Angela Sloan

A MEASURE of WORTH

Jobs up, wages stagnant • pg. 7

Bringing money management to 401(k)s • pg. 3

Refuting passive investment logic • pg. 4

October 9, 2014 | Volume 4 | Issue 3

First magazine focused on active investment management

pg. 8

TAX ALPHA

THE POWER OF

How can advisors level the playing field in a rising tax environment?

For Financial Professional Use Only. Services are offered through Security Distributors, Inc., a subsidiary of Security Benefit Corporation (“Security Benefit”). 99-00471-50 2014/09/09

Download our white paper today to learn more: The Power of Tax Alpha: Adding Value by Subtracting Tax

PowerOfTaxAlpha.com

as one of the investment options for

participants. From my perspective, this

is the ideal solution.

One of the plans I have done this

for recently involves a medical prac-

tice. The same due diligence in select-

ing third-party active managers and

the same emphasis on risk management

applies not only for the physicians, but

for all of the staff. The doctors who

own the practice are very thankful that

their staff has the ability to take advan-

tage of the expertise of a professional

money manager.

It is really rewarding to me that

everyone, no matter how much they

make or contribute, has the same

opportunity to grow and protect their

money over time.”

am an advocate of active

money management for all of

my clients. It is frustrating that strate-

gies for portfolio risk management are

mostly absent from many of my clients’

401(k) plans. Wherever possible, I am

trying to get more of my clients involved

with active management of their 401(k)

plans. This can basically go in one of two

different directions.

First is the option—now found

in many 401(k)s—for a brokerage

account. Based on a client’s specific

risk profile, third-party managers can

make specific recommendations as to

asset allocation. Sometimes, depending

on the account’s restrictions, this can

be fully handed over to a third-party

active money manager for their discre-

tionary portfolio management.

Other times, the plan participant

has to make adjustments based on rec-

ommendations. In either case, this is

far more preferable to not having any

real portfolio management and leaving

it up to the participant’s own analysis

and decision making.

Second, I have been working on

developing my own 401(k) business,

essentially taking over existing smaller

plans and placing them with one of the

open architecture third-party admin-

istrators. In this model, active money

managers can be incorporated directly

Tu BuiPleasanton, CA

Transamerica Financial Advisors, Inc.

“

Read text only

Bringing money management to 401(k)s

I

Tu Bui is a Registered Representative and an Investment Advisor Representative with Transamerica Financial Advisors, Inc. Securities and Investment Advisory Services offered through Transamerica Financial Advisors, Inc. (TFA), Transamerica Financial Group Division—Member FINRA, SIPC, and Registered Investment Advisor. Non-securities products and services are not offered through TFA. TFG004742-09/14.

Advertising proactiveadvisormagazine.com/advertising

Reprintsproactiveadvisormagazine.com/reprints

Contactproactiveadvisormagazine.com/contact

Proactive Advisor MagazineCopyright 2014 © 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 WritersLinda Ferentchak

David Wismer

Graphic DesignerTravis Bramble

Contributing PhotographerKyle Pearce

October 9, 2014Volume 4 | Issue 3

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.

October 9, 2014 | proactiveadvisormagazine.com 3

TIPS & TOOLS

REFUTINGthe twisted logic of thepassive investment crowd

By Linda Ferentchak

Read text only

proactiveadvisormagazine.com | October 9, 20144

continue on pg. 11

It’s always refreshing to see articles appear proclaiming that active management works. One of the more recent was from the Wall Street Journal (8/21/14) by Spencer Jakab, titled, “Yes, Virginia, You Can Time the Market.”

Jakab took a very simple approach using the Shiller P/E ratio to underweight or overweight stocks by 30% when the ratio was in the top or bottom tenth of readings and by 20% if it was in the next two. The result: a 68% improvement in performance over a buy-and-hold portfolio.

Unfortunately, it seems a lot more common to find articles proclaiming market timing doesn’t work. Typically, market timing is used to refer to any action an investor might take to reduce risk in uncertain markets. To help advi-sors explain to clients the common logical flaws in the “there’s nothing you can do … suck it up and hold on” passive investing arguments, some of the more common fallacies are explained below.

professor H. Nejat Seyhun for Towneley Capital Management back in 1994. The Towneley study showed that investing $1 on a buy-and-hold basis in a value-weighted index of the NYSE, AMEX, and NASDAQ stocks would have returned $637.30 from 1926 to 1993. A per-fect market timer would have ended the period with $690,000,000. Reality check: This is also statistically impossible and no one has demon-strated that level of accuracy; but the difference in total return shows the value of attempting to do so.

A more contemporary study along the same “miss the best days-miss the worst” approach confirms the benefit of missing the worst days, but also looks at what happens if you miss both the best and the worst. The analysis by Hepburn Capital Management concluded in part, “… the best days tend to closely follow the worst days. Sometimes they occur back to back. So if an investor misses one, chances are he will miss the other, as well.” If an investor missed both the 10, 20, and 40 best and worst days, the resulting average returns exceed that of the S&P 500 Index for the 25-year period ending December 31, 2013, according to the study.

The statement that 90% of mutual fund managers fail to outperform the S&P 500 is often tossed around to validate an index fund as the best investment. Rob Isbitts, founder and chief investment strategist of Sungarden Investment Research LLC, ran a study to test the accuracy of the statement and found there were no time periods in which the S&P 500 outperformed 90% of mutual funds. “The index was a middle-of-the-road performer in most of the 24 separate time period/peer group combinations studied. There is a noticeable tendency for the index to perform better than its active peers during friendlier market environments. During the two bull periods, the index outperformed 80% and 63% of its peers. However, during the down market cycles (bear), the index beat only 34% and 38% of its active management competitors.”

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

22%

78%

% outcomes whenbuy & hold is better

% outcomes whenactive management

is better

Source: Flexible Plan Investments, Ltd.

Buy & Hold vs. Active ManagementPerformance comparison over full market cycles

Myth #1: Missing the best market days leads to underperformance

It typically runs like this: The market makes most of its gains in a very few great days. If you miss those days, your portfolio is going to dramatically underperform. This seems to make perfect sense. If you do nothing more than miss the very best days of the market, you are going to under-perform. Besides being statistically impossible, why would an active management strategy be designed to miss only the best days? Ideally, it should miss the worst days—and if the manager is reasonably successful at that, the potential for smoothing returns is well worth the effort.

One landmark academic study of the “miss the best or worst” argument was con-ducted by University of Michigan finance

Myth #2: Trying to beat the S&P 500 is futile

October 9, 2014 | proactiveadvisormagazine.com 5

... when reasoning to support an argument goes astray.

4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%20142013201220112010200920082007

September: 2%

12-month increase

Lowest unemployment rate in six years, but wage growth stagnant

here was plenty to cheer about in last Friday’s (10/3) employment report from the Labor Department,

as the 5.9% unemployment rate fell to the lowest level since July 2008. The jump in new jobs in September came in at 248,000, above most expectations, and brought the monthly average for the year to 230,000. This average rate, achieved in a choppy fashion in 2014, was helped by upward revisions to both August (+38,000) and July (+31,000) numbers.

For September, construction (+3.9%) was the star performer among industry sub-sectors for year-over-year percentage gain in employment. Only professional and business services (+3.8%) provided competition, while manufacturing job gains lagged the other sectors. The percentage gain in the overall number of U.S. jobs was +1.9%. Of particular note, while the overall labor participation rate remained depressed and near levels of the 1970s, the African-American and Latino demographic sub-groups showed significant job gains. However, their overall unemployment rates still exceed the national average, at 6.9% and 11%, respectively.

According to MarketWatch, one of the few negatives from the overall employment report was found in the continued stagnation of wage

T

Source: MarketWatch/U.S. Dept. of Labor

growth. They said, “The bad news is that we don’t see any signs of wage pressure and shouldn’t expect wage increases anytime soon, especially with this many prime-aged workers on the sidelines … we will need a string of job reports like this one before we see wage growth start to reach most Americans, which is a real problem for an increasingly squeezed middle class.”

A relatively new indicator from the Federal Reserve, the “Labor Market Conditions Index” (LMCI) will now be released to the public every month. September’s report, which combines some 19 variables, came in at a reading of 2.5 on Monday (10/6), below most estimates but a shade above August’s 2.0 reading.

Read text only

AVERAGE HOURLY U.S. WAGES

The benefits of outsourcing your wealth management platformA turnkey investment management platform, with fees based on assets under management, can reduce costs, free up valuable time, and unlock strategic portfolio flexibility.

Understanding sequence of return risk: rates, crashes, and decadesExperiencing market volatility in the first years of retirement can be terrifying to a new retiree.

Communication dynamics with clientsThe soft skills of building client relationships and managing client behavior are of equal importance to the technical skills of financial plan design and portfolio management.

L NKS WEEK

7October 9, 2014 | proactiveadvisormagazine.com

TOPPING THE CHARTS

Angela Sloan

A MEASURE of WORTH

From the ashes of personal devastation, Angela Sloan has built a 4,000-client financial services firm. Her crusade to protect others from similar financial loss drives her to learn from industry experts and to demand excellence from business partnerships. The worth of every third-party asset manager she chooses is carefully measured by their risk management approach and performance. It’s part of “doing right” by her clients.

Read text only

By David WismerPhotography by Kyle Pearce

8 proactiveadvisormagazine.com | October 9, 2014

Proactive Advisor Magazine: Angela, can you describe your firm’s business model?

Angela Sloan: I am all about personal rela-tionships, and the thing that drives my business is doing right by my clients. I think that means understanding their total financial picture, seeing how each piece relates to everything else, and offering solutions to all of their financial needs.

We work with over 4,000 clients across all lines of business and offer many services to meet all clients’ needs: financial planning, tax planning and preparation, investment man-agement, many lines of personal insurance, and estate planning. I am most proud of the fact that just about every new client we take on is from a client referral. Currently we have around $300 million in assets under man-agement and that could not have happened without some very loyal and satisfied clients. That is impressive. How did you go about building the practice?

Getting into financial services was the fur-thest thing from my mind when I was young. It really happened through a series of life-changing events.

Early in my first marriage, I was living on a military base with my husband and children, trying to save money on a modest income. When I was diagnosed with cancer I incurred significant healthcare costs—I had to use our invested savings to pay for those expenses.

I had entrusted everything I had saved to a “financial advisor,” hoping to grow the money. He churned my account to make commissions and I lost close to everything I had worked so hard to save. I vowed at that point to become smart about financial matters and to try and make sure the same thing did not happen to others.

I tell people I grew up on the longest dirt road in South Carolina and never went to col-lege, but that did not stop me from figuring out how to obtain every license I could. I worked and studied hard—one of my gifts is absorbing information like a sponge. I read everything I can get my hands on and stay very current with the latest best practices, tools, and theory.

I entered the business first in insurance and then moved on to add investment planning and investment management. Before I knew it, I had built a financial services firm just by

helping people. Over the years it has kept grow-ing with clients, employees, and new services. I joke that our town only had one traffic light before they had to add another because of my new office building. How has your investment philosophy evolved?

I have always been conservative by nature, wanting to protect assets first. I grew up initially in the mutual fund business and was on a “ser-vice excellence” advisory board for one of the major fund companies. I have been exposed to some very smart minds throughout my career. I learned early on how important diversification was, but not just your typical diversification of different sectors of bonds or stocks—I am talking about the major buckets of investment alternatives people have to choose from and different asset classes. Through those early in-fluencers, I was introduced to the endowment model of investment management, where a wide range of alternatives can be considered depending on the specific objectives.

No one investment product, to my mind, can get the job done all by itself. The three things that clients need are a high degree of safety of principal, returns that can exceed inflation, and liquidity when it is required. No one invest-ment product is perfect in delivering all three at the same time, which is why having those major buckets of different asset classes or products is so important. Equities can provide, for example, liquidity and inflation-beating growth over the long term, but the safety of principal has his-torically been an issue over shorter time frames. What is your solution to that?

It really goes back to what the client’s needs, objectives, and desires are for the future. But in most cases, for those planning primarily for retirement, we will utilize the broad buckets of equities and fixed income, insurance products, annuities, and endowment-type investments in private equity or some form of business oper-ations. The objective is to put together a total portfolio approach that can help address the three objectives I cited and deliver sustainable, inflation-adjusted, lifetime growth and income for our clients.

We also think that for the broad bucket of equities—and even fixed income—there is a way to help reduce the drawback of shorter-term

volatility and drawdowns. This comes through the use of third-party asset managers who specialize in strategies that manage risk.

What first attracted you to active investment management?

I think it is a little ridiculous that one feels they can be an expert in everything. I want to surround myself with the people and prod-ucts that are at the top of the class, the best in the business. I have always operated that way and that carries over to the area of active management.

Third-party managers have complete focus on the markets every day and the expertise to build strategies that can react favorably to changes in market conditions. I have neither the time nor the ability to manage my clients’ specific investments with that level of knowledge and sophistication.

continue on pg. 10

Angela SloanCEO & Founder, Sloan Financial Group, LLC

Broker-dealer: Madison Avenue Securities

Years in business: 31

Number of employees: 11

Estimated AUM: $300M

October 9, 2014 | proactiveadvisormagazine.com 9

Show your clients a

friendlier

bear market

800-347-3539 | f lexibleplan.com

Past performance does not guarantee future results.

The opportunity for profits

carries with it the possibility of losses.

800-347-3539 | flexibleplan.com

A complete list of all of our recommendations over the last 12 months and Brochure Form ADV Part 2A are available upon request.

L E A R N M O R E

How do you evaluate third-party managers?

I expect excellent service and a clear and repeatable approach. I also want to examine the history of the firm to make sure they are going to be there over the long term for my clients. Of course, we closely examine their record on returns. Do they have the expertise to put their money where their mouth is, so to speak?

When it comes to returns, I am a little less interested in how they have performed during strong bull markets and more con-cerned with how they have performed during market downturns. I always tell my clients the first way to make money is to not lose it—the returns needed to make up big losses can take many years. I really measure the worth of active managers by their approach to risk management and how they perform during those difficult times in the market.

How does active management fit it with your client service philosophy?

I am always trying to bring the most sophis-ticated strategies and approaches to my clients that will ultimately make their lives better. I think active management fits perfectly with that approach, as its model seeks to deliver competitive returns and growth while doing a good job of managing risk. Knowing that my clients’ investments are in strong hands is very important to me.

I feel truly blessed for what I have been able to achieve in my personal and professional life. In turn, I want to provide clients with the high-est level of service and education and a broad line of financial products—so they can get their entire financial house in order and take care of planning for their future. I know we do a very good job at that.

continued from pg. 9

Angela Sloan is a registered representative of and offers securities through Madison Avenue Securities, Inc. (“MAS”), member FINRA & SIPC. MAS is not affiliated with Sloan Financial Group, LLC and its affiliated companies - Preservation Financial, Inc.; Metrolina Tax Service, Inc; and Metrolina Insurance.

10 proactiveadvisormagazine.com | October 9, 2014

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 Gug-genheim Partners, LLC. Securities offered through Guggenheim Funds Distributors, LLC. Guggenheim Funds Distributors, LLC is affiliated with Guggenheim Partners, LLC. x0515 #12526

Uncover the True Cost of Trading Mutual Funds and ETFs

The reflexive perception that ETFs cost less, simply based on their low expense ratios, and are more cost-effective than mutual funds, is not entirely true. In addition to an expense ratio, there are additional considerations that should be considered when making an informed choice between ETFs and funds— including spreads and commissions. This informative white paper from Rydex Funds provides an in-depth look at the cost of ownership of no-transaction-fee (NTF) mutual funds and ETFs—with a focus on active investing strategies.

Request your free copy.Call 630.505.3749 or visit guggenheiminvestments.com/rydex

Chicago | New York City | Santa Monica

Rydex Funds

A Comparison of ETFs and Mutual Funds—The True Cost of Investing

continued from pg. 5

Like Jakab, money manager Tobias Carlisle used Robert Shiller’s cyclically-adjusted price-to-earnings ratio as a timing trigger for Kenneth French’s value portfolio, backtesting the portfolio from 1926 through mid-2014. But instead of overweighting or underweight-ing the portfolio, Carlisle made 100% moves using two scenarios: 1) when the portfolio was one standard deviation and 2) two standard deviations above or below the average P/E. Then he calculated average annual returns and proclaimed a nail driven into the coffin of active management when those results came in below a buy-and-hold portfolio.

But averaging gains and losses is a far cry from actual performance. It doesn’t take a 30%

gain to make up a 30% loss—it takes a 43% gain. A 50% loss takes a 100% gain. Averages overlook the reality of gains and losses. When you look at the benefit of minimizing losses, the buy-and-hold portfolio underperforms.

With that said, active management is not necessarily a tool for the average investor. To succeed, a strategic active investment management approach must be systematic, disciplined, and non-emotional. The investor or fund manager must understand the system sufficiently to have confidence in its signals and the ability to execute those signals in a cost-effective, process-driven manner. Without an effective system and discipline, one runs the risk of emotional buying and selling—all too often at the worst possible point in the market cycle. In knowledgeable hands, however, active management can be a powerful tool for achiev-ing improved risk-adjusted returns.

Myth #3: Averaging gains and losses disproves active management

Myth #4: Time frames for backtesting are not cherry-picked

Investors generally don’t have 88-, 75- or even 50-year investment time frames. If they start early, they may have 30 to 40 years of sig-nificant investing before retirement. A backtest using 20-, 25- or 30-year time frames is going to produce different results than a 75-year backtest. It is also interesting to see how many studies “proving active management doesn’t work” conveniently fail to include bear markets at the start or the end of the study period.

11October 9, 2014 | proactiveadvisormagazine.com