Harold Evensky grew up in the construction business in Miami, acquired two college degrees in civil engineering and business, and began his financial career cold calling at Prudential. Today he is a prolific author, a professor, a speaker in demand, a recipient of too many awards to mention and a tireless proponent of the financial planning profession. At the same time, the president of Evensky & Katz in Coral Gables, Fla., spends 90% of his time managing his practice and tending to his clients' financial needs.

Their needs, coupled with his academic expertise as a part-time professor of graduate courses in investment theory and behavioral finance at Texas Tech in Lubbock, Texas, have caused him to reexamine some of the sacred cows of wealth management investmenting. As he explains, mimicking his favorite expression, "The future ain't what it used to be."

The rocky markets of the past decade lead Evensky to chart a narrow course between the Scylla of traditional multi-asset class/style allocation models and the Charybdis of bear market gurus proclaiming the death of modern portfolio theory and hedging everything in sight. With $620 million in assets under management, he has investigated the options and carefully sifted the hype from the hope.

His conclusions? Evensky believes the performance drag of fees and taxes in the current low-return environment nullifies the after-tax alpha of active money managers hell-bent on gross return. His question: "Is your alpha big enough to cover taxes and expenses?"

As for the doomsayers, he dead-pans, "Our firm does not plan for Armageddon." The death of modern portfolio theory, the brainchild of Harry Markowitz, has been proclaimed many times before, often by people who haven't bothered to read Markowitz.



Evensky has told his clients what he expects for future returns, risk and the correlation of investments over the next few decades. Assuming a 3% inflation rate, he expects real returns of around 6%. This compares with a long-term historical real return rate of 7.5%. The historical expected premium for stocks over government bonds may not pan out, he says. But that's far from the end of the world, in Evensky's opinion. Nominal fixed-income returns will come to 5.5%, he projects-a real return of 2.5%. So investment returns may be disappointing by current standards, but they will still exist.

As far as volatility goes, Evensky believes standard deviations will go higher. His team projects the volatility of the S&P will rise 40%, to a standard deviation above 21. The cause is neither Wall Street shenanigans nor government debt, but simply the nano-second micro-trading made possible by new technology.

Effective diversification will also be harder to find. One downside of the much-touted globalization is the tendency of all markets to move more in sync with one another. Recently Evensky and his team scoured the planet for hedging alternatives only to meet with frustration. They concluded that commodities were losing their diversification potential, hedge funds were needlessly opaque and expensive, and that real estate investment trusts were performing like mid-cap value indexes. "We have never found vehicles we trust to reflect real estate values rather than stock values," Evensky muses.

Evensky isn't interested in parking dollars in cash, though. With trillions sidelined in cash accounts, Evensky does not want to be out of the market when the cash floodgates burst.

All this may sound like Evensky has given up on alternative investments. Not so. In fact, he has recently added an alternative bucket to his main portfolio strategy. Varying with their need for income and risk tolerance, Evensky's clients may hold anywhere from 0% to 80% in stocks. The zero-stock holders may have most of their assets in a small business. Some are wealthy retirees with low risk tolerance and modest cash flow demands on their portfolio.



The core of his portfolio mimics the U.S. economy, with the iShares ETF tracking the Russell 3000. Often 50% of a client's equity portfolio is in this low-cost, tax-efficient investment. "Not sexy at all," Evensky notes. "But our job is to be smart, not brilliant." Clients often tell him that they could invest in the Russell 3000 themselves. He responds, "But you didn't!"

To this domestic portfolio, he adds the Dimensional Fund Advisors (DFA) U.S. Small Cap Value Index and iShares S&P Mid Cap 400 Value Index. On the international side, he favors developed markets using both active and passive funds. He also invests in emerging markets, buying DFA's Emerging Markets Core Equity I.

The satellite is a one-year strategy seeking to beat the market by at least 2%. It's divided into six parts, currently including commodities, high-yield bonds, emerging markets, Asia funds, JP Morgan structured products and a fund of funds, the Goldman Sachs Satellite strategy fund, which focuses on assets with lower correlations to large-cap equities and investment-grade bonds. Evensky's clients may hold up to 20% of their stocks in the satellite strategy.

After the last bear market, Evensky's investment committee investigated alternatives that might provide protection against a recurrence. In mid-2009, he added an extra investment option seeking a modest return, midway between bond and stock returns, from assets correlated 0.3% or less with the broader markets. He has three positions, each run by an active manager.



Evensky's clientele isn't unusual for a southern Florida firm. Of his 230 clients, the biggest group is retirees, followed by a significant number of physicians and attorneys. He represents entrepreneurs, widows and divorcees as well as a few institutional clients. He also acts as a financial fiduciary for a number of pension and 401(k) plans.

His average client holds a $2.5 to $3 million portfolio. His fee structure makes room for less wealthy clients, who can begin with $4,000 through his Horizon Solutions program, which is less customized. He requires $10,000 minimum for more affluent clients.

Despite having his hands full in Coral Gables, Evensky is particularly proud of the financial planning program at Texas Tech where his wife and partner, Deena Katz, teaches full-time. Texas Tech currently has 150 students working toward the Bachelor of Science degree in personal financial planning, 150 students working toward the Master of Science degree and 35 students in the PhD program. Evensky proudly notes that Texas Tech's PhD students have served as interns around the world.

At Tech, where he spends a day or two most weeks, he alternates teaching the advanced graduated investment course and a class on behavioral finance. Teaching allows him to cherry-pick the finest graduates for his own firm, keeps him abreast of the latest academic research and provides credibility with clients and the media.

Evensky believes in lots of communication with clients. His own frequent newsletters to clients are a mixture of wit and wisdom where arcane financial analysis shares space with puzzles and trivia quizzes. A modern-day Socrates, Evensky is skeptical of the financial buzz surrounding him, and moderate and thoughtful when he offers insights to clients and students.

What advice does he have for fellow financial planners? "Communicate, communicate, communicate!" he says. "In a classic Dennis the Menace cartoon, Dennis walks by Mr. Wilson resting in his hammock. Dennis tells a friend, 'Mr. Wilson says he don't wanna get ahead. He just wants to stay even.' Our job is to help the Mr. Wilsons of the world do just that."


Jim Grote, CFP, contributes regularly to Financial Planning.



Harold Evensky

Evensky & Katz



CFP, AIF, author of The New Wealth Management (2011) and Retirement Income Redesigned (2006)


Assets under management:

$620 million


How I see it:

"Our equity portfolio is not sexy at all. Our firm does not plan for Armageddon. We just want to know if your alpha is big enough to cover taxes and expenses."

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