German bond yield falls pg. 7

Balancing strategiesPassive and active pg. 3

Multiple levels of diversification pg. 4

Asset protectionCALLS FOR

activemanagement

Joe Wirbick

August 21, 2014 | Volume 3 | Issue 8

First magazine focused on active investment management

pg.8

Our firm has selected some of the top companies in the active man-agement industry to serve our cli-ents and help navigate the ups and downs of the market.

While there are no guarantees with any investment approach, my belief is that a blend of tactical and passive strategies can better manage market cycles than a passive approach alone. And depending on the client’s risk profile and overall investment ob-jectives, the tactical strategy element can be dialed up or dialed down to best fit a specific client’s needs.”

nvestment management for clients is not an all-or-nothing

proposition when it comes to build-ing the proper allocations within a financial plan.

My work with clients always starts with a big-picture view of their needs. Do they have in place the basics such as life insurance, long-term care, college planning, etc.? What will their income needs be in retirement and how can we allocate between income-oriented invest-ment products and looking for asset growth in a portfolio?

For investment portfolio growth, I find that a blend of tactical and more traditional passive strategies can often provide an excellent level of diversification. While I have not believed in strictly “buy-and-hope” since 2008, broad indexed mutual funds can provide a good foundation for a portfolio. There is still a role for passive investments in terms of beat-ing inflation over a longer horizon and leaning toward the fundamental market bias toward the upside.

But I think every investment portfolio has to have the capabili-ty to play both offense and defense. Over the last five years, I have in-troduced a higher level of tactical money management for most clients.

Balancing active and passive investment strategies

Gary ZieglerMadison, WI

Transamerica Financial Advisors, Inc.

I“

Last week’s results

VIEWER RESPONSE

In Q2 2014, what concerned advisors the most?

This week’s poll

How many third-party managers do you use?

Answer: Managing risk Fidelity Advisor’s  Q2 2014 Investment Pulse Survey found that advisors were increasingly focused on market volatil-ity. Many advisors surveyed cited the challenge of ensuring that their clients continue to benefit from the bull market, while also protecting them against the downside.

28%43%

29%

Portfolio managementFixed incomeManaging risk

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VOTE

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4 or more

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August 21, 2014 | proactiveadvisormagazine.com 3

TIPS & TOOLSPOLLS

By Linda Ferentchak

iversification may well be the oldest risk management strategy in the world and is certainly the most widely

advocated investment approach. While it is overwhelmingly supported by most investment theorists, one can still find a few detractors.

Warren Buffett has jokingly said “Diversification is protection against ignorance. It makes little sense if you know what you are doing.” But for many investors, advisors, and fund managers who freely admit that they

do not know where the market will be next month, let alone next year, diversification cre-ates a wider range of opportunities for profit, minimizes exposure to risk in any one area, and ideally reduces volatility in the portfolio. 

Active investment strategies—which strive to adapt to market conditions while limiting portfolio risk—do not need to rely solely on the static diversification among asset classes common to passive allocations. But diversi-fication still plays a strong role in the actively

managed portfolio. The difference is that active managers are also increasingly diversifying by strategies and managers.

In a traditional passive portfolio, one typ-ically sets an allocation of stocks and bonds with the expectation that when the equities allocation underperforms, bond performance will compensate. The equity and bond portions of the portfolio are also diversified to offset the potential of underperformance in one area with higher quality returns in another. For example,

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D

DIVERSIFICATIONand the

ACTIVE MANAGER

“It is the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” - Sancho Panza

Don Quixote, by Miguel de Cervantes [1547-1616]

proactiveadvisormagazine.com | August 21, 20144

a bond portfolio may be diversified among gov-ernment, corporate and high-yield bonds. The vulnerability of this approach is that part of the portfolio is usually underperforming, reducing overall returns.

Among the questions investors inevitably ask is, “why are we investing in underperform-ing assets?” Why not adapt the allocation to take advantage of opportunities that the current market environment offers?

Diversification takes this a step further to acknowledge that there are many different ways to actively invest, some of which perform better in different market conditions than others. While active investment strategies strive to adapt to market conditions, no investment strategy consistently outperforms the market every quarter, or even every year. Every in-vestment strategy has stopped working—or delivered less-than-optimal results—at some point. An advisor may have faith in his or her chosen approach and be willing to hold on until it rebounds, but the average client is often another matter.

Diversifying by investment strategy as well as by investment manager allows portfolio volatility to be reduced, ideally improving performance over the long run.

In or Out Diversified Allocation Strategies

Many active management firms began by allocating portfolios between stock, bond, and money market mutual funds, adjusting the mix based on the market’s direction. It made sense. Mutual fund exchanges could be made within the same fund family (and later the fund plat-form), at no cost. Investors benefited from the investment selection abilities and diversification

provided by the mutual fund, with the added layer of risk management.

The campaign against “market timing” and resulting limitations on the number of permitted exchanges by the fund families adversely affected many third-party managers using this approach. But new investment vehicles emerged in the form of index funds, Exchange Traded Funds (ETFs), stock baskets, and cost-effective access to individual securities that launched a much wider and more diverse active management universe. Typically, today’s allocation strategies focus on market indexes, such as the S&P 500 or NASDAQ, and adjust allocations in response to changes in the index’s trend. These strategies may also use leveraged and inverse funds to enhance opportunities for profit.

Equity StrategiesEquity strategies have proliferated with

the development of index, sector, and coun-try funds, and the ability to trade individual securities relatively inexpensively, along with advances in technology and the availability of market data. Equity approaches typically strive to identify leading investments within a defined universe or segment of the market. Among the equity investment approaches are strategies such as market leaders, sector rotation, and country leaders. While these strategies may retreat to the safety of money markets in extreme market conditions, non-correlated investment vehicles typically exist to keep strategies invested.

Bond StrategiesBonds are an entire investment universe

in and of themselves. Domestic U.S.Treasury, government agency, municipal, corporate, and corporate high yield compete with internation-al government and corporate issues. Managed funds, index funds, and individual securities all offer opportunities to exploit trends and market inefficiencies for profit. The result has been manager and strategy specialization focused on the bond markets that often utilize both long and short positions.

continue on pg. 11

Why not adapt the allocation to

take advantage of opportunities that the

current marketenvironment offers?

Diversifying byinvestment strategy

as well as by investment manager allows portfolio volatility to be reduced.

August 21, 2014 | proactiveadvisormagazine.com 5

Jan 1, 2006 Jan 1, 2008 Jan 1, 2010 Jan 1, 2012 Jan 1, 2014

3.00

2.00

1.00

-0.01

-1.00

-0.01

Germany 2-year bond yield falls to negative territory

he German 2-year note yield entered negative territory (again) on Friday, August 15. According to most analysts, this was a flight

to quality during a period of geopolitical risk and fear of further slow growth and deflationary pressures throughout Europe.

Investing.com reviewed several of the possible reasons for the close last week at a -0.01% yield on the German 2-year note:

• Euro-area economies are either in a recession or stagnating, with high levels of unemployment persisting in several nations.

• Tensions continue to rise regarding Ukraine and Russia, which has led secondarily to the escalating trade war between Russia and the European Union/U.S. and its negative impact on European economies.

• There is deflation risk in the euro area, which could force the ECB to enact quantitative easing.

• The Federal Reserve is set to end its quantitative easing in October, which could cause more market volatility across the globe.

The drop in bond yields across Europe also came on the heels of disappointing Q2 GDP reports for the region, with Germany’s GDP falling 0.2% from Q1, Italy appearing to move into recession, and the euro-zone overall growth rate flat.

Bloomberg notes that Germany’s results were particularly disappointing, as it has historically been the growth engine for Europe. They also reported that a gauge of investor confidence in Germany fell

TSource: Investing.com

this month to the lowest level since 2012 and factory orders slumped by the most in more than 21/2 years. Despite this, the Bundesbank maintains a growth estimate close to 2.0% for 2014 and 2015. Bespoke Investment Group said of Europe this week, “Europe is a basket case, and there

are real risks that EU weakness could spill over to a U.S. economy whose domestic demand appears to be chugging along at a relatively healthy, and possibly accelerating rate.”

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0.8%0.7%

-0.2%

-0.4%

0.3% 0.4%

2Q 3Q 4Q 2Q1Q13 1Q14

Source: Bloomberg/OECD.org

GERMAN GDP

GERMAN 2-YEAR

7August 21, 2014 | proactiveadvisormagazine.com

TOPPING THE CHARTS

Joe WirbickFounder and president of Sequinox in Lancaster, PA

Sequinox was awarded Business of the Year by Central Pennsylvania Business Journal (CPBJ) in 2011

Twice awarded Executive of the Year by CPBJ

Recognized as #1 Wealth Manager in Central Pennsylvania by CPBJ in 2011             

Serves on board of directors for PA public broadcasting station WITF

Member, Million Dollar Round Table, Top of the Table since 2006

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By David Wismer Photography by Jeremy Hess

Joe Wirbick

Asset protectionCALLS FOR

activemanagement

8 proactiveadvisormagazine.com | August 21, 2014

Proactive Advisor Magazine: Joe, what is your personal philosophy regarding investing?

Joe Wirbick: I come from a pretty modest economic background, strictly lower middle class. My parents were very hard-working, always trying to make ends meet.

I will never forget that in the eighth grade I told my teacher on a field trip that one day I was going to buy a commercial building like the ones we were driving by. You know what? I recently just bought the property our offices are located in.

This sort of defines the essence of my invest-ing philosophy. I believe in multiple streams of income and in being well diversified. It’s also important to be proactive—not to just sit idly by watching things happen when action should be taken.

Great story. How do you apply this to clients?

I think everyone needs to have asset pro-tection on several fronts. This can be through active investment management, through strong diversification, and in having investments with different time horizons, risk, and rates of return.

I feel blessed to have received some excellent training early in my career working for major financial services organizations. But my beliefs have evolved greatly over the years. I have some very definite ideas and have developed my own arsenal of financial solutions for clients.

Please explain.

One of the major changes we made about three years ago was switching to third-party active money managers. I only wish I had done that about twelve years ago.

It may be controversial to say, but I think a lot of advisors subtly mislead clients by saying they are managing their money for them. Most of us spend the bulk of our time working with current clients on their specific needs, finding the right solutions to various issues, educating, and prospecting. It is a rare advisor who can spend the day closely following the financial markets.

I do not think parking client money in a va-riety of mutual funds is really managing money.

I think it makes much more sense to employ the services of an entire investment team with the skill and training to handle billions of dollars. They are professionals dedicated to doing that and nothing else.

It is a whole different world—like night and day versus the old asset allocation methods. These managers have strategies that do not just go long the market like most traditional funds, but can go to cash at any time, or go short in a down market.

Did you ever really hear of major institu-tions telling their clients to sell when markets were plummeting? No, they tell them to hold on and wait it out—no matter how bad it gets. Being down 30-35% in 2008 is not doing the best job for clients, in my opinion. Not losing significant money in that kind of environment is the goal. That is the difference between a buy-and-hold approach and active management.

How do you communicate the benefits of active management to clients?

For a new client or prospect, I ask them what sort of protection they have for their portfolio. continue on pg. 10

When it comes to investing, Joe Wirbick is not shy about his convictions. His call to action is loud and clear: asset protection, asset protection, asset protection. Utilizing third-party managers and

educating his clients about active investment strategies is first in his arsenal of defense.

The answer is almost always one of three things: “I have none,” or “I don’t know,” or “I don’t have any money in stocks.”

For obvious reasons, none of those answers is acceptable. It is a pretty easy and persuasive argument why all or part of their life savings should not be exposed to markets without some measure of risk management. How much can they stand to lose? Most will say very little, and that leads naturally into a discussion of their individual risk profile.

My tendency is to use a combination of solutions for clients whenever appropriate—that might be some combination of indexed life, indexed annuities, and actively managed strategies.

With the active management portion of the portfolio, the third-party money managers we work with have done well in all sorts of market environments. Active money management is not designed to beat the market during strong upturns, and I tell clients that point blank. But when the market is down, clients will appreciate the protection it can provide. If we

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.

August 21, 2014 | proactiveadvisormagazine.com 9

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MULTI-MANAGER

One p rtfolioD Y N A M I C A L LY R I S K - M A N A G E D

L E A R N M O R E

Past performance does not guarantee future results.

The opportunity for profits

carries with it the possibility of losses.

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

for allocations into or out of the market, they also use a variety of asset classes: equities, fixed income, commodities, or currencies. It is eye-opening for clients to understand that they do not have to be limited to a long-only strategy or just one or two asset classes.

How would you summarize your advisory work?

It is definitely a constant process and our review meetings with current clients are very important. Have their life circumstances changed? Has anything changed with their em-ployment or with their business if they are an owner? Have their tax circumstances changed?

We take a great deal of pride in differentiat-ing our firm by working with tax issues. If we are doing everything in our power to develop sound risk management practices for portfolios, shouldn’t we also be providing investment strat-egies that are as tax effective as possible?

Our firm has shown tremendous growth over the years and I attribute that largely to the emphasis we place on client education.

can outperform during down years, active man-agement should provide meaningful returns over the long term. It is not about winning the inning, but winning the game.

Each element of a well-designed portfolio will likely have different performance char-acteristics during different types of market environments—up, down, sideways. The idea is to have this diversification working to the client’s benefit regardless of how the overall markets are doing.

Beyond the theory of your approach, are there any specific tools you use?

One of the things we do is run a Morningstar analysis on a new client’s current portfolio. This will show how their returns have actually per-formed in one or more mutual funds over the length of that investment.

We all know past performance is not in-dicative of future performance. But the track record of our active money managers in such a comparison exercise is very compelling. Aside from the flexibility these managers have

continued from pg. 9

Explaining concepts such as active manage-ment as thoroughly and as simply as possible to the average person is critical to developing shared expectations and having satisfied clients over the long run.

10 proactiveadvisormagazine.com | August 21, 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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Absolute Return StrategiesAbsolute return portfolios are designed to

produce a positive return regardless of the di-rection and the fluctuations of capital markets. How the third-party manager arrives at that return can be a blend of non-correlated invest-ments or more esoteric, proprietary investment approaches or hedges. Absolute return strat-egies are not designed to outperform market indices but seek to always increase value in the portfolio.

Alternative Investments AllocationAlternative investment strategies take the

technical analysis expertise of active manage-ment and apply it to assets beyond traditional stocks, bonds, and cash. These assets may be private equity, options, futures, commodities, leveraged funds, hedge funds, exchange funds, real estate, structured notes, etc. Manager and strategy specialization become part of the diver-sification mix.

Hedge Funds Hedge funds may be part of the alternative

strategy mix or their own allocation with the caveat that they are restricted to qualified in-vestors and usually have holding period require-ments. While there is a tendency to characterize hedge funds as long-short strategies, their current field is much broader. Hedge funds are currently less regulated by the U.S. Securities and Exchange Commission (SEC) and, being relatively less restricted, can invest in a wider range of securities than mutual funds. That leaves a lot of room for different approaches to the market.

Adding Depth and Responsiveness to Diversification

Within each of these diversification oppor-tunities, active managers may be using a variety of technical approaches to determine their view of the market … from fundamental analysis to trend following, pattern recognition, relative

strength, momentum, mean reversion, season-ality, market cycles, and more. While actively managed strategies are often disciplined, math-ematical approaches to investing, they have the flexibility and maneuverability that is lacking in traditional buy-and-hold portfolios.

The result is a fascinating blend of oppor-tunity. Add the ability to go long, short, or to cash and to use leveraged vehicles, and investing enters a new dimension that is no longer de-pendent on a rising market for profitability. At times, the choices may seem overwhelming, but the diversity of an active management approach also highlights the vitality and excitement of this rapidly expanding investment discipline.

continued from pg. 5

11August 21, 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 WritersLinda Ferentchak

David Wismer

Graphic DesignerTravis Bramble

Contributing PhotographerJeremy Hess Photographers

August 21, 2014Volume 3 | Issue 8

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.

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.

JPMorgan joins Goldman in designingderivatives for a new generationDerivatives that helped inflate the 2007 credit bubble are being remade for a new generation.

The virtues of growing by design:2014 FA Insight Study

The overall news is good: growth is up, and nearly three quarters of firms characterized their recent growth as “significant” (the median

growth rate was 6.7% in terms of clients, 15.5% based on revenue).

Do moving average strategies really work?Moving-average-crossover strategies have worked well over time, helping stem losses during the tech bubble and 2008 financial crisis. Most of those strategies, however, have underperformed the broad equity market since 2009.

Can an algorithm be a fiduciary?A surge of interest in automated investment management has sparked

debate about who or what can best meet the high ethical standards required by regulators for recommending investments.

Proliferation of ETFs both good and badAre there issues for advisors and investors in the

ever-expanding universe of ETFs?

Flip sides of the same coin: Compliance & transparencyThe upheaval caused by the 2008 financial crisis continues to ripple outward, creating an unsettled environment that has disrupted traditional measures of trust.

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