From the February 2014 issue of Investment Advisor • Subscribe!

January 27, 2014

Harold Evensky’s New Adventure

Harold Evensky is cajoling his fellow academics to produce more practical research for advisors while carefully honing the next generation of planners

Photography by Hayden Spears. Photography by Hayden Spears.

Like the Biblical Joseph, Harold Evensky has worn a coat of many colors over the “billion years” that he likes to say he’s been in this business. He’s an advisory firm owner. He’s an investment researcher. He’s an academic. He’s a leader of the profession by words and deeds and through the bully pulpit he’s built as a source and mentor to journalists.

He’s a conscience of the profession. He’s a staunch proponent of the fiduciary standard for all advice givers. He’s a believer in the next generation of advisors. He was an early adopter of the fee-only business model. He’s figured out a succession plan for the advisory firm that bears his name and his partner’s in business and life. Yet he remains a questioner not only of the conventional wisdom of advisors but of his own opinions as well. Never will Harold Evensky, in the words of John F. Kennedy, “enjoy the comfort of opinion without the discomfort of thought.”

Here’s one small example. Evensky was long a critic of annuities, but after the financial crisis of 2008-2009, he reformed some of that thinking. Now, he suspects that annuities, especially immediate annuities, “will be the most important investment vehicles of the next 10 years.”

But don’t mistake Evensky’s quotability with glibness, or his lofty perch as the recipient of many leadership awards for complacency.

When asked what’s next in his career, he joked that “my long-term goal was to be a dilettante; that’s where I am now.” His definition of “dilettante,” however, involves someone with a range of interests; Evensky is no dabbler, even and especially in an academic environment.

For years he’s been an adjunct professor in the graduate financial planning program at Texas Tech University. “I teach a wealth management class to graduate and doctoral students,” he said. He now lives in Lubbock, Texas, with his wife Deena Katz, who also teaches at the university and shares evangelist duties for the school. Their advisory firm, Evensky & Katz, based in the Miami suburb of Coral Gables, is run by a managing partner and a five-person management committee. “I’m not responsible on a day-to-day basis” for Evensky & Katz the business, Evensky said. An example: “We’re moving offices,” he said as we spoke in an early December interview. “I’m not involved.”

Cultivating a New Kind of Research

Describing the latest color to his coat, he said that at Texas Tech, moving forward “my responsibilities will be the same—teach one class a semester,” but he’ll also be “more proactive at meetings and conventions, talking about the Tech program” and working with graduate and doctoral students on research projects.

With Evensky involved, however, that research will be different from what’s preceded it. “Most research is sociological research—women are more conservative than men, for example. That’s fine if I’m setting policy, but as a practitioner, it’s not useful.” Without further prompting, he lists areas of research that would be practical to advisors.

On risk management: “We’ve done some research on saver reverse mortgages—I was always against them, but these are interesting risk management tools. I’ve looked at home equity loans, but in the last recession the banks wouldn’t do them.”

Then on to investing: With a graduate student at Texas Tech University, he conducted some research to look into whether “active management comes to the forefront in bear markets. We concluded that it’s simply not true.”

Then retirement planning: What’s a safe withdrawal number? Many suggest that if you make adjustments along the way you can take more out than the traditional 4%, but Evensky’s not convinced absent better research into the matter. “As people get older, people spend less” is the common wisdom, but Evensky’s own experience suggests otherwise. “They may get older and sicker, but they continue to enjoy spending money,” which has serious repercussions for retirement planning.

Then on to technology: “There’s lots of financial planning software out there that delivers very different conclusions” with the same inputs, he pointed out. “Why?”

Beyond what practitioners use to conduct financial planning, he’s also worried about what consumers use to plan. “There’s a lot of public software that’s even more dangerous,” he said. “I’d like to take a test case and have all the software” run its calculations to see which programs are best.

[Click here to read more about Harold and his fiduciary work.]

Then there’s the area where software and investing meet. “We live in a low-return environment. What does that mean for implementation?” At Evensky & Katz, “we’ve moved to a core and satellite” investing approach for clients, but still he wonders, “Is that appropriate?”

‘We Need to Do a Better Job for Clients’

There are other practical areas where some good academic research would be helpful, he argued. “There’s too little focus on transaction costs and taxes, so even half a percent has a huge impact” on outcomes for clients.

Even apparently simple issues like property and casualty insurance could stand some academic rigor. “What’s a reasonable deduction on clients’ car insurance: $50 or $5,000? It’s not complicated, but I don’t know, and there’s not much guidance for practitioners.”

As for those clients, Evensky said, “I hear a lot about ‘I need much more money for health care’, but if they do, they won’t be spending” those dollars “on anything else we’ve factored in. If we do factor in more for health care, what do we drop?” What about long-term care? “The reality is that if someone goes into LTC, they won’t be taking world cruises or going out to dinner every night.”

As he has done throughout his advisory career, Evensky challenges his new colleagues in academia to improve. “They’re making simple assumptions” in academic research, failing to “bring in taxes and transaction costs.”

He’d like to see some better research on topics like risk tolerance—“How do you even define it?” he asked—and behavioral finance, which he said is “so interesting, but how do we integrate it into our practices?”

Evensky has put on his thinking cap because, he said, “in trying to understand, in talking to other professors and graduate students, my concerns are not that intensive, they’re practical.”

For Evensky, this is not research for research’s sake. “We need to do a better job for clients; running a successful practice is something quite different.”

In the Beginning

Despite the lack of practicality in much academic research up to this point, Evensky realizes that the profession is much better off now than when he began. “I’m lucky. I started a billion years ago and was able to take a seat-of-the-pants approach to building a practice,” he said.

[Click here to read about Harold and his relationship with the media.]

Evensky & Katz Wealth Management managed $835 million in assets for 362 clients as of mid-year 2013, the great bulk of which was managed on a discretionary basis. The minimum portfolio size for wealth management clients is $1 million, though the firm also provides what it calls “horizon investment management” for portfolios of between $300,000 and $800,000. It also serves as an advisor to certain ERISA retirement plans and provides advice to 403(b) plan participants. “The practice itself—it’s exciting—is doing phenomenally well,” said Evensky, who remains president of the firm, which counts 10 CFPs on staff, including Evensky and Katz. The size of the firm is growing as well, he reported. “We’ve brought in more new clients this year than in all the past five years,” helped by his new owners in training (see more of which below).

“Years ago,” recalled Evensky, “I told everyone in the firm, ‘We have to go from being a practice to a business,’ not because I want to be big, but simply because it’s a reality if the firm was going to thrive. That’s also what the firm will need to thrive in the future.

“I want to have on staff a lawyer, a CPA, an LUTCF—that’s the direction we need to go.” Why? “For the fees we charge, we’ll have to deliver substantially more than retirement planning, portfolio planning and design. We’re going back to our roots as modular financial planners: This quarter, we’ll review your P&C; next quarter, your estate plan. We’ll have to do more of that, and if I can get big enough, we can leverage the costs.” The competition to wealth management firms like his, Evensky said, “is changing dramatically. There were only a handful of guys doing the quality of work we’re doing, but it’s not just us anymore.” As an example, he cited the use of technology. “Look at PIE [Technologies, makers of financial planning software MoneyGuidePro]. Raymond James is using it, UBS is using it.” In addition, he said, with tongue only partly in cheek, “half of the breakaway brokers are sophisticated and doing great work; the other half are good salespeople.”

Evensky’s business is also set up for a successful succession plan. “We spent years talking about transition, and we ultimately were the first to work with Mark Hurley and Fiduciary Network” to put a succession plan into place. “That’s been a highly valuable relationship,” he said of Hurley’s firm, which “allowed us to sell ownership to our next gen.” For that next generation of Evensky & Katz owners, “the big issue was transitioning from thinking as employees to owners. It’s a long process, but I’m extremely pleased and proud to see how they’ve changed.” That change includes becoming “actively involved in the community and bringing in new business,” which has led to the aforementioned growth in new clients.

While pleased with his succession plan, Evensky warned that it’s a “five-year process” and that there are “a lot of naïve advisors out there who will need to wake up” about their transition plans. However, he also argued that “so many of us who started these businesses need to sell off: There’s a phenomenal opportunity for ownership.”

The Next Generation of Advisors

Speaking of succession and the next generation of owners, Evensky is optimistic and, not surprisingly, an advocate for Texas Tech. “There are lots of jobs, the opportunity is great, it’s a great career and the salaries are great: We have to pay a lot for new graduates,” he said of Evensky & Katz. “Deena has been in charge of placing graduates; they walk out with a diploma in one hand and three job offers in the other.” At Texas Tech, he said, “we don’t want to be the only, just the best” program; he pointed out that there are “eight new [college financial planning] programs that our graduates have started around the country.” In the Tech program, “the practitioners of the future are the bachelors and masters students,” while the doctoral program has an appropriate academic bent, designed to “seed professors at different universities around the country.”

While there are more students at Texas Tech and other universities around the country, still “we need more people; there are not nearly enough to fill the need.”

That’s where the support of technology providers like PIE Tech has been important, while custodians like TD Ameritrade and Schwab Institutional “have been phenomenally supportive,” though he’d like to see more advisor partner firms get involved. “Schwab has put in well over $1 million here, and we now get over $5 million per year in donated software,” allowing students who are interested or who receive a job offer to “go into the lab and get up to speed on the software.” PIE, the maker of MoneyGuidePro (he’s quick to add that he serves as a consultant to PIE), has “taken the lead in putting together a group of software companies to develop a package they can offer to universities. You say you want it, we’ll deliver to you 10 of the major software programs, at no cost to the university.”

Beyond the technology, he said that students “are being trained very well,” though one of the areas they have to improve in “is to show the opportunities beyond firms like mine. I work hard to get them to understand that there are very good people in all forms of this businesses—in insurance, the wirehouses.” Evensky said that he doesn’t want financial planning students to “come out myopic,” thinking there are only “good guys and bad guys,” and that going to work for a large organization can’t be rewarding, even if it isn’t what a new graduate would find immediately gratifying. He tells a story about his own career to illustrate the value of working at a big company and being patient. After receiving his BA and MS in electrical engineering from Cornell, his first job was with Procter & Gamble. After working at P&G for a while, his boss pulled him aside and said, “Harold, you’re good, but you’re not ready yet to be president of Procter & Gamble.”

[Click here to read about Harold and his writings.]

The Present and the Future

In addition to using Mark Hurley’s firm to figure out Evensky & Katz’s succession plan, Evensky is also a fan of Hurley’s writings about how the advisory business will change over time, with smaller firms particularly at risk. “Much of what Hurley has written has been prophetic,” Evensky said. “The profession is going to look much different over the next decade from what it has in the past,” and “the day of being able to start out on your dining room table is yesterday’s story.” He admitted that there are “small, successful practices out there,” but competitively they’re at a big disadvantage. “There’s no way they can deliver the same quality of work as firms like mine do,” he said without a hint of hubris.

“We can be very cost effective for those people who have the resources” where there’s plenty of competition. The challenge, however, is “how can we deal with the next scale down?” those prospective clients with from $250,000 to $1 million in assets. Technology will play a big role in this, he suggested, perhaps even allowing bigger firms like his to serve those lower-net-worth people, especially if the growing number of financial planning college graduates are added to the equation. That’s something, he said, that “Deena is working on,” where “senior-level grad students can do back-office work, allowing me to deliver really good planning at smaller asset sizes, specifically with smaller fees.” Whether or not such a scenario plays out, the future of financial planning is “going to be very different world.”

However, it’s a world that Evensky himself plans to gambol in for some time as a dilettante and research guru. “I love this stuff,” he said. “Being a dilettante is fun. What are we going to do next?”

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