The ideas presented by Brunel and Evensky should, at a very minimum, encourage advisors to re-examine their assumptions and their investment processes. If one believes that investment returns will, in fact, fall below historical norms in the coming years, and if a significant portion of the asset one manages are in taxable accounts, a core/satellite approach deserves careful consideration.

Some of William Jahnke's past articles in the Journal of Financial Planning have generated considerable controversy, and he has many detractors among mainstream planners, but his essay Death to the Policy Portfolio is an incredible, lucid critique of the underpinnings of modern portfolio theory as it is practiced by many advisory firms today.

Jahnke states that "The common practice of forecasting returns and portfolio volatility based on historical mean returns and standard deviations requires the belief that the return-generating process is stable and the assumptions of the random walk model are valid." One can question how common the practice of using historical rates of return and normal distributions are among advisors today, but it is hard to argue with his assertion that such a model is less than ideal.

Jahnke correctly points out that when Markowitz and Sharpe won the Nobel Prize for Economics in 1990, many observers mistakenly saw that as a validation of the use of historical returns and mean variance optimization. Jahnke reminds us that "Markowitz's conception of mean-variance portfolio optimization was applied to the selection of securities, not of asset classes." He quotes Markowitz as follows: "When past performance of securities are used as inputs, the outputs of the analysis are portfolios which performed well in the past."

So how did this "bad science," to borrow Jahnke's phrase, become the gospel to financial planners? Jahnke lays much of the blame on investment consultants, who saw a huge payday in promoting the bad science, and the University of Chicago, which had a huge ideological stake in the continued acceptance of the "random walk" and "efficient market" models.

In short, Jahnke argues that some of the research that advisors take for granted today is based on faulty assumptions, while in other cases financial advisors failed to understand what the results of academic studies really meant. In any event, his conclusion is that everything you think you know about portfolio design is wrong. Whether you agree or not, you owe it to yourself to read this essay.

Professors William Jennings and William Reichenstein state, "Personal financial planning regularly adapts sophisticated techniques developed for institutional money managers, yet individual portfolios are different from institutional portfolios in at least two important ways: First, individuals pay taxes. Second, it is clear what assets belong in institutional portfolios, but the same is not true for individual portfolios."

Jennings and Reichenstein believe that the way to deal with taxes is to convert all portfolio assets to after-tax dollars and then determine the asset allocation based upon after-tax values. With regard to the contents of the portfolio, the authors submit that advisors must manage not only the financial assets, but off-balance-sheet assets as well. This would include things like the present value of future Social Security income, for example.

While much of the first section deals with "big picture" ideas, the second section is much more grounded in practical advice. It leads off with S. Timothy Kochis, president of Kochis, Fitz, Tracy, Fizhugh & Gott, explaining practical solutions to the problem of concentrated equity positions. As president of one of the leading wealth management firms in the country, there are few people more qualified that Kochis to offer a practitioner's view on these matters.

Kochis lays out some of the challenges that corporate executives in particular face. These include issues such as employee stock options, deferred compensation and misused 83(b) elections. He discusses strategies such as gifting, margined diversification, tax-managed index proxy accounts, exchange funds and derivatives (selling covered calls, buying puts, collars, prepaid forward contracts) in plain English, making the concepts accessible to those unfamiliar with these instruments.