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Exclusive Interview: Harold Evensky says Robo-Advisors “Roadmap to a Rocky Future”

July 22
00:02 2014

Harold Evensky is Chairman of Evensky & Katz and a Professor of Practice in the Texas Tech University, Personal Financial Planning Department.  We’ve have the pleasure to speak to him on a number of occasions over the past few years and Harold_Evensky_300each time we’ve learned something new. He’s had the opportunity to experience a broad range of business model and service types within the financial industry. We felt it was time to both give him a chance to talk directly to our readers and to give our readers a chance to experience him first hand. We were very exciting when he graciously agreed to this interview.

Evensky is the past Chair of the International CFP® Council, the CFP® Board of Governors, Board of Examiners, Board of Appeals and the TIAA-CREF Institute Advisory Board. Evensky is the research columnist for the Journal of Financial Planning. In 2013 he was listed as one of the professions 15 Transformational Advisors by Investment News and in he was a recipient of the FPA Heart of Financial Planning award. He is the co-author of Wealth Management, published in conjunction with the CFA Institute by Wiley & Sons and co-editor of The Investment Think Tank, Theory, Strategy, and Practice for Advisers and Retirement Income Redesigned – Master Plans for Distribution (Bloomberg).

FN: Harold, you’re pretty much considered a “dean” among financial advisers. Our readers always find it interesting to see how the folks we interview came to discover their place in the industry. How did you enter? Was it always something you wanted to do? Was there a special event or story that spurred your interest?
Evensky: Chris, the short answer is, I fell into it. My formal education was civil engineering and business (I grew up with family in the construction business). In the 70s I owned a home building company that was in the top hundred or so in Florida. But near the end of that decade we saw wildly fluctuating mortgage rates and a very disruptive home building environment. About every six months I would sit down in my windowless warehouse with a simple calculator and project my finances for the next 12 months. With the turbulent home-building market I concluded I either needed to be much smaller or change careers. I decided a career change was the only viable option. At the time I saw an ad for Bache (now Prudential) and thought it looked kind of interesting. Long story short, I was interviewed and hired as a new broker. In those days that meant spending two months in training and the local office and then a month in New York before you could sit for your securities license exam. Once completing all the training and passing the exam, I returned to the office in Miami. The branch manager showed me a desk and the telephone and said, “Start calling.” The first person I reached was a retired widow on Miami Beach who sounded like my grandmother. I very politely followed the script that had been provided to me, explaining I was a nice person calling to talk about investments. She promptly hung up on me. Well, with my “grandmother” hanging up on me I decided this would be a very short-lived career. Luckily, just about that time I saw an ad for something called the College for Financial Planning. I enrolled in the program and started doing yellow pad planning. I built my practice by doing educational seminars in the evening five or six nights a week. After a few years I left Bache as a VP investments to join Drexel Burnham Lambert. Although I had very positive experiences at both Bache and Drexel the firms really did not understand what my business was all about, so in 1985 I left Drexel and started my own firm. My first office was my dining room table.

FN: In your experience, what’s been the most significant invention, device or concept that has most helped financial advisers and investors in general?
Evensky: Take your pick – Graham and Dodd (fundamental analysis), Harry Markowitz (MPT and risk is as important as returns), Bill Sharpe (CAPM, systematic and unsystematic risk), Brinson, Hood, Beebower (asset allocation), Jack Bogle (expenses matter), Danny Kahneman (behavioral finance ), Charles Schwab (mutual fund marketplace), Joe Mansueto and Don Phillips (Morningstar), and technology – Portfolio Center, Bob Curtis (MoneyGuidePro)

FN: In your experience, what’s been the most significant invention, device or concept that has most hurt financial advisers and investors in general?
Evensky: Misleading behavioral heuristics and mental accounting, inappropriate regulation (suitability vs. fiduciary), and false gurus like Cramer.

FN: There’s been a lot of chatter lately questioning the “value” or “worth” of using a financial adviser. This has led to the rise of the Robo-Advisor and a more general movement towards do-it-yourself investing. What do you see as the drawbacks of this trend and can you foresee a “brick wall” that the people following this trend might be headed for? Also, how might you justify the “value” of professional advisers?
Evensky: Although I am a big believer in the use of technology to enable the delivery of better financial advice at lower costs for broader audiences, I do not believe that do-it-yourself planning will be a viable solution for most investors. Although good planning may not be rocket science, there is a reason that professionals spend years to become educated the field and continue annually to study and keep up with both new research and product trends. I would suggest to a do-it-yourselfer that planning the quality of the rest of their life with limited knowledge and blackbox software is a likely roadmap to a rocky future

FN: Can you think of any circumstances where Robo-Advisors or do-it-yourself investing might be appropriate for individual investors?
Evensky: Absolutely. As an educational tool, quality planning software can be very valuable and analytic software such as that provided by Morningstar can be very useful in assisting investors to move beyond the fund’s marketing hype. As an aside, I am currently working with a group of doctoral students to study the efficacy of publicly available retirement planning software. I will keep you posted on our results

FN: There’s a lot of confusion among retail (and even institutional) investors between the different types of service providers out there – and you’ve served in or worked as nearly all of them. If we can break providers down into three broad categories, can you tell us what types of clients should seek each type of adviser and why? When is it appropriate to use a traditional stock/bond portfolio manager and why? When is it appropriate to use a financial planner and why? When is it appropriate to use a broker and why? If I left out any general type of provider, feel free to answer this question for that provider.
Evensky: Needless to say, I’m biased, but here’s what I think:

A traditional broker – An appropriate choice when an investor is looking to obtain research information on a specific investment and/or simply looking for an organization to implement a transaction.

A “wrap” money manager – Almost never. In the retail universe money managers are offered to investors as wrap or separate accounts. For the most part these are very expensive mutual fund alternatives managed by junior staff. Admittedly mutual funds may not be very sexy, however top talent is devoted to billion dollar fund portfolios not $100,000 separate accounts. An exception to this would be a client who for some reason wanted to exclude investments in companies headquartered in say California. Obviously this cannot be accommodated through a mutual fund but could be through a separate account. In over 30 years of experience I’ve never had a client make such request.

Traditional Stock/Bond Portfolio Manager – In fact we do work with a few managers who customize portfolios for our clients. They are paid a modest AUM fee, no commissions and no middle men involved. However, I believe this is a fairly rare arrangement.

A financial planner (this would include financial planning professionals that brokerage firms) – Anyone seriously interested in the quality of their future fiscal life.

FN: The issue of the Fiduciary Standard has been a hot topic for several years now. How responsible do you think dual registration is for both the confusion mentioned in the previous question and the debate of the Fiduciary Standard? In the perfect world, what do you think is the most reasonable solution to this debate? In the real world, what do you expect to happen?
Evensky: Dual registration certainly confuses the issue as it incorporates standards of conduct – suitability on one hand and fiduciary on the other. The confusion could be easily resolved by applying what I refer to as the “you” standard. Rather than focusing on titles or business format, if an advisor simply implements the transaction and/or provides corporate research they would be held to a suitability standard; if he provides advice, he would henceforth and forever more become fiduciaries with respect to that client. For example:

  • Mr. Advisor I would like to buy 500 shares of AT&T – Suitability
  • Mr. Advisor, what does your firm think of AT&T? We like it, let me send you out our research report – Suitability
  • Mr. Advisor, do you think AT&T would be a good investment for my portfolio? Yes I think YOUwould do well to purchase AT&T. – Fiduciary

In a perfect world – we would require ANYONE providing investment advice to be held to a fiduciary standard independent titles or business format. Furthermore, we use the “You” standard to determine “advice.”

In the real world,… I’m afraid to think about it.

  • Best case – DOL and eventually the SEC implement a fundamentally sound fiduciary standard for anyone providing investment advice.
  • Worth case – redefining (i.e. “harmonizing”) the concept of fiduciary that renders it meaningless. For example, equating fiduciary with disclosure and allowing foreign investors opt-out .

FN: Underlying the fiduciary principle is the whole conflict-of-interest situation. While the DOL currently allows self-dealing by ERISA fiduciaries, both their proposed change in the Fiduciary Rule and the most recent announcement to explore best practices in retirement plans have focused on this conflict-of-interest problem. Is there a simple fix to this (say, by converting from a commission sales model to a fee-only sales model)? Even if there is a simple fix, what makes this problem so difficult for policy-makers to resolve?
Evensky: Certainly converting from a commission to a fee-only model would eliminate one serious potential conflict of interest. I’ve never quite understood the argument that under a fee alternative small clients could not be served. This would not be so difficult. For example, if the commission on a $10,000 purchase was $500, then why not simply charge a $500 fee? I believe the reason that it’s so difficult for policy makers to resolve is $ – deep pocketed special-interests.

FN: Annuities in retirement plans? Love ’em? Hate ’em? Are they practical, and, if so, for whom? Are there better alternatives?
Evensky: Other than in those states (e.g., Florida and Texas) where annuities may provide an additional element of asset protection, I cannot see a viable reason for their use in sheltered accounts.

FN: Along similar lines, is there a systematic flaw with pension plans (including public employee pensions and social security) that just can’t be fixed (some call them Ponzi Schemes)? If you think they can be fixed, how would you suggest doing it? Alternatively, why do you (or don’t you) feel defined contribution plan are more appropriate for future retirees than relying on pension plans and social security.
Evensky: I believe the systematic flaw is in the unrealistic actuarial assumptions made by far too many plans. Those assumptions allow firms to fund future obligations in amounts that, in hindsight, proved to be woefully inadequate. One solution would be to hold the firm’s principals feet to the fiduciary fire; i.e., require them to defend the basis for their assumptions. Under ERISA, if they failed to adequately defend their decision they would be held personally responsible. That would be a significant wake-up call. In a perfect world I believe most investors would be better served by a well-funded DC plan, unfortunately the question of DC versus DB plans and Social Security is a moot point as I believe DC plans are rapidly becoming dinosaurs.

FN: I appreciate your willingness to take part in this interview and to take time out of your busy schedule to answer these questions. With that in mind, is there anything else you’d like to add?
Evensky: Nope, great questions. Thank you for including me in this project. Don’t hesitate to call.

FN: Harold, on behalf of the readers of, it’s been a wonderful experience to hear your thoughts on these important issues. Your common sense notions are both refreshing and instructive. We look forward to reading more about your research.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Anthony Villa
    Anthony Villa July 24, 13:17

    “unfortunately the question of DC versus DB plans and Social Security is a moot point as I believe DC plans are rapidly becoming dinosaurs.”

    Chris >> I read this statement several times. Isn’t it DB plans that are rapidly becoming dinosaurs rather than Direct Contribution Plans (DC)?

  2. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author July 24, 20:33

    Anthony: I thought this was a typo, too But I asked Harold and this is what he said: “Yes, I’m one of the believers that DC plans are becoming dinosaurs. I believe the primary motivation is desire of firms to pass the market risk from the firm to the employee although it is sometimes framed as a desire to offer employees more control over their investments.”

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