April 23, 2015 | Volume 6 | Issue 4

Active investment management’s weekly magazine

Fed Beige Book presentsuneven economic picture

Mapping the active strategy universe

Life transitions call for advisor attention

Secrets of successful sector rotation

Bryce Winkel

Delivering HNW strategies to average Americans

Advisor perspectives on active investment management

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Letting research drive decisionsWe are benchmarking with an eye to risk-adjusted returns. It is about winning over the long term in a slow and steady fashion by avoiding large losses. We employ active managers who understand the current market environment and who can be highly adaptive as conditions undergo change. We try to give each and every client a credible, research-based investment recommendation based on their specific needs and risk tolerance. Third-party active managers are a big part of that equation.

LOUD & CLEARDebra White Stephens and John Gutfranski Houston, TX • Cetera Advisor Networks LLC

3April 23, 2015 | proactiveadvisormagazine.com

LOUD & CLEAR

Mapping the active strategy universeA view into how professional strategists

might classify active strategiesBY DAVE WALTON

4 proactiveadvisormagazine.com | April 23, 2015

hen someone is first exposed to actively managed strategies, they may think they just stepped foot on another planet. They hear a new language that

includes many foreign terms such as tactical asset allocation, statistical arbitrage, momen-tum, mean reversion, etc. The complexity can seem overwhelming when compared to the relative simplicity of passive strategies. There appear to be more flavors of active strategies than anyone could ever hope to make sense of.

This article attempts to chart this world through a simple classification scheme. To do that, I will discuss actively managed strategies through the lens of four vectors: time frame, asset classes, systematic factors, and use of discretion. Through a general look at active strategy characteristics, advisors will get a glimpse into performance drivers and be able to enhance their understanding for effectively matching strategies to their clients.

investment grade credit, high-yield credit, com-modities, real estate, currency carry, volatility, or international versions of any or all of these. There are many more ways to slice the investment uni-verse, but regardless of the particular asset classes sought, the idea is to capture the risk premiums from the exposure. In academia, this exposure is known as beta. The only difference between pas-sive and active strategies when it comes to beta is that active strategies often attempt to capture the premiums while avoiding the risk.

How? The answer leads us to the third vector of systematic factors. In academia, these are known as alpha, or performance unexplainable by exposure to asset class risk factors. And according to efficient market theory, these should not exist.

When developing an active strategy there are basically two schools of thought. On one side are those that attempt to find some market inefficiency that becomes the basis of a truly unique strategy which holds the promise of

understanding the drivers of risk and return.The other school of thought starts from a

foundation of academic and practitioner re-search. The core tenet of the “research” school is to leverage market behaviors that are well-stud-ied and likely to continue. In academia, these are known as anomalies. So what are they? This, too, is a source of debate, because depending on the criteria, there may be anywhere between a handful and several hundreds.

Two recent studies1,2 make valiant attempts to uncover systematic factors identified in top-tier research using logical and stringent criteria:

1. Performance has been consistent over many years and has survived numerous database revisions as well as extensive out-of-sample data.

2. The factor has been vetted, replicated, and debated in top academic journals over many years.

3. The factor works across multiple asset classes.

4. Minor variations in definition/con-struction do not significantly impact performance.

5. There is a credible reason to offer a persistent edge. Either it is related to a human behavioral bias that is not likely to change, or it is related to an institutional feature that cannot be easily changed.

Using these criteria they find that only the valuation, low volatility, illiquidity, and mo-mentum factors are significant when adjusted for data snooping bias. However, because illiquid securities have very little capacity, that factor is not commonly capitalized on by pro-fessional managers.

continue on pg. 13

W

Active strategies are disciplined and based on well-researched market behaviors.

To start off, let’s clarify the time frame vector. Active strategies, to give the extremes, can operate anywhere from ultra-high frequen-cy algorithms running on servers co-located at stock exchanges, to strategies that may rebalance only once a year. For the most part, strategies offered by advisors will operate on the daily time frame and longer. While active managers do react as market conditions dictate, changes in allocations are typically made far less frequently than might be expected.

Just like passive strategies, active strategies seek exposure to certain asset classes like stocks of different size characteristics, treasuries,

outstanding risk-adjusted returns. Techniques such as statistical arbitrage, pattern recognition, and machine learning come from the “unique” school.

Although truly unique strategies may have great potential, the creator must navigate a sea of development biases and overcome a gauntlet of formidable competition commanding armies of Ph.D.s and almost unlimited computer power. Because of these issues, performance of such strategies can be fleeting, or worse, just a mirage from data mining. Unique strategies may also have a tough time during the due diligence process as vetting usually involves

1. Harvey, Campbell R., Yan Liu, and Heqing Zhu, 2014, “…and the Cross-Section of Expected Returns,” http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2249314 2. Hsu, Jason and Vitali Kalesnik, 2014, “Finding Smart Beta in the Factor Zoo,” http://www.researchaffiliates.com/Our%20Ideas/Insights/Fundamentals/Pages/223_Finding_Smart_Beta_in_the_Factor_Zoo.aspx

April 23, 2015 | proactiveadvisormagazine.com 5

4.0

Qua

rter

ly p

erce

nt c

hang

e (S

AAR)

Date of forecast

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

-0.5

23-Jan 31-Jan 8-Feb 16-Feb 24-Feb 4-Mar 12-Mar 20-Mar 28-Mar 5-Apr 13-Apr

Blue Chip consensus Atlanta Fed

Range of top 10and bottom 10forecasts

Source: Blue Chip Economic Indicators and Blue Chip Financial Forecasts

Fed Beige Book presents uneven economic picturehe Federal Reserve released its survey of economic conditions last week, the Beige Book, based on anecdotal and empirical

reporting from the Fed’s 12 regional banks.According to The Wall Street Journal, it

presented a mixed picture, with the U.S. econ-omy expanding “moderately or modestly” across most regions of the country from mid-February through March. Cheaper gasoline prices appeared to boost retail sales in some areas. However, a strong dollar, falling oil prices, and harsh winter weather slowed activity in some sectors.

On the negative side, extremely cold and snowy winter weather in the Northeast, and especially the Boston area, had ripple effects for hotels, restaurants, food suppliers, and other parts of the travel industry. One business esti-mated that “restaurant revenues in the Boston area were down 30% to 40% during this period, reflecting lost traffic from corporate travelers, regional leisure travelers, and weekend business from local residents.” However, travel-related activity is still expected on balance to be up in 2015 versus prior year.

In the Dallas Fed region, “an oilfield machinery manufacturer laid off 10% of its workers in response to plummeting demand, and the company expects to lay off another 10% next month.” Oil and gas producers and oilfield service firms continued to cut their workforce as “low oil prices forced deeper cost cutting, although industry employment declines may be temporary.”

Positive anecdotal evidence came out of San Francisco-region areas, with active residential

T EVOLUTION OF ATLANTA FED REAL GDP FORECAST FOR 2015:Q1

construction and “strong demand for engineer-ing and architectural services.” Commercial real estate vacancy rates declined, and rents increased, “driven in part by strong demand from the technology and healthcare sectors.”

The Beige Book informs discussion at Fed policy meetings—the next FOMC meeting will start on April 28. Several economists have recently lowered their estimates for Q1 GDP growth, following disappointing reports on business spending and investment. The Atlanta Fed, for example, has lowered its Q1 estimate to 0.1%, while many analyst projections remain in the 0.8-2.2% range on an annualized basis.

For perspective, the U.S. economy con-tracted at a negative 2.1% annual pace in the

first quarter of 2014, a drop many economists attributed to severe weather. The economy bounced back significantly in the second and third quarters, resulting in a 2.4% annualized GDP increase for 2014. The Congressional Budget Office forecasts that GDP growth will remain below 3% for the next three years.

The Conference Board offered similar analysis last week in the release of its Leading Economic Index (LEI). “Although the Leading Economic Index still points to a moderate expansion in eco-nomic activity, its slowing growth rate over recent months suggests weaker growth may be ahead,” said Ataman Ozyildirim, economist and director of business cycles and growth research.

7April 23, 2015 | proactiveadvisormagazine.com

TOPPING THE CHARTS

DeliveringHNWstrategies

to averageAmericans

Investment technologies that once were only available to the elite are now a portfolio cornerstone for many of Bryce Winkel’s clients.

By David WismerPhotography by Joni Kabana

proactiveadvisormagazine.com | April 23, 20158

Bryce Winkel Portland, OR Transamerica Financial Advisors Inc.

Estimated AUM: $50M

Licenses: 6, 26, 63, 65

Practice focus: Estate planning

Bryce Winkel is a Registered Representative and Investment Advisor Representative with Transamerica Financial Advisors in Portland, Oregon. In addition to his 23 years of experience as a financial professional, Mr. Winkel had a rich and varied career before start-ing his financial advisory practice.

Following graduation from Brigham Young University, he was both a teacher and administrator within the LDS Church Educational System for 15 years. During this period he earned Masters and Doctorate degrees from BYU, the latter in Educational Administration. Mr. Winkel spent several years employed by the Franklin Institute (which later became Franklin-Covey), traveling around the western U.S. teaching time management seminars. He applied some of this theory in authoring a book about marriage and family directed toward couples, “Isn’t it About Time for Your Marriage?” Mr. Winkel began his financial career with Prudential Insurance Company, and started his own practice in 1992. He focuses on retirement and estate pres-ervation needs for his clients and has taught many estate preservation seminars with attorneys who have provided legal advice and products. Mr. Winkel and his wife Barbara have 5 children and 13 grandchildren. He is “very proud of them of all,” and is delighted that his daughter has recently joined his practice. Mr. Winkel says, “Following a strong values-based approach has been important to me my entire life, and I apply this to working with my clients every day.”

continue on pg. 10

are really not a viable option anymore. I mean that both from a psychological and emotional basis and from the actuality of the impact such events could have on a client’s portfolio.

The idea that one can have third-party managers who do nothing but evaluate port-folio strategies and follow market conditions is very attractive to clients. I explain that these managers have the disciplined training, the

“We have third-party managers who do nothing but evaluate portfolio strategies and follow market conditions.”

Proactive Advisor Magazine: Bryce, what has shaped your approach to working with clients?

Bryce Winkel: I have a strong formal educational background and hands-on expe-rience as a teacher. That has definitely been a great influence for how I approach things with clients. Having worked in a religious education setting, as well as a corporate consultant for time management planning, the broad lesson coming out of both is that people need a little guidance in working effectively to reach the big life goals that are important to them.

This really goes hand-in-hand with the process of working with individuals or couples planning for retirement. What are their dreams and aspirations and what is truly going to be most meaningful to them going forward? While I cannot lay claim to making everything come true, professional financial advice can certainly play a huge role in helping people progress toward their goals.

Another important part of my client philosophy is an objective that is part of our organization’s overall mission statement. We want to bring sophisticated financial and investment tools and strategies to the average American. The financial environment of the 21st century is very different, and far riskier, than previous eras. People from all walks of life deserve to have access to the kind of knowledge and expertise that previously was only available to those having a high net worth.

What is that knowledge and expertise?

I went for my Series 65 license in 2007, which opened up an entirely new approach to me for managing client investments. My broker-dealer facilitated access at that time to third-party active managers and, after doing my own due diligence and study, I decided this was a really excellent program for clients. They have been very receptive to this approach. And I have since moved a considerable amount of assets under management to these managers.

What are the benefits to active management?

I think we learned in 2000-02 about the effect of having some very steep market losses. This was something most people had forgotten in the 1990s. And then of course these types of dramatic losses were repeated even more broadly in 2008-09.

With so many Baby Boomers moving toward retirement, buy-and-hold strategies

staff, and the computer models dedicated to this task. They are reassured by the fact that, essentially, someone is watching over their portfolio at all times, and they realize that that is not really feasible for an individual advisor to do on a full-time basis.

How do you handle a discussion of fees for outside managers?

I am very straightforward and transparent about it. It comes down to paying for what something is worth. Providing the assistance of very knowledgeable and proficient managers obviously comes with some sort of price.

Clients can understand the concept of paying something for professionals that are working full-time on their behalf. And though I cannot make hard-and-fast promises, clients should not be concerned with reasonable fees within the larger framework of knowing they have a higher degree of risk management applied to their portfolios.

What is your process for selecting third-party managers?

I feel I can add real value in this area for my clients, in the sense of matching appropriate managers to clients. While virtually all of our managers are good at what they do, they all have different approaches, styles, and philosophies. Some are a better fit for more conservative clients and others have the capacity to better handle more aggressively oriented clients. Still others offer a wide range of portfolio management

April 23, 2015 | proactiveadvisormagazine.com 9

Bryce Winkel 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. TFG006279-04/15

options that can fit a variety of risk profiles. I spend a fair amount of time meeting with and investigating each of the managers we work with and then ascertaining the right client fit. That can sometimes mean exclusively employing one manager for a client or mixing and matching different elements from various managers.

Are there other reasons active management makes sense for clients?

When clients are in their fifties, sixties, or seventies, they really cannot tolerate the thought of losing 30-40% of their assets. They are also cognizant, after working through the planning process with me, that deriving income for retirement will require competitive returns on their money. I used to make heavier use of annuities with a guaranteed feature, and still do for many clients. This has become more challenging with today’s interest rates.

In reality, when one selects the upper echelon of third-party managers, a lot of the rationale for using those guaranteed annuities disappears. Third-party managers can provide the type of risk management that is intended to mitigate large portfolio losses, which was the reason clients were attracted to a guaranteed feature in the first place. An active management approach may not always deliver the highest re-turns, but that is not really the point. The point is to develop a well-diversified and risk-man-aged portfolio strategy using all of the options available, with the goal of creating a smoother ride over the long term.

It really all comes back to a specific client or couple and what their specific financial, risk, and advisory profiles look like. I take great plea-sure and satisfaction in working through those issues with clients, and that has proven to be very successful for my practice.

continued from pg. 9Bryce Winkel

10 proactiveadvisormagazine.com | April 23, 2015

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Managing risk

Investors invariably think taking a loss makes them wrong—failing to see at the time how it might be the best decision they could make.

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April 23, 2015 | proactiveadvisormagazine.com 11

Secrets of a successful sector strategy

Marshall Schield is the chief strategist for STIR Research LLC, a publisher of active allocation indexes and asset class/sector research for financial advisors and institutional investors. Mr. Schield has been an active strategist for four decades and his accomplishments have  achieved national recognition from a variety of sources, including Barron’s and Lipper Analytical Services. www.stirresearch.com

100% 150% 200% 250% 300%

S&P 500 Sectors0%

Healthcare

Consumer Services

Financial

Industrial

Technology

Consumer Goods

Telecommunications

Basic materials

Utilities

Energy

164%

146%

129%

118%

94%

85%

74%

62%

59%

41%

50% 100% 150% 200% 250% 300%0%

Biotechnology

Healthcare

Leisure

Internet

Retailing

Financial

Banking

Technology

Real estate

Telecommunications

Basic materials

Energy

50%

Electronics

294%

166%

134%

118%

111%

107%

97%

91%

84%

43%

27%

1%

104%

Sector Growth

Source: FastTrack.net

If you own all of the sectors, you own the market and achieve average returns. The goal is to “aim higher,” strive for higher returns, and accomplish that with less risk. Based upon sev-eral decades of sector investing, we have found several “secrets” for building a rules-based, quantitative sector strategy.

#1—Build a better sector universe Too many managers stick with the original 10

sectors within the S&P 500 Index. However, the world has changed dramatically in the past 30-50 years. Don’t make that mistake: break out the newer sectors like Biotechnology and Internet. If you leave them buried within their broader sectors (like Internet within Technology), their individual potential is diluted.

The chart reflects the performance of the original “10” S&P sectors versus the “better sector universe” during the current bull market. Only four of the S&P 10 sectors have hit triple-digit returns, while almost twice as many did in the expanded sector universe.

#2—Rotation occurs Many do not understand the rotation in per-

formance that can occur between one bull market and the next. As an example, during the bull market of 3/2009-4/2011, Biotechnology was at the bottom of the 13 sectors in performance. But things change and rotation in leadership occurs. In the next bull market phase (9/2011-3/2015), Biotechnology was the clear leader with a 292% gain versus 95% for all sectors.

The rotation in sector leadership provides op-portunity for an active manager. How to identify leadership? Look to relative strength/persistency in price and momentum. The strong tend to get stronger, while the weak tend to get weaker.

#3—Focus on the leaders Some sector strategies tend to lose focus

during a bull market. When the market is very strong, such as 2013, these strategies end up buying all of the sectors. They are content

with market returns, which you can achieve by buying a Vanguard 500 fund.

A smarter strategy is to focus in on the lead-ing sectors. Why settle for market returns of 30% in 2013, when sector leaders like Biotech jumped 66% and Internet was up 54%? Laggards, like Utilities with a 14% gain, pulled down returns. Owning all sectors is being too diversified. Follow the advice of Warren Buffett, “Diversification is protection against ignorance, it makes little sense for those who know what they’re doing.” A focused group of just the four leading sectors provides a level of diversification, while not sacrificing potentially higher returns.

#4—Tailor fit your risk management (and your use of leverage)

Risk management is a cornerstone for any successful long-term investment strategy. Changes in economic trends or political events

do occur that can lift or drop a specific sector regardless of the overall market’s direction. Last summer the Energy sector swooned, falling 30% when crude prices dropped 50%. However, the overall market continued to rise. If your risk management was only focused on the overall market, you would have been hit with large losses in your Energy sector holdings.

Similar to this, consider employing leverage on a sector-by-sector basis when conditions are favorable. Employing ultra-sector funds (1.5X or 2X) at the right time has the potential of making a great move into a spectacular move. Of course, along with the greater potential comes the real possibility of higher risk. Therefore, we follow both individual sector signals and a broader market environmental signal to apply an extra measure of risk management.

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.

S&P 500 SECTORS VS. GROWTH SECTORS (10/03/11-03/20/15)

12 proactiveadvisormagazine.com | April 23, 2015

HOW I SEE IT

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

Explore how a tactical approach may help maintain diversification.

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.

Request your free copy.Call 800.258.4332 or visit guggenheiminvestments.com/dilemma

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

Chicago | New York City | Santa Monica

continued from pg. 5

Additionally, research indicates that the mo-mentum factor can be logically subdivided into three separate factors (absolute, relative, and mean reversion), leaving five factors that are widely used. All of these factors are summarized in the following table.

An active strategy may use one or a multitude of these systematic factors. It is important to note that these are just high level concepts. The clas-sification does not prescribe any specific trading rules, just general tendencies. For example, one trend-following system may use moving average crossovers whereas another uses rate-of-change of returns. They are constructed differently but capitalize on the same systematic factor.

The last vector to discuss is the use of discre-tion, and here there is a continuum. On one end are the mechanical systems that are 100% rules-based, driven totally by programmed models. On the other end are the fully discretionary traders who use intuition and experience-based pattern recognition to make seat-of-the-pants trading decisions. Somewhere in the middle are the rules-based traders that sometimes override signals or position sizing decisions based on con-viction or extenuating circumstance. In general, the more discretion involved in a strategy, the

harder it is to estimate the expected performance characteristics moving forward.

In conclusion, we’ve boiled down the active strategy universe into four simple vectors: time frame, asset classes, systematic factors, and use or non-use of discretion. There are certainly other ways to classify strategies, but this method gives some insight into how profes-sional strategists might think about the active strategy universe. Although exceptions exist,

active strategies are generally disciplined and based on well-researched market behaviors. It is important for advisors to have a basic understanding of the general characteristics so they can more effectively match strategies to their clients.

Mapping strategy universe

Dave Walton is co-founder and principal of StatisTrade, LLC, a trading system evaluation firm that works with fund managers to evaluate and improve trading system performance using advanced statistical techniques. Mr. Walton won the NAAIM 2014 Wagner Award for one of his creative system validation methods.

Factor Definition Why it works (theory) Common active strategies

Valuation Low-valuation assets outperform high valuation

Long-run mean reversion (24m+) inversely related to investor herding behavior

Value stocks, rebalancing, tactical asset allocation

Low volatility Low-volatility assets outperform high volatility

Investor gambling preference and institutional intolerance of tracking error

Minimum volatility or variance allocations, Beta weighting

Absolute momentum

Past returns (2-18m) predict future returns

Investor herding behavior, multitude of emotional biases causing initial underreaction and delayed overreaction

Trend-following

Relative momentum

Relative performance (2-18m) predicts future relative performance

Investor herding behavior and a variety of market and emotional biases.

Relative strength, rotational

Short-term mean reversion

Short-run (< 1m) return predicts opposite future return

Availability bias, aversion to losses

Overbought/oversold, band trading

13April 23, 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 WritersMarshall Schield

Dave WaltonDavid Wismer

Graphic DesignerTravis Bramble

Contributing PhotographerJoni Kabana

April 23, 2015Volume 6 | Issue 4

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.

Life transitions callfor advisor attention

Chris GurneePresident, Cornerstone Financial

and Associates Inc.Ogden, UT

Foresters Equity Services Inc.

Christopher Gurnee is an Investment Advisor Representative offering securities and advisory services through Foresters Equity Services Inc., member FINRA, SIPC and a Registered Investment Advisor. Cornerstone Financial & Associates Inc. is independent of Foresters Equity Services Inc.

These are usually fairly well-educated and middle- to senior-type managers. I have a process in place whereby I hold lunch seminars for such job seekers.

I do not approach this as a sales pitch, but cover some of the nuances of their retirement plans and benefits options, and assist them with transition questions. This turns into a win-win for both the job-seeker and me. If the individual likes what they hear and are comfortable with me, this may lead to a further informational meeting.

have built a focus for my practice around serving the needs of clients in transition. These can be upsetting situations such as

a layoff or death of a spouse, or much happi-er circumstances such as new employment, marriage, the arrival of children, or moving fully into retirement.

One of the most challenging times can be during a life event. I help navigate my cli-ents through these changes, simplifying the choices available, when needed most. I focus on creative ways to manage investments, in-surance options, new employment packages, and even retirement, allowing my clients to focus on their new employment search, relocation for retirement, or travel plans.

I work closely with an estate planning attorney who is able to assist with this important aspect of future planning. We jointly own the office space and, with a client’s approval, are able to ascertain that their financial and estate planning affairs are in order. We work for the common benefit of the client. Currently, we are in search of a CPA to work with and strengthen our relationships in a one-stop approach.

I use several different approaches to developing new client prospects, not the least of which is cross-referrals through the attorney relationship. I also believe strongly in organic client referrals, and will seldom directly ask a client for a referral. I prefer on focusing on the job at hand and in having very frequent communications and reviews with clients. This tends to produce referrals on its own.

One of the most fruitful tactics I have found concerns prospects who may have faced a reduction in force or layoff situation.

I

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 assets continue to grow 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, 4th Annual Report,” PriceMetrixwww.pricemetrix.com

2011 2012 2013

Fee-Based Assets (% of Total Assets) 25% 28% 31%

Fee-Based Revenue (% of Total Revenue) 43% 45% 47%

Fee Accounts per Advisor 85 92 101

Average Fee Account Assets ($000s) $240 $258 $293

Source: PriceMetrix Insights – The State of Retail Wealth Management 2013 – 4th Annual Report (Aggregated data representing 7 million retail investors and over $3.5 trillion in investment assets.)