Active investment insights

May 14, 2015 | Volume 6 | Issue 7
Active investment management’s weekly magazine
Wage growth mixed amid
“just right” employment report
The Efficient
Frontier fails
the test of
time
Maintaining a high-profile
practice
Illusion of current market highs
Damon Ridley
Beyond MPT
An active way to diversify

Advisor perspectives on active investment management
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Mutual funds:
The tip of the iceberg
When most clients hear about active management
they immediately think about an actively managed
mutual fund, the kind of thing brokers have been
telling them about throughout their investment
lives. Our approach is very different, as we actively
manage their entire portfolio,blending different active
strategies in line with risk profiles and investment
objectives. The volatility of the last 15 years has
demonstrated that a different strategy is required—
that strategy is active management.
LOUD & CLEAR
Mike Zimmerman • Lancaster, PA
J.W. Cole Advisors • Sequinox
3May 14, 2015 | proactiveadvisormagazine.com
LOUD & CLEAR

By Linda Ferentchak
proactiveadvisormagazine.com | May 14, 20154

o understand the investment Efficient
Frontier, it helps to go back to its origin. In
1952, economist Harry Markowitz pub-
lished an investment model that became
known as Modern Portfolio Theory. One ele-
gant aspect of the model that transformed port-
folio design was the development of an efficient
frontier to balance risk and return. Markowitz
looked at the effect of allocating percentages of a
portfolio between bonds and equities. Graphed
on a risk (standard deviation) and mean return
basis, the result was a fishhook-shaped frontier
that, based on historical data prior to 1952,
showed a blend of 40% bonds to 60% equity
allocation produced a higher return at a roughly
comparable risk level to a 100% bonds position.
The “hook” is the element that makes
the Efficient Frontier so intriguing. It clearly
continue on pg. 11
T
Figure 1
illustrates that a blend of stocks and bonds can
potentially improve the risk/return balance
of a portfolio—achieving higher returns than
a conservative all-bond portfolio without
substantially increasing risk, as measured by
standard deviation.
Figure 1 shows a portfolio composed of
the Barclays Capital Aggregate Bond Index
and S&P 500 Index allocated in 10% portfo-
lio increments using mean/average standard
deviations and returns over the 65-year period
from 1950 to 2014. The circle indicates the
point at which the portfolio is invested in 60%
equity/40% bonds.
Risk for the 60/40 portfolio is slightly more
than a 100% bond portfolio, but annual return
has increased from 6.47% for the 100% bond
portfolio to 9.95% for the blended approach,
indicating a considerably more efficient port-
folio in terms of risk/return. In Figure 1, it
appears that Markowitz’s Efficient Frontier still
holds true 60 years later.
Or does it?
The problem with the Efficient Frontier
is that it is a moving target. If one looks at
the frontier between bonds and equities over
10-year intervals, which is much more repre-
sentative of the average investor’s time frame,
the highest return for the lowest risk ranges
from 100% bonds to 100% equity. That’s not
very efficient.
Figure 2 was first published by Rydex
Investments and has been recreated by the
research team at Flexible Plan Investments
to encompass the period from 1950 through
2014.
Like so many simplistic approaches to the
financial markets, the Efficient Frontier fails
to reflect market reality
Markowitz’s Efficient Frontier
1950-2014
Exhibits developed by Flexible Plan Investments Ltd. research group. Figure 2 is an original concept developed by Rydex/SGI (now a part of Guggenheim Investments). Equity returns are based on the S&P 500 Index, including
the reinvestment of dividends. Bond returns include the reinvestment of dividends and are based on the Barclays Capital Aggregate Bond Index. Index returns do not reflect any management fees, transaction costs or expenses.
May 14, 2015 | proactiveadvisormagazine.com 5

Wage growth mixed amid “just right” employment report
he U.S. Bureau of Labor Statistics
(BLS) reported last Friday that total
nonfarm payroll employment increased
by 223,000 jobs in April, with the unemploy-
ment rate moving slightly lower to 5.4%.
Whiletheoverallemploymentnumberscame
in slightly below estimates and prior months
were revised significantly lower, Schaeffer’s
Research said the April employment report “hit
the sweet spot for traders.” The market cheered
both the rebound from March’s dismal numbers
and the unemployment rate drop to a level not
seen since 2008. However, most analysts believe
the job gains were “not enough to prompt a June
interest rate hike by the Federal Reserve.”
Barron’s said the earnings component of the
jobs data was mixed, with the monthly reading
on average hourly earnings up only 0.1%. But the
year-on-year rate was over the key 2% line, up
2.2%. This was a bit weaker than some encour-
aging news in the Employment Cost Index (ECI)
reported in late April, which showed a discernible
uptick in wage pressures. (Note: the Fed’s general-
ly stated inflation goal remains at 2%.)
According to The Wall Street Journal, U.S.
labor costs “accelerated in early 2015, a sign
that the job market may be tightening and
beginning to generate a long-awaited pickup
in workers’ wages.” They pointed to labor costs
rising 2.6% in Q1, from a 2.2% increase in the
third and fourth quarters of 2014. “This is hard
evidence and a reliable index that says we are
seeing some acceleration in wages as a result of
a tighter job market,” though “it probably still
T
has further to go,” said Stuart Hoffman, chief
economist at PNC Financial Services Group.
The Journal’s reporting found that “a
number of big U.S. companies have an-
nounced pay increases in recent months,
seeking to attract and retain workers in a
tighter market.” These include McDonald’s,
Walmart, Target, and Aetna and may “signal
that the U.S. economy has finally improved to
the point where workers’ wages, which have
been stuck at roughly 2% annual growth for a
half-decade, are beginning to climb.”
Bespoke Investment Group takes a look in the
chartatacombinationofweeklyhoursworkedand
wage increases, showing a less encouraging picture.
The combined increase year-over-year for both was
at 1.8% in April, perhaps reflecting the continued
trends of lower-paying industries adding jobs and
younger workers growing in the employment
ranks. The employment-to-population rate was
unchanged at 59.3%, said Barron’s, where it “has
been stuck for four months.” For those fortunate
to have jobs, “workers have just about kept up with
inflation.”
WEEKLY PAY: HOURS WORKED X HOURLY WAGE (YOY%)
TOPPING THE CHARTS

Beyond MPT
An active way to diversify
By David Wismer
Photography by Mike Morgan
8 proactiveadvisormagazine.com | May 14, 2015

Damon Ridley
Greenbelt, MD
President, Ridley Wealth Strategies
FSC Securities Corp.
Damon Ridley is CEO of Ridley Wealth Strategies
based in Greenbelt, MD, and is an Investment Advisor
Representative offering securities and advisory ser-
vices through FSC Securities Corporation (FSC).
He has extensive experience in the financial services
industry, having worked previously for ING Financial
Partners (now Voya Financial Advisors) and Ameriprise
Financial Services Inc. He has a B.S. in Finance from
the University of Southern California (Marshall School
of Business) and certification in financial planning from
Georgetown University (McDonough School of Business).
Mr. Ridley grew up in the Philadelphia area, where he
was a skilled athlete, especially on the football field.
He was a walk-on prospect for the famed USC football
team as a cornerback, but eventually decided to focus
his energies on his studies in business and finance. He
still is a “fanatic” follower of college football, “especially
when the Trojans are contending for another national
championship.”
Ridley Wealth Strategies offers a full menu of finan-
cial services to both individuals and small businesses.
Mr. Ridley says that he “enjoys working with financially
motivated individuals who wish to place their financial
house in order, so they can concentrate on what is truly
important in their lives.”
Mr. Ridley and his wife reside in Maryland in the
Baltimore-Washington corridor and have two children,
ages 8 and 14. They enjoy “spending quality time with
the family” and seeing their children engage in a variety
of activities. Their son is a talented athlete and honors
student and they look forward to helping him navigate
the college selection process. Mr. Ridley also mentors
local high school students, teaching them about financ-
es and entrepreneurship.
Proactive Advisor Magazine: Damon,
when did you become interested in active
investment management?
Damon Ridley: It was the 2000-02 time
frame, when we were in the middle of what
began as the dot-com meltdown. This was a
very difficult time for advisors and investors—
we had not seen anything quite like it with the
creation of a whole new investment sector of
technology companies. It became pretty appar-
ent to me that there was the traditional diver-
sification of Modern Portfolio Theory (MPT),
and then there was the opportunity to pursue
a more active way to approach diversification.
What I mean by that is that many of the
tenets of MPT are fundamentally sound over
the long term, but it made very little sense to
me to stick with investment sectors in the short
run that were seeing huge continuous losses,
while other sectors were faring much better. So,
even if one were primarily long-only in orienta-
tion, there appeared to be better ways to more
actively manage money than plain vanilla MPT
and traditional asset allocation and rebalancing.
That was really the genesis of my thinking
around active management. To put it as simply
and logically as possible: Why keep money in
an area that is going down when there’s another
area that’s going up at the same time?
Where did that take your investment
thinking?
In my advisory capacity, this made me in-
tensely curious to find other potential strategies.
I started to look for other ways to add alpha and
be able to reduce a client’s risk exposure.
What’s interesting to me is the fact that
clients often have a very common sense way of
viewing investments and their feelings about
risk—they just do not have the experience,
tools, or expertise to act upon those feelings in
a disciplined or effective way. Investors inher-
ently know it is not a good thing to see their
portfolios go down 20, 30, or 40%. Why do so
many advisors think that is acceptable?
I was determined not to be one of those ad-
visors, and my outlook changed over the years
to align very nicely with the common sense
views of most clients. The difference is that I
have the technology and relationships with
active money managers to be able to effectively
implement the investment strategies that can
work well for clients over time.
I educate clients on the purpose of active
management: Reducing the amount of risk
in their portfolios. Not necessarily to greatly
enhance returns or beat the market each and
every year, but to actually enhance total port-
folio returns over time by minimizing large
drawdowns, volatility, and fluctuations. Clients
can reasonably expect to remain within a range
of returns, depending on their objectives and
risk profiles.
The secondary important benefit to this is
that clients will be more likely to stick with
their strategy consistently, therefore avoiding
the pitfalls inherent in the sequence of returns
and taking advantage of the compounding
effect of those returns.
How do you educate clients on the
investment process?
I think the large mutual fund companies,
good as they may be in many areas, have
continue on pg. 10
so strongly and effectively marketed to the
American public the idea of passive investing
that it is important to start from square one
with many clients. I discuss why having large
portfolio drawdowns is such an issue, especially
for those close to or in retirement—and I
demonstrate the math on that.
We also talk about things like DALBAR
research, which shows how the average investor
on their own tends to make large mistakes with
their portfolios and consistently underperforms
the market by a large margin. Then we get into
those benefits I mentioned of an integrated
and active investment approach: That an
“There are better
ways to actively
manage money than
plain vanilla MPT.”

Securities and advisory services offered through FSC Securities Corporation, member FINRA, SIPC, and a Registered Investment Adviser. Ridley Wealth Strategies is not affiliated with FSC Securities Corporation or registered as a
broker-dealer or investment advisor. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of
future results. Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.
actively managed portfolio can deliver compet-
itive and smoother returns, that risk and draw-
downs can be mitigated, and that over time they
can expect to see compounded growth with less
worry about day-to-day fluctuations.
Theywillgaintheknowledgethatprofessional
money managers are watching their investments
constantly, using sophisticated techniques on
their behalf. When the market gets more volatile,
they will know that active management attempts
to minimize and narrow those fluctuations. A
comfort level then starts to occur with the client,
hopefully helping them stay invested throughout
the whole process.
What else do you find important in
working with clients?
Clients are more educated today and they
are used to having fast and easy access to infor-
mation. You need to be able to provide a flow
of information to them, not just about their
specific investments, but also how they are track-
ing toward their financial goals on a holistic basis.
I also believe in keeping clients informed about
bigger trends and events in the markets, whether
that is through emails, seminars, or blog posts via
our website or social media.
The single most important thing, however,
is building the personal connection with a client
and understanding their unique circumstances.
They fall all over the spectrum in terms of age,
occupation, assets, and lifestyle. It is critical to
use the financial planning process to get at their
needs and objectives.
My philosophy is that the planning pro-
cess helps educate clients about their total
financial situation and the investment advisory
process educates clients about the strategy
and the vehicles to help achieve their goals.
My role is to have both of these aspects work
hand-in-hand, becoming a financial coach for
many aspects of my clients’ lives.
continued from pg. 9
Damon Ridley

Figure 2
The inefficient frontier?
Seven time periods, seven different frontiers
Figure 2 depicts the efficient frontier of
equity and bond portfolios illustrated in
10% increments. Equity returns are based on
the S&P 500 Index, including the reinvest-
ment of dividends. Bond returns include the
reinvestment of dividends and are based on
the Barclays Capital Aggregate Bond Index.
Index returns do not reflect any management
fees, transaction costs, or expenses. Standard
deviation is used as a measure of risk. This is
a statistical measure of the historical volatility
of an investment, computed over each 10-year
period. The higher the number, the more vola-
tility is to be expected.
In decades that include a major bear market,
bonds tend to outperform equities. In 1970-79,
the fishhook disappears as 100% bonds and
100% equity portfolios achieve roughly the
same return but with equities at more than
double the volatility. In 2000-09, the fishhook
is inverted and bonds dramatically outperform
equities, moving the point of lowest risk/highest
return to 70% bonds/30% equities.
Efficient Frontier
Figure 3
Allocation to achieve lowest risk/highest return
Note: Lighter shade represents the fixed-income allocation; the darker shade is the equity allocation.
These discrepancies illustrate the problem with
trying to use simplistic 60/40 portfolio designs and
expecting a predictable return. Financial markets
rarelyfittheassumptionsofmean-variancemodels.
Fifty-plus-year averages almost always fail to match
actual results of shorter periods. If the optimal
portfolio is defined as one that achieves the greatest
return with the least risk, there isn’t a single 10-year
period that matches the 60/40 allocation. Each
decade has a different “efficient frontier,” with
the lowest risk/highest return portfolio varying as
shown in Figure 3.
Another way to utilize the Efficient Frontier
portfolio approach is to develop an allocation of-
fering the maximum expected return for a given
level of risk. According to the Efficient Frontier’s
traditional curve, using the 65 years of data from
1950-2014, the appropriate allocation is 70%
bonds/30% equity at an 8% standard deviation
risk level.
Once again, each decade produces a different
value for a portfolio with an 8% standard devi-
ation/risk level. The 2010 decade actually offers
two options: An 80% bond/20% equity portfo-
lio has a roughly equivalent risk level to a 30%
bond/70% equity allocation as seen in Figure 4.
The lasting value of the Efficient Frontier
concept is the fishhook curve. With the exception
of the 1970s when the curve flattens out, there is
a point on each frontier where diversification re-
duced risk beyond that of the perceived lower-risk
investment (i.e. bonds) and improved returns.
continue on pg. 14
Financial markets rarely
fit the assumptions of
mean-variance models.

- A custodian that makes your life as an RIA simpler.
The importance of full
market cycle returns
Selecting a manager by using too short of a period
or one that only includes a discrete type of market
(bull or bear) may be misleading—and costly—
over the long term.
Spring cleaning: Time to
throw out some old asset
allocation advice
Architects design buildings for the once-in-100-years
event; why don’t financial advisors do the same with
portfolio design and asset management?
Dog days of the U.S.
expansion
While the expansion is now over 70 months old
and in the mature phase, slower growth means it
may have more headroom than is typically the
case at this point in the cycle.
L NKS WEEK
proactiveadvisormagazine.com | May 14, 201512

Market high?
Pie in the sky
Ian Naismith founded Investment Portfolio Solutions in 2012 and has been trading the markets since the early 1990s. He licenses trade signals and portfolio construction
consulting to financial institutions. A member of the National Association of Active Investment Managers (NAAIM), Mr. Naismith has also served as board member and
president. www.linkedin.com/in/investmentportfoliosolutions
0
500
1000
1500
2000
2500
3000
3500
4000
4500
3/24/2000
S&P 500 market high
1527.57
5/7/2015
S&P 500 closing
(near current “market highs”)
2088.00
5/7/2015
S&P 500 “target real high”
(Adj for 1980-based CPI
& U.S. dollar since 3/24/00)
4051.01
Source: Ian Naismith, Kensington Analytics LLC
1527.57 2.40 .905 4051.01
(3/24/00 high)
X / =
(rounded
compounded effect of
6% annual inflation that
has been underreported
since 3/24/00)
(depreciation
of the U.S. dollar
since 3/24/2000)
(dollar-depreciated,
underreported
phantom-inflation-
adjusted high)
S&P 500 “REAL HIGH” FORMULA
hile the talking heads on your favorite
financial news network are likely
touting the new highs (I guess—I gave
up watching that stuff years ago), other forces
have silently been at work for years undermining
the real rate of return. It is my opinion that the
goofing of the CPI calculation by the Bureau of
Labor Statistics over the past few decades has
reduced major payout stress of the Social
Security annual Cost of Living Adjustment
(COLA) increases for existing and future Baby
Boomers. This is especially provocative after the
1990 CPI adjustments.
The notion that CPI is a true representation
of price change over time for a “standard of
living” lost its validity long ago. Without ex-
plaining in detail what has formed my opinion,
you can find plenty of data and analysis of the
CPI manipulations via construction and the
form of calculations on various sites.
So, let’s break it down in the numbers.
This is a promise—the following premise and/
or calculations can be scrutinized—there are so
many factors that could be argued for measur-
ing the “true high”—but, conceptually I hope
this sheds some light as to how “off” the “new
highs” really are. The 5/7/15 S&P 500 close
was a nice round number of 2088.00 and the
U.S. Dollar Index (DXY) close was 94.64.
Now, if I were a lucky person and bought
the S&P 500 at the close on 3/24/00, which
was its “all time high” at that point, I would
have bought one unit at 1527.57 with a DXY
value at close of 104.56. Then I held to now.
Needless to say, the next 14 years or so would’ve
been “a long, strange trip.”
So, not adjusting for dividends (because the
index calculations are not), you would have had
a 36.7% increase in your S&P unit or a little
morethan2%annualreturn.Prettygood…not.
Here is where the CPI manipulation comes in.
W
Isn’t the main goal of investing in equities and
equity indexes like the S&P 500 to outpace
inflation? How has the net return of the S&P
500 dividend stream, less fees/expenses, been in
the last 15 years? Pretty thin.
Between the market high in 2000 and today,
the BLS-posted official CPI is an estimated 6-7%
lower than if the CPI had been calculated with
1980-based CPI methodology. That is a huge
amount of unaccounted-for additional inflation.
The S&P 500 unit growth now looks pretty paltry,
right? Now, let’s pour on the U.S. dollar effect. The
basket has not changed since 1999, so the 2000
high example is a currency apples-to-apples time
comparison. Although the U.S. dollar has rallied
for the past year, it is still -9.5% off of 5/24/00.
Low equity returns, depreciating dollar—don’t get
too bummed out!
Finally, my interpretation of what the S&P
500 “real high” should be is illustrated above.
This calculation requires a perfect world: a tax-
free, fee-free S&P 500 total return of 6.71% per
year to equal the combined effects of the depre-
ciating dollar and unreported phantom inflation
since 3/24/00. So, our “high” of 2088 is actually
only 51% of where the real “high” should be.
Look at the bright side—on 7/1/14, the
real high was 4578.53 when the S&P 500 was
1614.96, so we are gaining ground.
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.
ILLUSION OF THE CURRENT “MARKET HIGHS”
HOW I SEE IT

Therecanbenoassurancethatanyinvestmentproductwillachieveitsinvestmentobjective(s).Therearerisksassociatedwithinvesting,includingtheentirelossofprincipalinvested.Investinginvolvesmarketrisk.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 Diversification Dilemma
Tactical Management and
Today’s Evolving Markets
By Douglas C. Mangini, J.D., Senior Managing Director
Chicago | New York City | Santa Monica
Efficient Frontier
Linda Ferentchak is the president of Financial Communications Associates Inc. Ms. Ferentchak has worked in financial industry communications since
1979 and has an extensive background in investment and money management philosophies and strategies.
Figure 4
Allocation to achieve an 8% risk level
Note: Lighter shade represents the fixed-income allocation; the darker shade is the equity allocation.
*The 1980s were a particularly volatile decade with the lowest average standard deviation at 12.25%.
Thus, no allocation would have met an 8% standard deviation.
The brilliance of Markowitz was his recogni-
tion of the potential for diversification to reduce
portfolio risk without unduly depressing returns.
However, he created the Efficient Market Theory
before computers and the multitude of investment
vehicles were developed that allow today’s invest-
ment managers to slice and dice the market into
endless allocations and change those allocations
quickly and cost efficiently. The market was in
many ways much simpler: a world without instan-
taneous transactions, global influences, data-driven
computer models, and the ease of analyzing and
investing in a great number of investment choices.
It is time to rethink the Efficient Frontier to
accommodate new investment approaches to
achieve reduced risk and improved returns.Today’s
investment managers have the ability to go beyond
simplistic formulas to create financial security for
their clients by using investment approaches that
take advantage of the enormous potential and
flexibility of the financial markets.
By developing allocations based on market
conditions and incorporating the use of strategic
diversification, today’s active managers can manage
risk while dynamically optimizing portfolio alloca-
tions. This is where a total portfolio approach to
active management comes into play.

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Editor
David Wismer
Associate Editor
Elizabeth Whitley
Contributing Writers
Linda Ferentchak
Ian Naismith
David Wismer
Graphic Designer
Travis Bramble
Contributing Photographer
Mike Morgan
May 14, 2015
Volume 6 | Issue 7
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.
Maintaining a high-profile practice
Marlow Felton
Denver, CO
Transamerica Financial Advisors Inc.
Chris Felton and Marlow Felton are Investment Advisor Representa-
tives offering Securities and Investment Advisory Services through
Transamerica Financial Advisors Inc. (TFA), Transamerica Financial
Group Division, member FINRA, SIPC, and a Registered Investment
Advisor. Non-securities products and services are not offered through
TFA. 5600 S. Quebec Street Suite 325-C Greenwood Village, CO
80111, 303-221-3639. Past performance does not guarantee future
results. No investment strategy can assure a profit or protect against
loss in declining markets. TFG0006367-04/15
relevant to women and their money matters,
typically getting a nice turnout with a great
group of people.
All of these efforts combined help to fuel
a stream of contacts and referrals. While we
are not hesitant to ask current clients for
referrals, more often than not we find that
doing a great job for a client will lead them
to refer our practice on their own.
e try to incorporate some sort of
outreach into just about every-
thing that we do in our practice.
This can be for networking, prospecting, or
recruiting purposes—sometimes all three to-
gether. On average, we are probably hosting
an event or have a speaking engagement 1-2
times per week.
This begins with our involvement with our
national firm as trainers on motivational and
practice management topics. We speak to large
audiences across the country and have trained
and mentored over 100 advisors ourselves.
We also do a lot of events at our office
or outside locations, inviting prospects and
current clients, and encouraging them to
bring friends. We often feel we are in the
event planning business, making sure that
we remind the team to invite, invite, invite.
Being a leader, you have to get used to hear-
ing yourself say the same thing ten times to
the same people. We want to drive people to
our events, where we might have a money
manager come in to do a presentation for cli-
ents or potential clients, or we might present
our corporate overview and philosophy.
Networking is also very important,
although this might be a delayed form of
gratification. We belong to many groups and
are constantly trying to meet new people
and introduce contacts to other contacts.
We actually met each other before getting
married through networking contacts. We
are very intentional about networking and
getting other people connected, as well, not
just ourselves.
In 2011 we published a book, “Couples
Money,” which has created opportunities
through workshops and coaching for
couples. Though this is separate from our
advisory practice, our speaking engagements
around the book have certainly fed into our
networking and prospecting efforts. It’s been
very rewarding to be able to help couples
with their relationships and money matters.
We also have special outreach programs
for women, both as potential prospects
and recruits. This can come in the form of
publishing articles and holding seminars on
topics such as estate planning for women.
We often bring in a guest expert on a topic
W
Chris Felton
Denver, CO
Transamerica Financial Advisors Inc.
15
TIPS & TOOLS

Active Management
There 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
Dynamic
Strategic
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 Advisors
Websites
Proactive 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 Investments
goto.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 Investments
www.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,” PriceMetrix
www.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.)

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