June 18, 2015 | Volume 6 | Issue 11

Active investment management’s weekly magazine

Do record corporate margins pose market threat?

10 questions for third-party managers

Drive seminar attendance with hot-button topics

“Rule of 240” compounding

Bob Pearson

Attitudes & analyticsFormulating client investment options

Advisor perspectives on active investment management

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The f lawed seduction of buy-and-holdClients tend to have very short memories. They often have misconceptions about buy-and-hold investing and are seduced by arguments about average annual returns for the S&P 500—forgetting the pain of severe drawdowns. We attempt to find strategies for clients to navigate volatile markets and manage risk, while hopefully achieving the returns they want. There will always be bumpy roads, so we use managers who can make portfolio adjustments according to market conditions.

LOUD & CLEARRodger Sprouse • Overland Park, KS Titan Securities • Sprouse Financial Group Inc.

3June 18, 2015 | proactiveadvisormagazine.com

LOUD & CLEAR

EXPERTSNEED

EXPERTS10 questions to ask

third-party money managers

By Kellye Whitney

proactiveadvisormagazine.com | June 18, 20154

continue on pg. 13

T hey say the only thing worse than wasted time is wasted money. But for independent financial advisors the two

are inextricably linked—and for those advisors who are successful, waste in either bucket is not an option.

It’s not easy being a financial advisor, especially in today’s complex financial envi-ronment. Clients need a lot of attention and advisors offer far more services than first meets the eye. One successful advisor interviewed in the Maryland area has identified 50 discrete client-related “major financial tasks” to review for each and every client. Then, like any other business owner, there are the day-to-day office duties to handle, employees to manage, and strategic business concerns to manage with a vigilant eye.

For financial advisors running small businesses, it can feel like there aren’t enough hours in the day. That is one critical and prag-matic reason why more and more advisors are partnering with third-party asset managers, especially money managers who add additional value through sophisticated risk management approaches.

However, unlike partnering with, say, a tech vendor, where a demo might clearly illustrate a “cut-and-dried” reason why it’s advantageous to use their product or service, it’s not always easy for a financial advisor to make the decision to outsource the portfolio management function. Many advisors, especially those who have been in the business for years, may still feel that “portfolio management” helps define who they are as an advisor.

However, it makes sense to do so. This kind of partnership gives advisors the time they need to focus on their core business—clients—and im-mersing themselves in the information gathering that will inform the strategies that will produce the financial outcomes those clients want.

A recent Forbes article reinforced this point, saying, “Financial advisors can offer a tremen-dous amount of value by dealing with extreme-ly complex tax issues, investment choices, and

Revenue goals 82%

77%

76%

75%

58%

55%

54%

43%

0% 20% 40% 60% 80% 100%

Source of new business

Client-services goals/strategies

AUM goals

Personal goals (e.g. net worth)

Roles and responsibilitiesof support staff

Client-retention goals

Roles and responsibilities ofpartners and advisors

Source: Financial Planning Association, “Doing More with Less—Time Management and Advisor Productivity,” 2014

Components of an effective advisor business planSuccessful advisors are more likely to set specific asset and revenue growth goals, formulate new-business and

client-retention objectives, and to incorporate team roles and responsibilities into the planning process

emotional decisions impacting one’s financial well-being. Furthermore, they make people more secure for retirement, increase their client’s wealth, and help people feel more confi-dent about their financial status.”

And the facts back this up. A recent study by the Investor Protection

Institute, a tough critic of the business, ac-knowledges to consumers that financial plans work. “Research shows that over a lifetime, investors with a financial plan accumulate about 20% more wealth than those with no plan.” A Morningstar paper actually places the figure even higher, with estimates of the advisor impact helping to create “29% higher retire-ment income wealth.”

Third-party asset managers can play an im-portant role in wealth creation and lifting some of the financial advisors’ time and resource burden, allowing them to focus on what they do best. Is it really feasible today for an advi-sor to not only develop a sound fundamental

portfolio approach for 50, 100, 200, or more clients, but also to worry about the day-to-day implementation and monitoring of all of the various strategy combinations their many cli-ents should have?

The expertise a third-party active asset man-ager can offer, when coupled with the financial advisor’s top-notch customer service, creates a valuable package to offer any discerning client. Of course, as with any effective partnership, the asset manager needs to be properly vetted before any relationship is established. Due diligence on third-party asset managers is becoming an increasingly important task for the individual independent advisor, their firm and associates, and their broker-dealer.

When advisors are selecting potential asset manager partners they have to evaluate, for instance, whether the asset manager is using the most sophisticated tools, algorithms, market analysis, and data available. Predictive analytics are increasingly complex, and the technology

Money managers add value beyond investment expertise, freeing up time for advisors to do what they do best. How do you evaluate them?

June 18, 2015 | proactiveadvisormagazine.com 5

‘47 ‘57 ‘67 ‘77 ‘87 ‘97 ‘073456

78910

11%

Source: Barron’s, Federal Reserve Bank of St. Louis

Corporateafter-taxprofits/GDP

Do record margins pose market threat?ne of the most consistent themes of the bull market since March 2009 has been the way U.S. companies have managed to

increase operating and profit margins. Although there are many contributing factors, some of the “credit” has been placed, fairly or unfairly, on cor-porate America’s ability to keep workforces lean and wage growth modest—which has ultimately played out in the tepid consumer spending of the past six years.

Also at play in soaring corporate margins is what Bloomberg recently called the “hidden hero of the stock market”—the consistently low corporate debt-servicing ratios since the reces-sion, induced by the Fed’s Zero Interest Rate policy (ZIRP).

Bloomberg says that record-low interest rates means that the cost of servicing debt for companies in the S& P 500 Index fell to an all-time low of 3.5% of sales over the past 12 months. The decline from 7.4% in 2007 represented $310 billion in savings and “contributed to a doubling of profits and a three-fold increase in stock prices.”

They also point out that the concern for mar-kets now is the impact on debt-servicing rates when the Federal Reserve finally does implement its long-telegraphed “slow and steady” move to increasing interest rates. Bloomberg says, “Seldom have low financing costs lasted long following the start of tighter monetary policy,” and this comes at a time when “analysts already see profit growth of less than 2% in 2015.”

The conclusion? One of the bigger issues now facing the markets is whether or not corporate margins will eventually revert to the mean. Some

O

analysts say such concerns are overblown, with companies having locked down low interest rates for years going forward and Fed rate hikes expected to be introduced at one of the slowest paces of post-recession tightening ever.

Others disagree. “One of the things that worries me a little bit is with profit margins near their historic highs, Wall Street analysts in the aggregate expect profit margins to continue to improve,” said David Joy, chief market strategist at Ameriprise Financial Inc. Rising rates “make that forecast more difficult,” he says.

Barron’s pointed out this past weekend that naysayers on corporate margins have been vocal “ever since corporate profit margins first hit a record high in 2012.” They added, “There have been ongoing predictions that it was only a matter of time before they fell to historical

norms—and dragged the stock market down with them.”

Barron’s examined a variety of somewhat similar scenarios in the post-WWII era and found mixed results: “For every example of market destruction due to falling corporate mar-gins, there’s another example in which markets not only gained, but gained significantly.”

Citigroup strategist Tobias Levkovich says, “It usually takes a recession for falling margins to become a market problem.” Levkovich cites strong hiring intentions, capital spending plans by nonenergy companies, and lax credit condi-tions as reasons to expect the economy to keep moving forward at a modest pace. He adds, “Falling margins shouldn’t derail the market unless there is something more economically sinister going on.”

Corporate profit margins as % GDP are at their highest level on record

7June 18, 2015 | proactiveadvisormagazine.com

TOPPING THE CHARTS

&ATTITUDESANALYTICSFormulating clientinvestment optionsBy David WismerPhotography by Joni Kabana

8 proactiveadvisormagazine.com | June 18, 2015

Bob Pearson Portland, OR

Transamerica Financial Advisors Inc.

Robert Pearson is a financial advisor based in Portland, OR, and offers securities and investment advisory services through Transamerica Financial Advisors Inc. (TFA), Transamerica Financial Group Division. He is affiliated with Managed Wealth Financial based in Ogden, UT, which provides a wide range of financial services to clients.

Mr. Pearson was born in Idaho and lived in a “beauti-ful rural area of lakes and mountains halfway between Coeur d’Alene Lake and Hayden Lake.” He earned a B.S. from the University of Washington in Building Technology and Administration, and later completed an M.B.A., also from the University of Washington.

Following college, Mr. Pearson had a successful career with the Boeing Corporation, working first on the construction and design side and later in finance. He says, “I was involved with many fascinating proj-ects, including the construction of the world’s largest building under one roof, about 55 acres, and some cutting-edge aeronautics initiatives.” Mr. Pearson also owned his own construction and homebuilding firm prior to a career shift to working with retail financial services clients. He says, “I cannot really say this was something I had planned for a long time, but I did always want to focus my career in the financial arena. I was very impressed with the opportu-nities for helping everyday Americans with their financ-es, and the growth potential for my own practice. I have never regretted making the switch and have been at it now for close to 30 years.”

Mr. Pearson and his wife are committed to vari-ous church-related and charitable activities. Says Mr. Pearson,“In addition to family, friends, and clients, our church is a huge part of our lives.”

continue on pg. 10

Proactive Advisor Magazine: Bob, what has been the biggest change during your career as an advisor?

It is pretty amazing, but the people I first started in the business with are still some of my closest associates. Over the years, we have all evolved to a far more sophisticated view of how clients’ money should be invested. My generation of advisors was brought up in the days of fairly simple diversification and spreading the money around among some high-quality investments. It was standard asset allocation.

In the mid-2000s, that started to change. We had seen the dot-com bubble and asset prices come crashing down. No matter how diversified you were in equities, your accounts probably took a pretty good hit. Today, we just do not think that is acceptable as a way of investing money, especially for those close to retirement or are already there. Passive investing is not some-thing we do for clients, and, broadly-speaking, I really don’t see a reason to buy and hold any asset class.

How do you implement that approach?

Our broker-dealer took the lead in introduc-ing us to third-party active money managers. A key part of our operating philosophy is in trying to bring the resources that were once only avail-able to high-net-worth clients to our everyday clients. Over time, an effort has been made to reduce the minimums necessary to work with a wider range of managers. That has been pretty successful and most, if not all, of our clients now have the opportunity to have top-quality money management for their accounts.

How do you determine an investment strategy for specific clients?

I am a branch manager and therefore very involved with the suitability review for many clients. With my own clients, it all starts with some basic “getting to know you” types of questions related to their finances: What are your broad financial goals and objectives? What kinds of things have you done in the past, or are you doing now, in the way of financial strategies, savings, and investing? What have you liked or not liked, and what has your comfort level been with things you have done in the past? Each of these areas provides plenty of opportunity to drill down and find out some below-the-surface attitudes about money and investing.

Then we apply the more scientific part of our analysis and have a variety of tools to get at things like risk tolerance, time horizons, and income needs in retirement. Only when we have the complete picture of both the softer at-titudinal side and the harder analytical side can we get into formulating investment options. Our company is driven by suitability and by doing the right thing for each and every client.

Describe how you explain actively managed strategies to clients.

First we explain the more scientific data points based on their suitability: their risk tol-erance, their time horizon, their future income needs, and other factors. We also discuss how the investment piece is just one part of their overall financial needs, and whether it is life insurance, long-term care, taxation issues, legacy planning, or other factors, these can all come into play.

markets each and every day, week, or month. That is my job and the job of our professional money managers. Our managers will make the changes they feel are appropriate to the investment environment. Most of the time that message comes across loud and clear, and I have an excellent record in retaining clients and client satisfaction.

What criteria do you use for selecting strategies for a client?

Obviously it all depends on what is suitable for that client. In a general sense, many of my clients are retired and need to draw income from their accounts. We typically look for combining more of a fixed-income strategy with several different equity strategies for a blended

We try to give each client an investment program they can live with over the long term.

On the investment portfolio side, it’s about making sure they understand the type of expec-tations we have for their overall strategies. This is a matter of explaining a range of possible returns, potential volatility, and drawdowns. It is more of a goals-based investing approach, trying to minimize volatility and smooth out returns. There are no ironclad guarantees, but we are trying to give each client or client couple a program they can live with and stick with over the long term. We are not looking necessarily for the highest returns, but we are also certainly not looking to see the types of drawdowns or volatility that unmanaged money will have to endure.

The toughest issue I occasionally face is reminding certain clients that it is not really valuable or helpful to track or worry about

June 18, 2015 | proactiveadvisormagazine.com 9

Bob Pearson is a Registered Representative and an Investment Advisor Representative with Transamerica Financial Advisors Inc. (TFA). Securities and Investment Advisory Services offered through TFA, Transamerica Financial Group Division, member FINRA, SIPC, and a Registered Investment Advisor. Non-securities products and services are not offered through TFA. Managed Wealth Financial (MWF) is a financial services marketing organization comprised of Associates of World Financial Group Inc. (WFG), a financial services marketing company whose affiliates offer life insurance and a broad array of financial products and services. Insurance products are offered through World Financial Group Insurance Agency Inc. (WFGIA) or its subsidiaries. WFG, WFGIA and TFA are affiliated companies. MWF and TFA are not affiliated. 7300 SW Hunziker, Suite 214, Portland, OR 97223 503-684-4010. TFG006660-06/15

overall approach, most or all of which is actively managed.

In terms of selecting managers, we have done a lot of the due diligence upfront based on their historical records, their philosophy, and their consistency in applying their strategic approach. We might use anywhere from two to eight different strategies for a client, and that can range from the very conservative to more growth-oriented or a number of combinations of strategies and managers.

The commonality to the best managers we use is that they tend to be quantitative in their approach. They are not trying to predict the market, but they are using algorithms to identify trends and allocate according to the prevailing trends.

I show clients a variety of materials on how individual managers’ models have performed during different market conditions, using different asset classes. Again, no guarantees,

but these managers have a good track record of picking up on the trends—moving to cash when necessary or even going inverse the market in a downtrend.

Has your investment approach helped to differentiate your practice?

Without a doubt. For example, I have a rel-atively new, very affluent and successful client who has had the opportunity to work with other advisors. When he gained some experi-ence with our firm and came to understand our investment approach, he began moving more and more of his money to actively managed portfolios. He appreciates our focus on risk management, as capital preservation is very important to him. I think it is fair to say that attitude generally applies across our client base and has been very important in helping me to attract and retain clients.

continued from pg. 9Bob Pearson

10 proactiveadvisormagazine.com | June 18, 2015

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Active management’s benefits are poorly understood

Active management, which spans the many decisions needed to produce desired outcomes, can help inves-tors reach their personal investment objectives.

Women: “The largest emerging market in the world”

Moving the conversation beyond gender differenc-es to acknowledging that the share of global wealth controlled by women is rising at a rapid rate.

Triple Crown winners and false correlations

Data surrounding market performance in the years of a Triple Crown winner is powerful, but like many other correlations, can you really take it seriously?

June 18, 2015 | proactiveadvisormagazine.com 11

“Rule of 240” compounding

Ron Rowland has been providing market commentary and active investment advice since 1991 with the creation of the All Star Fund Trader newsletter, a highly regarded paid subscription investment service. The All Star Investor newsletter has been tracked by Hulbert Financial Digest since 1993 and can usually be found near the top of Hulbert’s long-term performance ratings. Mr. Rowland is also the founder of Invest With An Edge, a website and weekly newsletter providing free actionable ideas for all investors with an emphasis on ETFs. www.allstarinvestor.com, www.investwithanedge.com

Years10 15 20 25 30 35 40 45 50

Annu

al re

turn

s25%

20%

15%

10%

5%

0%

ActualRule of 240 Estimate

ost investors are familiar with the Rule of 72, a formula for approximating the time it takes an investment to double at

a given compounded annual return. The Rule states that dividing 72 by the annual return equals the number of years it takes to double. Conversely, the Rule of 72 can also determine the annual return by dividing 72 by the number of years. For example, it takes nine years to double an investment compounding at 8% a year (72/8% = 9 years). Similarly, the return required to double an investment in just six years is 12% (72/6 years = 12%).

Retirement is the primary goal of many investment plans. These long-range plans require more than just a doubling of an investment, and involve time horizons that are longer than those easily estimated with the Rule of 72. To make the planning process easier, I have developed the Rule of 240, a formula for approximating the time and/or compounded return needed for an investment to increase by a factor of ten.

The mathematical term for a factor of ten is called an “order of magnitude” and it may be easier to think about it as “adding a zero” to your investment. The methodology for using the Rule of 240 is the same as the Rule of 72. Specifically, the number of years it takes to increase an invest-ment by an order of magnitude, multiplied by the annual return, is equal to 240. For example, an investment will take 20 years to add a zero ($100 will grow to $1,000) if the return is 12% a year (240/12% = 20 years). With an 8% annual return, it will take an investment 30 years to increase by a factor of ten.

Although the Rule of 240 is an estimation technique, it is a reasonably accurate estimation. The Rule of 240 is accurate to within six months for all returns in the 6% to 15% range and is ac-curate to within 0.1% a year for all periods great-er than 21 years. (See exhibit for comparison of

M

actual compounding results versus Rule of 240 estimates—the two curves are remarkably close.)

The rule refers to an “investment” gaining 10x, but in reality it can be anything in nature that compounds—including inflation. Inflation at 3% a year would be 10x after 80 years (240/3). In other words, an item costing $1 today will cost $10 in 80 years at 3% inflation. If you prefer to think of it in terms of diminishing value, your $1 will be worth just 10 cents in 80 years at 3% inflation.

Investment results adjusted for inflation are called “real” returns. If you are concerned about the impact of inflation, the Rule of 240 still ap-plies. You just need to adjust for inflation to get to the “real” return. For example, a 12% nominal return takes 20 years to increase 10x. With 3% inflation, your 12% nominal return becomes a 9% real return, and the years to 10x becomes

240/9 = 26.7 years. The formula can also handle tax impacts, as long as you can express your annualized return as an after-tax figure.

The Rule of 240 doesn’t care how you generate the annual returns. It works for buy-and-hold, as well as day trading and all points in between. It doesn’t care whether we are in a deflationary environment or inflation is running at 7% a year, or whether your holdings are in a taxable or tax-sheltered account.

You can also use it to provide a reality check to clients that believe their $100k nest egg is going to turn into a $1 million retirement fund at 5% return per year. With no inflation, that lofty goal requires about 48 years. With 3% in-flation and a 2% real return … it quickly extends to multiple lifetimes (240/2 = ? The answer is left as an exercise for the student.).

Proactive Advisor Magazine presents weekly commentary provided by well-known market analysts, financial authors, investment newsletter publishers, and economists. The opinions expressed each week represent their personal perspectives and not necessarily those of the magazine.

RULE OF 240Order-of-magnitude compounding

proactiveadvisormagazine.com | June 18, 201512

HOW I SEE IT

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There can be no assurance that any investment product will achieve its investment objective(s). There are risks associated with investing, including the entire loss of principal invested. Investing involves market risk. The investment return and principal value of any investment product will fluctuate with changes in market conditions. Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC. Securities offered through Guggenheim Funds Distributors, LLC. Guggenheim Funds Distributors, LLC is affiliated with Guggenheim Partners, LLC. x0516 #17180

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How diversified are investor portfolios? The answer is that, when diversification is needed most, portfolios may not be as diversified as investors assume. In this paper, we will explore the concept of portfolio diversification, the impact of evolving financial markets, and why we believe tactical management is playing an increasingly pivotal role.

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The Diversi� cation DilemmaTactical Management and Today’s Evolving MarketsBy Douglas C. Mangini, J.D., Senior Managing Director

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continued from pg. 5

used to support this data gathering and report-ing is constantly advancing. It is important for a financial advisor to know what systems the asset manager is using, how the data is pulled or mined, how it’s analyzed, how often, and by whom. The financial advisor should know how the asset manager is benchmarking current performance against market performance, or whether they have established their own inde-pendent benchmarks.

Feedback from leading advisors shows sev-eral areas of commonality in their analysis and scrutiny of third-party managers:

How long have they been doing what they are doing and how well is it documented?

What are the qualifications of the asset manager’s leadership and analytical team and their bench strength?

What is their specific strategic focus? Is it narrow or broad?

Do they execute well and consistently on their strategies?

Are they adaptable in changing market environments?

Do they have strong risk management capabilities?

Are their reporting systems timely and user-friendly?

Do they provide tools to address suitability questions and client risk profile assessments?

Do they have value-add materials to help in client education?

Are they committed to customer service and problem resolution for both advisors and clients?

Given the constraints associated with run-ning a business, it may well be impossible for an advisor to replicate the specialized expertise and the time and attention third-party active asset managers can devote to client portfolio management. It is a given that the right asset managers will provide a high degree of sophis-ticated portfolio management. But there is one factor that is not always top of mind—they will likely save a financial advisor valuable time that can better be used to focus on growing their client base and assets under management, and to provide the advice, services, and face-to-face attention today’s clients demand.

In the end, after all, time is money.

10 questions

Kellye Whitney has more than 15 years’ experience in media, publishing and communications. An award-winning author and editor, Ms. Whitney writes frequently about time management, human resources, and corporate strategy issues.

13June 18, 2015 | proactiveadvisormagazine.com

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Copyright 2015© Dynamic Performance Publishing Inc. All rights reserved. Reproduction of printed form, whole or in part, without permission is prohibited.

EditorDavid Wismer

Associate EditorElizabeth Whitley

Contributing WritersRon RowlandKellye WhitneyDavid Wismer

Graphic DesignerTravis Bramble

Contributing PhotographerJoni Kabana

June 18, 2015Volume 6 | Issue 11

Proactive Advisor Magazine is dedicated to promoting and educating on active investment management. Distribution reaches a wide audience of financial professionals who advise clients on investments and portfolio management. Each issue features an experienced investment advisor who offers insights on active money management, client service, and investment approaches. Additionally, Proactive Advisor Magazine offers an up-close look at a topic with current relevance to the field of active management.

The opinions and forecasts expressed herein are those of the author and may not actually come to pass. Any opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. The analysis and information in this edition and on our website is for informational purposes only. No part of the material presented in this edition or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any portfolio constitutes a solicitation to purchase or sell securities or any investment program.

Hot-button topics drive seminar attendance

Matthew GaudeAtlanta, GA

FSC SecuritiesCo-president, Clarus Financial Group

Securities and advisory services offered through FSC Securities Corporation, member FINRA, SIPC, and a Registered Investment Adviser. Clarus Financial Group is not affiliated with FSC Securities Corporation or registered as a broker/dealer or investment advisor.

can be found all over the country as a mailer or in a magazine format. This can be highly targeted for specific neighborhoods, ZIP codes, demographics and so forth, and has worked well. Interested people will call a des-ignated 800-number to reserve a space at the seminar or they can go online to our website. We can do 20,000-30,000 of these mailings at a time and it has been a great investment for us, really driving attendance.

e have a number of ways that we build our client base, the most important being referrals

from current clients. We have found the most important thing when acting upon a referral is to keep it low-key versus a sales-type experience. If the initial meetings are getting traction, we offer a number of ways to structure the relationship and are very sensitive to having competitive fee arrange-ments. We want to make the process as comfortable as possible for the prospect.

We also do a fair amount of outbound marketing, with topical seminars being the most cost-effective for our firm. We select a hot-button topic and build a specific storyline around it. For example, the low interest rate environment, with its poten-tial for serious change, has been popular recently.

The basic concept for promoting the seminar is, “Are you tired of the low interest rates on your money markets, CDs, and savings accounts?” We advertise the workshop for individuals and couples to learn about a range of strategies for investing excess cash in a zero interest-rate world, and subtopics such as the risk of overinvesting in cash; the need to under-stand how rising interest rates might affect your fixed-income investments; and to find out why Warren Buffet in 2012 described bonds as “potentially the most dangerous of all assets.”

We get the word out through Facebook, Google, and invitations to current clients, asking if they would like to invite a friend. The most effective way we have found is a little unusual for our industry. We use a pub-lication that offers discounts or coupons and promotes local services, the type of thing that

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14

TIPS & TOOLS

Active ManagementThere is a great deal of confusion surrounding the term “active

management” created by the business press. When one reads a headline in any given year that “active managers” are underperforming or overper-forming their benchmarks, this typically is referring to “active” managers of a mutual fund—who are being measured against a specific index or competing funds within that style.

Within the field of true active portfolio management, this narrow and misleading definition really has little significance.

Active investment management is not about exceeding a specific benchmark or “beating the market.” Active management seeks favorable risk-adjusted returns in any market environment, generally employing sophisticated algorithms and models to capture gains and protect against losses in a wide variety of sectors, asset classes, and geographies.

It is about controlling risk in the markets, finding new ways to dynamically diversify, and smoothing out the long-term volatility typically found in any asset class. Active managers tend to rely on quantitative approaches for asset allocation, exposure to the market, and adjustments to portfolios based on current market conditions. When it comes to evaluating returns, they generally will not compare to the S&P 500 or global total market indexes, but are far more interested in risk-adjusted returns and in meeting their portfolio objectives.

In theory, it is fundamentally about a long-term approach to portfolio management that is diametrically opposed to “buy-and-hold.”

Fee-based revenues remain strong among advisors

101

DynamicStrategic

Diversification

Tools Models

Strategies

5 reasons to consider active management

Buy-and-hold is dead(ly)—While bull market runs are impressive, history shows it is not a matter of “if” but more a matter of

“when” for the next bear market. Investment expert Kenneth Solow sums it up: “Patiently waiting for stocks to deliver historical average returns does not rise to the level of an investment strategy.”

Bear market math is daunting—It takes longer than most in-vestors think to recover from bear markets—a gain of 50% is

needed to overcome a 33% portfolio loss.

Risk first: Always—As one prominent active manager has said, “No one would ever jump into a car without brakes, so why

would investors even consider having an investment strategy that did not have a strong defense?”

Active management aligns with investor psychology—Behavioral finance studies have documented the tendencies of investors to

operate on the destructive principles of “fear and greed.” Disciplined active management takes emotion out of the equation.

Does “set it and forget it” really make sense?—For retirees or those approaching it, the “sequence of returns” dilemma can

have a devastating effect on future income needs. Active management offers a prudent path to achieving the twin goals of asset preservation and compounded capital growth.

Resources for AdvisorsWebsitesProactive Advisor Magazine: Active investment management’s weekly magazine, providing advisor perspectives, topical issues in active management and commentary on strategy and tactical tools. www.proactiveadvisormagazine.com

National Association of Active Investment Managers (NAAIM): Peer-to-peer networking in the active investment management community, providing best practices among successful advisors and advisory firms. www.naaim.org

Market Technicians Association (MTA): Leading national organization of investment analysts, stock market analysis professionals and certified market technicians. www.mta.org

Advisor Perspectives: Audience-generated and vendor-neutral forum where fund companies, wealth managers and financial advisors share their views on the market, the economy and investment strategy. www.advisorperspectives.com

Whitepapers“Bucket Investing with Dynamic Risk-Managed Portfolios,” Flexible Plan Investmentsgoto.flexibleplan.com/download/whitepaper-bucket-investing.pdf

“Comparison of ETFs and Mutual Funds—The True Cost of Investing,” Guggenheim Investments guggenheiminvestments.com/rydex

“Understanding Leveraged Exchange Traded Funds,” Direxion Investmentswww.direxioninvestments.com

“Small Accounts, Big Opportunities,” Trust Company of America www.trustamerica.com/resources

“Why Gold? Seven Enduring Reasons,” Flexible Plan Investments goldbullionstrategyfund.com

“The State of Retail Wealth Management, 5th Annual Report,” PriceMetrixwww.pricemetrix.com

2012 2013 2014

Fee-Based Assets (% of Total Assets) 28% 31% 35%

Fee-Based Revenue (% of Total Revenue) 45% 47% 53%

Average Fee Accounts per Advisor ($000s) $258 $293 $293

Average Assets of New Client HHs ($000s) $475 $477 $538

Source: PriceMetrix Insights – The State of Retail Wealth Management 2014 – 5th Annual Report (Aggregated data representing 7 million retail investors and over $3.5 trillion in investment assets.)