Harold Evensky, of Florida-based Evensky & Katz, responded to several of our articles last week. In response to Scott MacKillop’s article, Taking Exception: 'Fiduciary' is Much Ado about Something!, Evensky writes:
I have a simple solution to the debate; one I've proposed for the retail investor but any advisor can use it without waiting for a client’s request:
Why wait?
Congress has passed a bill that instructs the SEC to conduct a six-month study related to advisor and broker responsibilities with respect to their clients. After conducting the study, the Commission is authorized to promulgate rules to provide that the standard of conduct for all broker-dealers and investment advisers, when providing personalized investment advice shall be to act in the best interest of the customer without regard to the financial or other interest of the broker-dealer or adviser providing the advice.
Why wait six months or a year to get that protection when you can have it now – for free! Just ask your advisor to agree to in writing the Five Fiduciary Principles:
- Put the client’s best interest first;
- Act with prudence; that is, with the skill, care, diligence and good judgment of a professional;
- Do not mislead clients; provide conspicuous, full and fair disclosure of all important facts;
- Avoid conflicts of interest;
- Fully disclose and fairly manage, in the client’s favor, any unavoidable conflicts.
It’s like mom and apple pie; who could object?
In response to Jeff Briskin’s article, Performance that Plan Sponsors Value Most, Evensky writes:
As a follow up to your recent survey, I believe the following is an important issue that is well below everyone’s radar.
I hope I’m reading this wrong; however, I don’t think so.
Most advisory firms with 401(k)s are probably like ours. Included in the investment selections are model portfolios we’ve designed. As we believe we should eat our own cooking, everyone in the firm is invested in an Evensky & Katz model portfolio. As a consequence, it would seem that according to the new regulations, we would be considered to have custody and subject to a surprise audit. Does that mean we either have to shut down our plan, eliminate our own recommendations or hire another RIA to manage our own 401(k)? Absurd, right? But I fear correct.
In response to Ken Solow’s and Michael Kitces’ article, When Active Management Matters, Evensky writes:
Can Ken and Michael to provide a list of those they consider eclectic managers so researchers would have a universe to study that meets the objections raised in their paper?
Ken Solow responds:
Finding a suitable database of eclectic and non-style constrained managers is not easy. The most obvious source is the Morningstar database of publicly traded funds. You can pick through the World Allocation and Long-Short categories to find fund managers that clearly fit the description. In addition, you can pick through the “Prospectus Objective” category in Morningstar and you will find suitable managers under the Multi-Asset Global and Asset Allocation strategies. However, you couldn’t just download the data for any of these groups because you would get plenty of funds you don’t want. For example, the Asset Allocation family is full of strategic funds and target date funds.
The most obvious universe of managers would be in the hedge fund space. Virtually any of the long-short, market neutral, global macro, and event driven funds should have extremely low correlations to the “market.” Any attempt to use hedge fund databases would have to contend with biases in the data.
There is, of course, a universe of managers in the RIA world that goes completely under the radar that use a variety of active strategies. Pinnacle, my firm, is a good example. It is ironic, considering our article, that we believe Ibbotson’s metrics for market returns (not policy returns) probably apply to us. While we utilize a variety of sector rotation and tactical asset allocation strategies in order to earn positive alpha, we still view ourselves as a relative value manager. We have a very high r-squared to the S&P 500 Index and don’t claim to dramatically minimize the impact of market movements on the overall direction of our portfolio returns. Our process intentionally puts us right in the middle among strategic money management and long-short strategies.
As we said in the article, to our knowledge a suitable universe of managers to study does not exist. Since we have armies of academics burning to study these topics, I’m afraid they will continue to data mine the same universe of style-constrained managers and reach the same conclusions over and over again.
