August 28, 2014 | Volume 3 | Issue 9

First magazine focused on active investment management

Can USD continue its run? pg. 7

Demonstrating client appreciationpg. 3

Active solutions for 401(k) plans pg. 4

Jim Mardock

A STRONG PRACTICE NEEDS STRONGPARTNERSpg. 8

Third is our ongoing educational process. This is one-on-one for all clients, of course, but we also like to conduct frequent seminars that in-clude current clients, not just pros-pects. It also involves regular educa-tional newsletters and fresh topical content on our website each month.

Finally, we show our appreciation to clients in any number of small ways. Our clients love the fact we have a co-op arrangement for a free birthday meal for them at one of our top local restaurants. Sounds simple, but it is a win-win-win for us, for the client, and for the restaurant.”

lient retention not only makes pure economic

sense in and of itself, but developing lasting relationships is the very best form of marketing we can do for the firm. Satisfied clients spread the word about us and how we approach financial matters a little differently with our commitment to active in-vestment management.

We do several things to promote client retention. It starts with the basic financial planning that we are able to offer without a fee. Our close rate is very high with prospects, so we feel confident we can afford to do this. And we are 100% transparent about how our firm makes money in each and every client relationship. Clients greatly appreciate this.

A second piece is the client review process. Although our firm has a good number of clients, our goal is to meet with each client 3-4 times a year. Aside from evaluating their portfolio’s investment performance, we review any number of issues from changes in their life circumstances to taxes. I also like to provide some information at each meeting that is fresh, whether it involves a financial topic in the news, a new product concept, or a new tax law that might affect them down the road.

Demonstrating client appreciation

Joe WirbickLancaster, PA

J.W. Cole Advisors, Inc.Sequinox

C“

Joe Wirbick is a Registered Representative of J.W. Cole Financial, Inc. Securities offered through J.W. Cole Financial, Inc. (JWC), Member FINRA/SIPC. Advisory Services offered through J.W. Cole Advisors, Inc. (JWCA). Sequinox and JWC/JWCA are unaffiliated entities.

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More and more advisors are utilizing systems of third-party managers that enable them to delegate the day-to-day work of allocating investments. Advisors are recognizing that someone else can manage the assets better and more efficiently, but nobody else can manage client relationships better than the advisor.

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TIPS & TOOLSPOLLS

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How active is your client’s 401(k)?

By Greg Gann

proactiveadvisormagazine.com | August 28, 20144

Incorporating active management solutions within defined contribution plans

This shift began in the 1980s, and the exuberance of the market at that time enabled this change to occur without much backlash. By the mid-1980s, a perfect storm was brewing. Almost magically, the largest generation of all time, the baby boomers, was at its peak earning and spending years, while at the same time a technology revolution was forming. These two factors unified perfectly to result in one of the most massive bull markets in U.S. history. A soaring market provided the perfect context for corporations to make this shift, not only with-out backlash, but with overwhelming support.

While legacy defined benefit plans still have an impressive asset base, total defined contribu-tion plan assets are now roughly twice as large, with such plans representing over 90% of new pension plans formed in recent years. To an employee who has entered the workforce since

here was a time not that long ago when an employee’s retirement was provided by his employer almost ex-

clusively in the form of a defined benefit plan. The responsibility and burden of investment performance in a defined benefit plan rested firmly with the employer—with employees “guaranteed” a fixed amount of income at retirement.

The employer in a defined benefit plan is liable to provide the predetermined retirement benefit irrespective of how the underlying investments perform. This liability has under-scored the extreme financial difficulties of many major companies, including General Motors and American Airlines. Over the last 30 years, there has been a notable trend by corporations to alleviate—or at least minimize—the obliga-tion with respect to the performance of their employees’ retirement accounts. This has result-ed in a shift from companies offering defined benefit plans to defined contribution plans such as 401(k) plans.

the mid-1980s, the defined contribution plan is now the norm. This means that the invest-ment choices that one makes in their corporate retirement plan will hugely impact their golden years.

This evolution of retirement plans and in-vestment choices—and what has been generally accepted as financial guidance to participants—has been incongruent, to put it mildly. While mountains of laws and regulations have been developed to “safeguard” plan participants, they fail to adequately address the primary issue of investors’ lack of preparedness for making life-changing financial decisions.

Today’s typical 401(k) plan provides par-ticipants with not much more than a menu of mainly traditional stock and bond investment options. Most retirement plan participants typically meet with a plan representative once a year in a group setting for largely a functional presentation. Participants make a selection from the menu and the vast majority either: A) set it as best they can and forget it, or B) make poor timing decisions based on mostly emotional reactions to a prior period’s market performance.

Even major corporations sponsoring defined contribution plans recognize the issue. A 2012 survey by benefits consultant Towers Watson found only one in five large companies believed their employees generally made informed deci-sions about retirement savings.

Obviously, the term “201(k)” did not

originate without some grounding in the market realities of the past fifteen years. Does it make sense that retirement plan participants remain basically uninformed about the principles of investment risk management, let alone have the means to practice them within their 401(k) plans?

continue on pg. 11

T

Almost magically, the largest generation of all time was at its peak earning and spending years, while at the same time A technology revolution was forming.

If 401(k) plans had been actively managed to provide defensive strategies, it could have been much less likely that their

values would have been halved.

If 401(k) plans had been actively managed to provide defensive strategies attempting to insulate them from downward market momen-tum, it could have been much less likely that their values would have been halved during the past two major market corrections. Far too many plan participants are taking excessive risk with their retirement portfolios, especially as they enter their 50s and 60s. Because the vast majority of today’s retirement plans are not ac-tively managed, we have disadvantaged partic-ipants, stacking the odds against their success.

Where does all of this leave today’s finan-cial advisor—especially the financial advisor with a holistic approach that embraces active

9%

15%

22%

26%

45%

65%

37%

35%

42%

43%

34%

22%

54%

50%

36%

31%

21%

14%

Strongly agreeor agree

Neutral, neitheragree or disagree

Disagree or stronglydisagree

Employees have established retirement income goals

A majority of employees make good use of availableretirement/investment planning resources

Employees generally make informed decisionsregarding their total retirement savings

Employees have realistic expectations of what aprimary DC plan can provide

Employees appreciate and understand the designfeature of a DC plan

Employees have adequate retirement/investment planning resources available

Company perspective on employee behaviors and preparedness for retirement readiness

Source: Towers Watson: 2012 U.S. Defined Contribution Sponsor Survey Report

August 28, 2014 | proactiveadvisormagazine.com 5

Can the U.S. Dollar continue its run higher?

espoke Investment Group calls the past three-month move higher

for the U.S. Dollar (USD) “one of the stronger trends we have (recently) seen.”

The factors behind the move are varied: weak economic data from foreign markets, a strengthening U.S. economy which is comparatively in much better shape (see accompanying PMI data), geopolitical risk from several global hotspots, and the weakness of the Euro (EUR).

Bespoke notes that the EUR makes up over half of the USD index’s performance, and weak EUR performance has been the biggest single contributor to USD strength. They point out that there are some very good fundamental reasons to go along with that performance: “Europe is extremely weak in terms of demand, has seen growth slow to a snail’s pace, and the ECB’s support for the economy appears questionable.”

The possibility of further stimulative policy out of Europe, while the U.S. continues to wind down QE asset purchases, has added a level of uncertainty as to where the USD/EUR relationship goes from here. From a technical perspective, Bespoke says, “While there are many reasons to be bearish on the EUR over the longer-term, in the short term the currency is starting to look very over-sold relative to fundamental drivers of its exchange rate with the USD … whether that will lead to a large move (lower) in the USD index or a longer-term move higher (for EUR) will probably depend more on underlying fundamentals of the two respective economies.”

B

Source: Bespoke Investment Group

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U.S. DOLLAR INDEX: LAST SIX MONTHS

Source: Bespoke Investment Group

GLOBAL FLASH MANUFACTURING PMIS: MOM CHANGE

7August 28, 2014 | proactiveadvisormagazine.com

TOPPING THE CHARTS

Jim Mardock

B.S., Business Administration, Portland State University

Board of Directors, Tilikum Center for Retreats and Outdoor Ministries

Enjoys hiking, fishing, and time with grandchildren

Avid mushroom-picker

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A STRONG PRACTICENEEDS STRONG PARTNERSBy David WismerPhotography by Aubrie LeGault

JIM MARDOCK

8 proactiveadvisormagazine.com | August 28, 2014

Proactive Advisor Magazine: Jim, when did you first get involved with active management?

Jim Mardock: I went through the dot-com crash of 2000-2002 just like everyone else who was in traditional stock and bond allocations. I personally lost a fair amount of money on paper. And that’s okay. I understand money goes down and up, and I understand buy-and-hold. But it really bothered me to see my clients’ portfolio values drop.

The managers of their mutual funds could not really get out of the market to any large degree. They had to do as best they could within the confines of each mutual fund’s pro-spectus. We had client money in excellent, very well-managed funds, but our clients still took significant losses.

At that time I didn’t know much about active management. A few years later, our company decided to add active management to our potential client allocation mix. As I came to understand its guiding principle of manag-ing risk first, the more interested I became.

Within six months I had moved many of my clients into actively managed strategies. It became clear to me that growth-oriented strat-egies could be pursued within an investment process that did not have to sit idly by and passively accept large portfolio drawdowns.

That seems like a big change. How did the process work?

Our parent company at the time did a thorough job in meetings and materials of explaining this new strategic option to advisors like me. They brought on board several third-party managers after looking at dozens. We have since joined Transamerica Financial Advisors (TFA). They perform the

broad level of due diligence and then we have the ability to find strategies that match well with our individual clients’ objectives.

The third-party managers themselves played a critical role for us. We held sem-inars with representatives of several money managers and the client attendance was remarkable. Everyone was hungry to learn about a new way to approach portfolio man-agement that could mitigate some of the risk. It also had a very positive impact on my business and obtaining referrals.

Can you explain a typical client conver-sation about active management?

A lot of what I emphasize in explaining third-party active management is the fact that there is an entire team working on behalf of the client. Highly skilled professionals are there on a daily basis using analytics, research, and algorithms to watch your money and determine whether it should be in or out of the markets, what the risk levels are, and where money should be allocated.

I am not hesitant to tell clients that my specific job is not money management per se; it is to provide the highest level of service and overall planning that I can. A big part of that job is to find asset managers that are really proficient at what they do.

What criteria do you use in selecting an active manager?

As I said, I am not the final decision-maker on the active managers that are available. But I was on an advisory board for some time so I am very familiar with the process.

We are looking for managers with a clear and differentiated strategic approach. We ex-amine their track records on performance, of

course. How do they stack up versus their com-petition for their approach? And perhaps most importantly, are they disciplined in following their stated objectives and rule sets?

We are looking for repeatable and sustained performance. We realize every manager will have years that are better than others—but we want to make sure they stay true to their philosophy. Personally, I am also very interested in their position on account minimums. I have a lot of smaller and mid-sized accounts and feel these clients should have access to sophisticated active strategies as well.

How do you explain performance of strategies to clients?

I utilize materials that focus on the process or approach of the strategy—then evaluate the performance based on the rules set defined by that particular strategy. For example, a

A year ago, Jim Mardock unwittingly put his third-party active managers to the test.

When his wife passed away after a long illness, Jim depended on their quantitative,

disciplined approach to manage the strategies and portfolios of his clients. The care of

his practice and clients continued uninterrupted, in dependable hands.

continue on pg. 10

August 28, 2014 | proactiveadvisormagazine.com 9

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I had many dedicated professionals working diligently on behalf of my clients.

This situation also further reinforced my belief in utilizing third-party active managers. I knew that with their disciplined and quan-titative approach, our strategies and portfolios were in good hands. With everyone’s help, my practice and my clients did not miss a beat.

trend-following strategy based on specific signals works best when there is a well-defined trend of some duration. In 2011, the broad market changed direction a very high number of times and ended up almost flat for the year.

A trend-following strategy can get caught in some of the whipsaw action and underperform the market. The strategy did exactly what it was supposed to do, yet it lost money on the year. That illustrates a couple of important concepts about using active management.

First, it is important to set the proper ex-pectations with clients. Every strategy will not have optimal performance every year. Second, it is why we want to be well-diversified with a number of complementary strategies in our arsenal. And, third, active management should not be measured against one year’s performance. It is designed to work over full market cycles. That trend-following strategy works very well in both bull and bear markets; it just happens to struggle a bit in sideways markets.

Jim, thanks for discussing your view of active management.

I do want to share a personal note. My wife passed away a year ago after a long illness. I want to thank all of my clients and colleagues for their support. When one is distracted and hurting, as I was, it was very reassuring to know

continued from pg. 9

Jim Mardock 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.

10 proactiveadvisormagazine.com | August 28, 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

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investment management? From several per-spectives, this can be a difficult question for advisors due to fiduciary issues and questions of access and compensation.

I believe it starts with education, and I like to explain it to clients with a simple analogy. Because I personally have zero construction skills, even if all of the supplies to build an ad-dition to my office were delivered, it would be totally unreasonable to conclude that I would have the proficiency to construct anything. This is tantamount to believing that the average skilled contractor has the expertise, inclina-tion, or desire to build and actively manage his 401(k) just because a menu of investment options was delivered to his “parking lot.”

One relatively straightforward answer to this issue can be found in the growing ranks of advisors who are becoming experienced at the 401(k) market within their overall advisory practices. These advisors, working with plan sponsors, third-party administrators, and custo-dians, are able to incorporate actively managed

solutions through fiduciary relationships with money management firms. One advisor with a very robust 401(k) practice says, “It can be extremely comforting for those individuals who are carving out a piece of their hard-earned paychecks that professional, well-screened third-party managers are proactively working on their behalf every day.”

There are also a good number of plan providers offering self-directed options (often called the “brokerage option”) for individual participants as part of their 401(k) investment alternatives. While the nomenclature and re-strictions can vary widely within the industry, plan participants have the ability through many of these providers to call upon advisors for

guidance and, ultimately, access to active man-agement investment solutions. I believe advisors should be informing their clients of this option, and, where permitted, assisting clients to find the most appropriate investment alternatives for their 401(k).

Active money management is far more than simply buying securities. It is about having a game plan consisting of when to buy, sell, and how to rotate, and even when to invest on an inverse basis. The vast majority of Americans’ savings for retirement is tied to their corporate retirement plans. For this reason, all of the ben-efits and rationales stressing the importance of active investment management should especial-ly apply for these assets. With many retirement plan balances today just slightly above their pre-crash levels, the time is now ripe to deliver actively managed 401(k) plans. Because partic-ipants’ expectations for managing 401(k)plans are so low, we should more than satisfy their expectations —we should exceed them.

continued from pg. 5

With many retirement plan balancestoday just slightly above their pre-crash

levels, the time is now ripe to deliveractively managed 401(k) plans.

11August 28, 2014 | proactiveadvisormagazine.com

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.

EditorDavid Wismer

Associate EditorElizabeth Whitley

Contributing WritersGreg Gann

David Wismer

Graphic DesignerTravis Bramble

Contributing PhotographerAubrie LeGault

August 28, 2014Volume 3 | Issue 9

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.

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Proactive Advisor MagazineCopyright 2014 © Dynamic Performance Publishing, Inc. All rights reserved. Reproduction of printed form, whole or in part, without permission is prohibited.

A 20% allocation to gold? Seriously. If history is your guide, the case for owning lots of gold all the time is an easy one to make—but detractors of the argument cite the shiny metal’s volatility.

At a glance: Takeaways from Jackson Hole 2014

Here is a quick rundown on the four most important developments of the Jackson Hole proceedings.

You don’t have to choose between active and passive investingWhile the debate between active and passive may never truly be settled, investors can sidestep the acrimony and embrace a simple approach that blends both to help build a better portfolio.

When history and asset allocation collideTraditional portfolio allocations and investing styles cannot be counted on to fund 4% annual withdrawals for retirees.

What “Smart Beta” means to usAs with most new expressions, “smart beta” is in the process of seeking an established meaning. It is fast becoming one of the most overused,

ill-defined, and controversial terms in the modern financial lexicon.

Maximizing Social Security benefits using advanced distribution strategiesPlanning for your client’s Social Security benefits distribution is a much more complex task than many advisors may realize.

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