4 Must-Hear Facts From Legendary Financial Advisor Harold Evensky’s Farewell Speech

Even among knowledgeable investors, the name Harold Evensky may draw blank stares. But that's forgivable -- after all, how many cops know the name of the woman who invented Kevlar?

That said, we're talking about the author and CFP whom Morningstar CEO Don Phillips lauded as the Dean of Financial Planning, and Evensky's track record and brilliance gave him justifiable influence. But at 76, the man who has helped so many others plan for their own retirements is taking his own, and in September, he gave one last speech to his peers.

And in the "What's Up, Bro?" segment from this episode of the Motley Fool Answers podcast, Alison Southwick and Robert Brokamp discuss a few of the most important insights that Foolish investors can glean from it.

A full transcript follows the video.

This video was recorded on Oct. 09, 2018.

Alison Southwick: So, Bro, what's up?

Robert Brokamp: Well, Alison, a giant in the financial advisory business is retiring. Chances are most investors don't know the name of Harold Evensky, but he's a pioneer in the world of research-based financial planning. It's pretty safe to say that there's no advisor who's won more awards or accolades than Harold Evensky. He's so respected that one of his clients is psychologist Daniel Kahneman who won the Nobel Prize in economics and is considered one of the fathers of behavioral finance. So if a guy's that smart and he's going to Harold Evensky, you might think he must know what he's doing.

Harold just turned 76 and he gave his final speech last month at a conference in San Diego, and the speech was summarized by Robert Huebscher for AdvisorPerspectives.com. There's a lot of good stuff in there, but I'm just going to highlight four key takeaways.

No. 1 is expect lower future returns. Evensky recommends that after fees, taxes, and inflation, investors should expect to earn just 2% a year on average over the next decade. So not over the next year, or two, or three years. We don't know. But over the next decade we should expect pretty low returns.

Now he's not the only person to predict that the markets will provide below-average returns, but it's particularly notable coming from him because for a very long time, some of the financial planning software that is most commonly used by financial advisors relied on Harold Evensky's predictions for their return assumptions, so his predictions are fairly well respected. In his speech he emphasized that in a low-return world managing fees and taxes is even more important than ever, which brings us to No. 2.

And that is be both active and passive. The debate of whether investors should try to beat the market or they should just stick with index funds rages within the financial advice business as well as without. What does Evensky recommend? He says you should do both. He was actually one of the early pioneers of what became known as the core and satellite approach to investing.

A core of your portfolio should be index funds. It's clear that they outperform most active strategies, but more importantly, very low cost and very tax efficient. Then once you have your core in index funds, you can do what he called satellites in your portfolio. Try for more aggressive strategies. Try for a little more active management. See if it works out. It could work out, but not everything's riding on those. And make sure you do it in your IRAs, because generally active strategies are more tax inefficient.

No. 3 is don't invest money you need in the next five years. That may not sound particularly insightful. Everyone knows to keep short-term money out of stocks, but the actual size of that cash cushion differs by whom you ask. Even I'm a little squishy about it. I tend to say if you don't need it in the next three to five years. Some people say in the next one to two years, so I think it's significant that someone like Harold Evensky is saying five years is really what you should be targeting. If you need that money in the next five years, it should not be in the stock market, especially if you're retired, because that's generally the length of an economic cycle.

And No. 4, the last one, is give annuities a fresh look. Like many experts, Evensky derided annuities for years, and I did that as well. But that's changing, mostly because the cost of annuities has come down so much. And by annuities, he's generally talking about what are known as single premium income annuities. You hand over a large lump sum to an insurance company and they pay you a check for the rest of your life. Regardless of what's going on in the stock market with interest rates, the economy, and how long you live; you know you're going to get that check in the mail each and every month.

Generally speaking, the research is that you should wait until you're age 70 to do it, because the longer you wait, the higher your payout. It's based on life expectancy, but 20% or more of a retiree's portfolio could be in annuities and that would generally replace what you would otherwise invest in cash and bonds.

Those are just four takeaways from Evensky's final speech. There's plenty more from that presentation and from the many speeches he's given over the years as well as the many academic papers, articles, and books he's written. If you're looking for some good, evidence-based financial planning, just google his name and you'll come up with some pretty solid stuff.

And finally, I'd like to say that after spending decades of helping other people retire, I wish Harold Evensky the best now that he finally gets to retire all on his own.