The Investment Think Tank, a new book edited by Harold Evensky and Deena Katz, makes you rethink some fundamental priciples.

If the financial markets' behavior during the last decade hasn't caused you to occasionally question some of the most basic assumptions of modern finance, then you're probably either a true believer or oblivious to dramatic statistical aberrations.

So what happens when one of the most prominent and respected financial planning duos agree to edit an investment book for financial advisors? The answer, it turns out, is that you get a unique, and thought-provoking volume that challenges all of your pre conceived investment notions.

Evensky and Katz bring together a diverse group of experts from the worlds of investments, insurance, financial planning and academia in The Investment Think Tank: Theory, Strategy, and Practice for Advisers (Bloomberg Press, 400 pages). Each expert argues passionately about a topic of particular interest. "Deena and I know a lot of people who we respect and like. We thought it would be interesting to ask them what advisors should be thinking about over the next five years. We didn't expect all of the pieces to fit neatly together and they don't, but that's OK. We were just looking for their best ideas."

Some of the more practical essays, on topics such as concentrated stock positions, alternative investments, mutual fund selection and client issues, are sure to find a receptive audience. Others, on subjects such as yet-to-be-developed investment vehicles, asset location, and the use of annuities in the withdrawal phase of retirement, will hopefully stimulate further research that will further advance the profession.

The book includes 22 articles (one authored by Evensky) grouped into five categories: The Portfolio, Strategy, Investments, Practice & Theory and Clients. While the groupings are sensible, and the book reads well from beginning to end, each piece stands on its own; it is possible to skip around, reading chapters of particular interest first without any adverse consequences.

Part One, The Portfolio, is probably the most integrated section of the book. Here, the four stories are different, but the message is the same: Portfolio design, as practiced by the vast majority of advisors on behalf of individual investors, is all wrong.

Jean Brunel, the editor of the Journal of Wealth Management and former chief investment officer at JP Morgan's global private bank, is an expert in the field of investment management in a taxable environment. He argues persuasively that "asset allocation," as practiced by financial planners and individual investors, is a fool's game, primarily because of the tax consequences.

If one accepts Brunel's argument, a couple of thoughts immediately come to mind. One is that moving from actively managed mutual funds to low-cost index funds or ETFs will not solve the problem alone. The more asset classes you put into the mix, the more frequent the rebalancing requirements are likely to be, and rebalancing will trigger tax consequences. While it is likely that tax management will be able to lessen the tax bite, odds are that it will not eliminate it.

Brunel's argument also suggests that traditional asset allocation models do not encourage investors to think about the amount of additional alpha necessary to trigger a trade. For example, if you own one mutual fund, but are thinking about selling it and purchasing a replacement fund, how much better will the replacement fund have to do to justify the trade? Might other portfolio construction techniques encourage this type of thought process?
Brunel indicates that a core satellite approach can help with tax efficiency, better frame the question of cost vs. alpha and possibly help advisors to better manage risk as well.

Evensky's piece, Professional Portfolio Design, builds on the earlier article by Brunel. In essence, he argues that the
effects of taxes and expenses on the portfolio are amplified in a low-return environment, and he concludes that a core/satellite structure is the most appropriate method of designing a portfolio for retail investors today. Not only does Evensky provide a rational explanation of the reasons that core/satellite is superior, he also offers a practical step-by-step guide, including examples, of how an advisor might go about implementing core/satellite portfolios for clients.

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