Harold Evensky on the New Rules for Wealth Management

Harold Evensky

If you don’t have a copy of The New Wealth Management on your bookshelf, you should.  From gauging the risk tolerance of your clients to measuring the performance of their portfolios, this book provides comprehensive guidance for virtually every aspect of a financial advisory practice.  Harold Evensky, the lead author, spoke with me last week and highlighted some key themes in the newly released second edition.

Stephen Horan and Thomas Robinson co-authored the book with Evensky.  Both are affiliated with the CFA Institute, and this edition is part of the CFA Institute Investment Series.

As Roger Ibbotson noted in the foreword, 14 long years have passed since the original edition of this book came out.  But as I will describe, very little has changed since then.   I’ll look at some of those changes, as well as at what Evensky said about a controversial issue – annuities – and how it will play a critical role in financial planning.   Lastly, I’ll explore a couple of topics you won’t find in this book.

Bridging a 14-year gap

The overarching message of this book is one that our readers already intimately understand: Advisors should act as fiduciaries, following well-documented precepts such as placing client needs first and avoiding conflicts of interest.  That message resonates as clearly now as it did in the original edition.

Evensky and his co-authors have introduced some new concepts in this edition to strengthen fiduciary relationships.  One is the life balance sheet.  It differs from a traditional balance sheet, where one compares client assets to liabilities, in that it includes implied components.  Human capital is an implied asset that represents one’s earning potential, and one’s implied liabilities are determined based on one’s desired retirement goals.

Another concept that Evensky said underwent significant updating is in the retirement stage of planning.  He incorporated a concept called “squaring the curve” to account for the fact that people are living longer and healthier lives. 

“The assumption that as you get older, you’re going to spend less, may not be credible,” Evensky said.

When the original version of the book was written, expectations for returns from the capital markets were much higher than they are today.  In this edition, Evensky has stressed the importance of adopting the context of lowered returns.

“We’ve got some control over expenses and taxes,” he said.  “We have no control over returns.