  will completely ruin them. Capacity is a hard
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  physical limit. But for the panicky 28 year old,
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  even with all the math on their side, putting
• 5:21
  them in a highly volatile portfolio guarantees
• 5:23
  they will capitulate and sell at the absolute
• 5:25
  bottom. Right. A portfolio you abandon at the
• 5:28
  worst possible moment is always mathematically
• 5:31
  worse than a conservative portfolio you actually
• 5:33
  hold onto. Because your behavioral response during
• 5:36
  a crash literally becomes a permanent part of
• 5:39
  your compounding return. Exactly. So regulators
• 5:42
  force the advisor to manage to the lowest common
• 5:45
  denominator, just to prevent either mathematical
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  ruin or behavioral capitulation. OK. So if people
• 5:51
  are naturally giving aspirational, brave answers
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  to these psychological questions, what actually
• 5:56
  happens when the arithmetic of a market crash
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  hits them? Well, they lose a quarter of their
• 6:00
  life savings and they decide to complain. And
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  this is where the KYC transit from a friendly
• 6:04
  questionnaire into an ironclad legal defense.
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  Yeah, it completely ceases to be an onboarding
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  document and becomes a literal instruction manual
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  for dispute resolution. We really need to look
• 6:14
  at the actual mechanics of a suitability dispute
• 6:17
  in Canada, because when a client loses money
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  and files a formal complaint claiming that an
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  investment was, you know, unsuitable or too aggressive...
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  The investigation does not start with a review
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  of the stock market. Right. It starts with the
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  compliance department pulling the KYC form. So
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  if you shrugged your way through those questions
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  five years ago and let the advisor tick aggressive
• 6:38
  growth just to seem like a high roller, you have
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  essentially argued the opposing firm's case in
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  your own handwriting years in advance. You really
• 6:46
  have. You will sit in mediation or before the
• 6:49
  ombudsman for banking services and investments,
• 6:51
  OBSI, and argue that you never should have been
• 6:54
  placed in volatile equities. And what does the
• 6:56
  firm do? The firm's legal counsel will simply
• 6:59
  produce the document bearing your signature.
• 7:01
  where you explicitly stated you had a high tolerance
• 7:04
  for risk and a time horizon that supported aggressive
• 7:07
  growth. The written record dictates the legal
• 7:10
  outcome. You know, I look at this from the client's
• 7:13
  perspective and I see a glaring issue. What's
• 7:15
  that? A professional advisor should know when
• 7:18
  their client is in over their head, regardless
• 7:20
  of what a piece of paper from five years ago
• 7:22
  says. Right. You would think so. I mean, if I'm
• 7:25
  a client and I'm clearly nervous about a changing
• 7:27
  economic landscape, shouldn't the advisor look
• 7:30
  past an old form and just protect my capital?
• 7:33
  It makes sense intuitively, but the regulatory
• 7:36
  system does not run on an advisor's intuition
• 7:39
  about your vibe, nor does it run on the unrecorded
• 7:43
  memory of a phone call. It runs entirely on the
• 7:45
  documented rector. Completely. If the signed
• 7:48
  paper explicitly instructs the advisor to maximize
• 7:51
  risk and the advisor purchases high -risk assets,
• 7:54
  the advisor has fulfilled their legal suitability
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  obligation. Because regulators like the Canadian
• 7:59
  Investment Regulatory Organization, or C .I .R
• 8:01
  .O., audit firms based on the alignment between
• 8:04
  the portfolio and the paperwork. Exactly. You
• 8:07
  cannot retroactively claim you were conservative
• 8:10
  when your signature actively instructed the firm
• 8:12
  to be aggressive. The huge vulnerability here
• 8:15
  seems to be time. Oh, absolutely. Time is the
• 8:18
  enemy of the KYC. Right. If this form is a mathematical
• 8:21
  snapshot of my life, then getting married, having
• 8:24
  a kid or retiring doesn't just change my lifestyle.
• 8:27
  It mathematically alters my risk capacity. Meaning
• 8:30
  the document is legally stale the very moment
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  your life changes. Which leads to what might
• 8:35
  be the most dangerous systemic issue in wealth
• 8:38
  management. The ghost client. Yes, the ghost
• 8:41
  client. The KYC is so widely misunderstood as
• 8:45
  a one time onboarding document. but it is actually
• 8:48
  a strict ongoing regulatory obligation. The information
• 8:51
  on that form must reflect the mathematical reality
• 8:54
  of who you are today, not who you were a decade
• 8:56
  ago. Any significant life event fundamentally
• 8:59
  rewrites your arithmetic risk capacity. We're
• 9:01
  talking about marriage, divorce, the birth of
• 9:03
  a new child, a job loss. Receiving a large inheritance,
• 9:06
  retiring from the workforce, or even receiving
• 9:08
  a serious medical diagnosis. Because every single
• 9:11
  one of those events instantly alters your investment
• 9:14
  timeline, your available capital, or your immediate
• 9:16
  need for cash liquidity. Right, and the mechanism
• 9:19
  of failure here is entirely silent. Let's walk
• 9:21
  through a common scenario for this. Okay, so
• 9:23
  a 38 -year -old single professional walks into
• 9:26
  a firm earning a high income, and fills out a
• 9:29
  growth -focused KYC form. Makes sense. The advisor
• 9:32
  builds an aggressive portfolio. Yep. Then two
• 9:35
  decades pass. That person is now 60, married,
• 9:39
  preparing to retire, and requires safe, reliable
• 9:42
  income from their investments to cover, you know,
• 9:45
  property taxes and living expenses. But the paperwork
• 9:47
  was never updated. Never updated. So legally,
• 9:50
  the firm is still managing money for a 38 -year
• 9:52
  -old who just doesn't exist anymore. The firm
• 9:55
  is managing a ghost. Exactly. And when the market
• 9:58
  inevitably cycles downward, the portfolio plummets
• 10:01
  because it remains heavily weighted in volatile
• 10:04
  growth stocks. The client is devastated and files
• 10:07
  a complaint, but the firm just points to the
• 10:09
  file. Yeah. Nobody acted maliciously on any given
• 10:12
  day. The advisor didn't deliberately try to ruin
• 10:15
  the client. But the regulatory picture went entirely
• 10:18
  stale, leading to a disastrous and completely
• 10:21
  avoidable asset allocation mismatch. How many
• 10:24
  times have you gotten married or changed careers
• 10:26
  and immediately thought to update your Spotify
• 10:28
  algorithm so it plays better dinner music, but,
• 10:31
  uh, haven't updated your investment risk profile
• 10:34
  in a decade? It happens all the time. Keeping
• 10:36
  this form updated isn't just administrative overhead.
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  It is actively tuning your financial armor to
• 10:42
  fit the body you currently have. And regulators
• 10:44
  actually recognize that keeping this armor tuned
• 10:47
  requires the client to be fully engaged and lucid.
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  But cognitive decline or external manipulation
• 10:54
  creates a scenario where the client can no longer
• 10:56
  protect themselves. Which introduces a completely
• 10:59
  different regulatory challenge altogether. So
• 11:01
  we need to explore how modern regulations attempt
• 11:03
  to handle that exact vulnerability. And this
• 11:06
  brings us to the trusted contact person. Right,
• 11:09
  this is a much newer addition to investor protection
• 11:12
  and honestly it causes a significant amount of
• 11:15
  anxiety for clients. Firms are now actively pushing
• 11:18
  clients to name a trusted contact person when
• 11:20
  opening or updating an account. Yes. This is
• 11:23
  a designated individual the firm can reach out
• 11:25
  to if they genuinely suspect you are the victim
• 11:28
  of financial exploitation or if they are seeing
• 11:32
  clear signs of diminished mental capacity. Or
• 11:34
  if you simply go completely unreachable for an
• 11:37
  extended period of time. Exactly. But the immediate
• 11:39
  paranoia for anyone filling this out is the surrender
• 11:42
  of control. I mean, if I name my brother as my
• 11:45
  trusted contact, their fear is that he can suddenly
• 11:47
  call up my broker, authorize a bunch of trades,
• 11:50
  or lock up my life savings based on some disagreement
• 11:53
  we had. I hear that all the time, but it's important
• 11:56
  to clarify. A trusted contact has absolutely
• 11:59
  zero authority over your money or your trading
• 12:01
  decisions. None at all. None. They cannot authorize
• 12:04
  a trade, withdraw funds, or even change your
• 12:07
  mailing address. It is distinctly not a power
• 12:09
  of attorney. Let's walk through the actual mechanics
• 12:12
  of how this is utilized by a compliance department
• 12:14
  then. If it's not a power of attorney, what happens
• 12:16
  when the firm actually makes that phone call?
• 12:18
  It basically acts as an emergency lifeline. So
• 12:21
  let's say an advisor notices you are suddenly
• 12:24
  demanding to wire massive sums of money to an
• 12:27
  overseas entity you have never once mentioned
• 12:29
  before. And maybe your explanations on the phone
• 12:31
  sound rehearsed or a bit confused. Right. Under
• 12:34
  new regulatory provisions, the firm can place
• 12:37
  a temporary hold on the disbursement of those
• 12:39
  funds. And during that hold, they call your trusted
• 12:41
  contact. Exactly. And they do not ask your brother
• 12:45
  for permission to trade. They ask, is everything
• 12:47
  OK? We have severe concerns about a transaction
• 12:51
  that does not align with the client's historical
• 12:53
  behavior Ah, so it gives the firm the legal breathing
• 12:57
  room to halt suspected exploitation without violating
• 13:00
  their obligation to execute your instructions
• 13:02
  Exactly. It is a safety net designed to pause
• 13:05
  the action not a mechanism to hand over the keys
• 13:08
  to your account That makes a lot of sense. But
• 13:10
  we have spent this entire conversation detailing
• 13:12
  the robust protections built into the traditional
• 13:14
  advisor -client relationship, the KYC, the ongoing
• 13:18
  suitability requirements, the temporary holds,
• 13:20
  the trusted contacts. Right. This entire framework
• 13:22
  completely assumes you have a broker. Which brings
• 13:25
  us to the massive regulatory exception governing
• 13:28
  millions of retail investors today. Yeah. If
• 13:31
  you use a self -directed discount brokerage,
• 13:34
  what Canadian regulators classify as an Order
• 13:37
  Execution Only or OEO platform, you're operating
• 13:41
  in an entirely different legal universe. Because
• 13:44
  when you open a zero commission trading app on
• 13:46
  your phone, they still force you through a KYC
• 13:49
  questionnaire. They ask for your income, your
• 13:51
  net worth, your risk tolerance. And the natural
• 13:54
  assumption is that the app is collecting this
• 13:56
  data to watch out for you, just like a traditional
• 13:59
  advisor would. But they aren't, are they? No,
• 14:01
  not at all. They're collecting that data purely
• 14:03
  for identity verification and anti -money laundering
• 14:06
  compliance. Wow. The fundamental legal trade
• 14:09
  off the government made in allowing order execution
• 14:11
  only platforms to exist was stripping away the
• 14:14
  suitability obligation in exchange for democratized
• 14:17
  access and lower fees. So on an OEO platform,
• 14:20
  nobody is checking to see if your trades make
• 14:22
  mathematical sense for your risk profile. Nobody.
• 14:25
  Not an advisor, not an algorithm, and certainly
• 14:28
  not a compliance officer. To put that into perspective,
• 14:31
  your KYC on the app could explicitly state you
• 14:34
  are a low income student with zero risk tolerance
• 14:37
  and zero investment knowledge. Yes. And if you
• 14:40
  suddenly decide to bet your entire account balance
• 14:42
  on highly leveraged speculative options contracts
• 14:45
  expiring on a Friday, the app will execute the
• 14:48
  trade instantly. Won't flag it. Nope. It will
• 14:51
  execute it without a second thought because their
• 14:53
  only legal mandate is to route your order to
• 14:55
  the exchange. The regulatory safety net of suit
• 14:58
  of has been completely removed by design. If
• 15:02
  you invest through a self -directed app, you
• 15:04
  are the sole suitability check. You really are.
• 15:06
  There is no compliance department reviewing your
• 15:08
  file to protect you from sequence of returns
• 15:10
  risk. There is no one to pause a trade and ask
• 15:14
  if you are sure. You are completely on your own
• 15:16
  operating without the financial armor we just
• 15:18
  spent the last 15 minutes describing. Which means
• 15:21
  understanding the arithmetic of your own risk
• 15:23
  capacity is more vital now than it has ever been
• 15:26
  in the history of financial markets. Precisely
• 15:29
  because the friction of the traditional advisory
• 15:32
  model has been eliminated. You have to enforce
• 15:35
  the discipline yourself and you have to do it
• 15:37
  against a user interface that is essentially
• 15:39
  designed to encourage frequent trading. We have
• 15:42
  covered a tremendous amount of ground today regarding
• 15:45
  the mechanics of how Canadian market regulations
• 15:47
  view your profile. Let's distill this down to
• 15:51
  the absolute essentials you need to carry forward.
• 15:54
  Sounds good. First, risk tolerance is your psychology,
• 15:57
  but risk capacity is your math. They are fundamentally
• 16:00
  different. And legally, the lower of the two
• 16:03
  must govern the decisions made in your account
• 16:05
  to prevent both mathematical ruin and behavioral
• 16:09
  capitulation. That's the core of it. Second,
• 16:11
  answer your KYC forms honestly, not aspirationally.
• 16:15
  There is no social prize for looking brave on
• 16:17
  paper. If things go wrong and you enter a dispute,
• 16:20
  your own handwriting and your own documented
• 16:22
  instructions will absolutely be used against
• 16:24
  you by the firm's compliance department. They
• 16:25
  will pull that form immediately. Third, update
• 16:28
  the form after any major life event. Do not let
• 16:32
  your broker manage a ghost. If you get married,
• 16:35
  divorced, have a child, or retire, you have fundamentally
• 16:38
  altered the math of your life, and the legal
• 16:40
  documentation must reflect that immediately.
• 16:43
  Cannot stress that one enough. And finally, if
• 16:45
  you are trading at a discount brokerage or on
• 16:48
  an app, you are your only safety net. The suitability
• 16:52
  obligation simply does not exist on an order
• 16:55
  execution -only platform. Those four pillars
• 16:58
  really form the foundation. of protecting your
• 17:00
  capital within this regulatory system. It all
• 17:03
  routes back to a single document that demands
• 17:06
  total honesty about your current reality. That
• 17:09
  leaves me with one final kind of lingering thought
• 17:11
  for you to explore on your own. We started this
• 17:13
  deep dive by talking about how easy it is to
• 17:15
  scroll past the friction of an onboarding document.
• 17:18
  Right. Historically, the KYC form was explicitly
• 17:20
  designed to introduce a moment of deep psychological
• 17:23
  friction. It forced a moment of self -reflection,
• 17:26
  a pause before you put your life savings on the
• 17:28
  line. It was a feature, not a bug. Exactly. But
• 17:31
  look at the environment we operate in now. Consider
• 17:34
  the modern gamification of zero commission trading
• 17:37
  apps. The confetti on the screen when you buy
• 17:39
  a stock, the bright colors, the constant push
• 17:42
  notifications. It's designed to be addictive.
• 17:44
  If the interface is actively designed to make
• 17:46
  trading feel like a frictionless, endless game?
• 17:49
  Is it inherently short -circuiting our ability
• 17:51
  to honestly assess our own risk capacity? When
• 17:54
  we strip away the friction that regulations originally
• 17:57
  intended, do we also remove our ability to see
• 17:59
  the arithmetic reality of our own financial ruin?
• 18:02
  That is a very heavy question. Take your time
• 18:05
  with that one. Until next time.