Harold Evensky on Steps Needed to Restore Investor Trust—Weekend Interview

With a new book on wealth management, the sage of Coral Gables discusses fiduciary, regulators, the future and, notably, clients

At a time when investor trust in Wall Street is still shockingly low, there are a handful of leaders  whose integrity, thoughtfullness, body of work and advocacy make a difference to advisors and their clients every day. Harold Evensky is one of those few. 

Author of a new book, “The New Wealth Management,” Evensky has also become an adjunct professor at Texas Tech University's  Division of Personal Financial Planning  He is a member, once again, of the IA 25 this year.

With his experience and insight, is Evensky optimistic that investor trust can be restored, and that the Congress can protect investors? He is not sanguine about the political process, he admitted in a recent interview, but places his hopes, particularly as regards a fiduciary standard for all advice givers, "in the media and in individuals stepping up to protect themselves and, simply, demanding it." Perhaps surprisingly, he thinks that both the SEC and FINRA "get it" when it comes to a fiduciary standard. 

What do you see happening in the investment industry over the next six months and then two to five years?

A continuing move toward professionalization—we’re moving in the right direction, slowly and bumpily—the whole regulatory environment; the debate is frustrating but ultimately positive. The level of intellectual activity in the field…today I’m at Texas Tech. We’re graduating students trained in [financial] planning, as opposed to a second career. The recent change with FINRA and suitability and the growth of RIAs are leading to a more professional universe of practitioners.

We’ve served together on The Committee for the Fiduciary Standard for almost two years now. Do you think that it will come to pass that the fiduciary standard will be extended to brokers who give advice?

I have to admit that the experience has made me progressively more skeptical and disappointed about politics and politicians, so I’m far less optimistic that Congress will do what it should do. I place my hopes now, really, in the media and in individuals stepping up to protect themselves and, simply, demanding it—even if it’s not required from a regulatory standpoint. I am hopeful but skeptical that there will be a meaningful fiduciary standard.

What would impede and what would help that possibility?

Impeding it is a Congress that seems to want to ignore or eliminate any of what I consider a fairly Mom-and-Pop and obvious protection for the investing public—so politics is the primary impediment, clearly as a result of immensely successful lobbying by the financial services and insurance industries. I don’t see anything particularly positive in terms of politics. I do remain reasonably optimistic in terms of the regulators, the SEC or FINRA. I

believe they do get it and would like to see something positive happen but I don’t know that they’ll have the resources to do it.

What can investors do to help bring this about? Are you seeing in your practice people who are becoming aware that there is a difference in the standard for advice and becoming vocal about it?

Unfortunately I’ve not seen it in the public. Where I’ve placed my hope is in the public media. As you know, the Committee [for the Fiduciary Standard] has developed this Mom and Pop fiduciary statement. I’m hoping that the media will simply print up that little statement and suggest to Investors that "when you go in to talk to anyone, ask them to sign it.’ All it does is put on paper that, 'Hey, I’m going to place your interests first, I’ll eliminate the conflicts I can, I’ll manage the ones I can't in your best interest and I’ll do my job at a professional level.'     

It would seem that this is such a simple thing to do and yet the industry on the broker-dealer side is protesting—even as individual brokers want to do this, according to the surveys that we have done and seen…

I think you’ve really hit the key issue; based on the surveys that we [the Committee] and others have done, those on the front line dealing with clients believe they are doing, and want to do, the right thing. It’s the institution that is getting between the client and the broker—it’s most frustrating.

In your new book--“The New Wealth Management: The Financial Advisor's Guide to Managing and Investing Client Assets,” (Wiley; May 2011), one of the intriguing points was the differentiation you made between the wealth management process and the investment management process. What are the differences?

It’s really an expansion. Conceptually there’s no fundamental difference; what we currently call our investment policy statement incorporates a lot of what would be in a wealth management policy statement. We’re explicit in expanding on these concepts in some detail about goals and priorities; impact of taxes; location of investments, as opposed to a traditional money manager investment policy statement (IPS) that’s solely focused on a portfolio—wealth management policy statements can be focused on the client. That would be the key differentiating factor.

Is this an holistic, whole client picture rather than the investments themselves?

It's whole in terms of following a financial planning process—I don’t want to confuse it with comprehensive financial planning, it’s not that. The focus is on the investment aspects of financial planning; investments, perhaps retirement planning, but yes, it’s definitely more holistic than an institutional IPS.

Then in terms of financial planning, does that take it several steps further than the wealth management IPS?

With financial planning we start to incorporate risk management, estate planning and all the other classic elements of comprehensive planning. Those elements typically would not be included in either an IPS or wealth management.

Tell me more about the book.

This is an update of a book I wrote in the late ’90s for McGraw-Hill. I was approached a while ago by the CFA Institute and they assisted me in getting the rights back, transferred to Wiley. My co-authors, who are both former professors and senior staff at the CFA Institute, worked with me on updating it.

In the book you talk about client education. How are you going about doing this with your clients now? Have you seen the needs of clients change over the time that you’ve been practicing?

To answer the second question first, no, the education we do pretty much remains the same as we always have. It’s an introduction to basic concepts going back to Graham and Dodd—the fact that when you buy stocks you’re investing in the business, so the idea of fundamental investing, moving on to Harry Markowitzmodern portfolio theory, the fact that risk is important as returns and what does that mean, Bill Sharpe, the concepts of systematic and unsystematic risk, the fact that there is no safe investment and our job is to balance those different kinds of risk. When we talk about client education, those are the elements we’re looking to have our clients understand.

Have the techniques of this education changed?

Yes! Interestingly enough, they’ve become simpler. When we started doing this many years ago,

I’d pull out a very sophisticated mean-variance optimization/efficient frontier chart and go into a huge amount of detail. Today I literally take a scrap piece of paper and say ‘I’m going to give you a lesson in modern portfolio theory,’ and draw a simple little graph. It’s not dumbing it down, it’s trying to make it more user-friendly and more meaningful. If someone goes into a doctor, they’re not looking for a detailed explanation of the drugs—but hopefully they’ll get some explanation of the basic attributes and why they’re taking them.

Are there other technology-based techniques that you use?

The other one that we use extensively, and I’m biased because we’ve worked with them in developing them for years, is the MoneyGuide Pro software from PIEtech, because it’s immensely interactive and we go through that with the clients with the goal being, ultimately, that the client says, ‘Gee that looks and feels like me.’

The interactive planning process has been a major change and a powerful one. The other one would be FinaMetrica. We use that not strictly as a risk tolerance [evaluation] but as a risk-coaching process. We have our own internal [risk assessment] and we use the two together. We find that a very useful educational tool.

Are you seeing more topics since the financial crisis and the Japan catastrophe that clients are aware of or reticent about?

We’ve seen a general shift from a focus on returns to a focus on risk. For the most part a fairly healthy change. I don’t know how long that’s going to last, I’m one of the ones that feels that memory is fairly short-lived. What we’ve gone through is not like the Great Depression that people are going to be traumatized for decades. I think investors are more realistic and more thoughtful.

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