Impact of oil price plunge • pg. 7

Adapting practices for NextGen • pg. 3

December 4, 2014 | Volume 4 | Issue 10

First magazine focused on active investment management

Rodger Sprouse

problems with buy-and-hold pg. 84

NAAIM’s “Shark Tank”15 new active strategies pitched • pg. 4

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think my generation of advisors needs to address. There are several areas where technology can come into play. An obvious one is in having the most client-friendly access to account infor-mation, presented in a clear, concise, and intelligent fashion.

I also am going to improve my elec-tronic communications with clients. I have recruited my teenaged son to help me sort through the best technology practices. Fortunately, he is very inter-ested in financial services and will be getting vetted so he can work with me. His perspective and hands-on input will be very valuable.”

have always had an advi-sory practice that has been

fairly ‘quiet’ when it comes to external marketing activities. My focus is on high-net-worth families and their unique and complicated needs, includ-ing the planning for the transfer of wealth across generations, charitable giving, business succession or sale, and managing their substantial and varied assets. Almost all of my referrals come from attorneys or accountants who know I can handle the specialized needs of the affluent.

In working with HNW families, I am increasingly seeing the need for ramping up my use of technology to address the needs of the future gener-ations of my current clients.

Sons and daughters, or grandchil-dren—now in their teens or twen-ties—have obviously grown up with a far greater exposure to technolo-gy than prior generations. They also have a different mindset, seeming to be less patient and looking for fast, technologically-enabled answers for just about every aspect of their lives.

They are used to instant gratifica-tion and instantaneous response. The challenge will not only be in the me-chanics of communicating with them, but also in explaining and reinforcing long-term investment strategies for a generation that thinks in real time.

I cannot claim to have all of the answers but it is something that I

Adapting business practices for the next generation of clients

Robert KinnunMidland, MI

Madison Avenue Securities, Inc.

I“

Robert Kinnun is a registered representative of and offers securities through Madison Avenue Securities, Inc. (“MAS”), member FINRA & SIPC, a registered investment advisor.

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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.

EditorDavid Wismer

Associate EditorElizabeth Whitley

Contributing WritersLinda Ferentchak

David Wismer

Graphic DesignerTravis Bramble

Contributing PhotographerSteve Puppe

December 04, 2014Volume 4 | Issue 10

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.

December 4, 2014 | proactiveadvisormagazine.com 3

TIPS & TOOLS

SWIMMING WITH THE

SHARKSBy Linda Ferentchak

15 developers of active investing strategies faced fierce competition at the NAAIM 2014 Outlook Conference.

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proactiveadvisormagazine.com | December 4, 20144

continue on pg. 11

ince the formation of the first finan-cial markets, investors have sought to find the edge—the strategy or insight

that blunts the pain of market declines and fo-cuses on profitable investments. Over hundreds of years of market analysis, calculations, obser-vations, and theories, the single right approach has yet to be found. But the ongoing challenge of balancing the market’s promise with its peri-odic wealth-destroying tendencies has created a wide range of innovative investment strategies, reflecting the diversity of how individuals ap-proach the risk and return aspects of investing.

This variety of thought processes was very much in evidence at the “Shark Tank Audi-tions” at the National Association of Active Investment Managers (NAAIM) Outlook Conference on November 11, 2014. Fifteen investment managers brought fifteen different strategies to the podium in rapid-fire progres-sion, with seven minutes of presentation time followed by five minutes of questions and answers. A brief overview of some of the top-ranked, dramatically different approaches is provided below. But first, a little background.

Back in May, NAAIM hosted its first Shark Tank—an opportunity for the developers of active investing approaches to pitch their strat-egies to fellow advisors and active investment managers in pursuit of sub-advisor agreements. The success of that endeavor led to these recent auditions for the upcoming 2015 NAAIM Manager Showcase finals. Held in Dallas, Texas, the two-day conference attracted more than 90 active managers. NAAIM antici-pates announcing those firms selected to appear

at the 2015 Manager Showcase finals later in December.

Actuarial Management Company LLC

Receiving high audience ranking and high scores from the judges/sharks was Jonathan Wallentine of Actuarial Management Company LLC (ämco) with his presentation of their com-pany’s Risk Managed Fund approach. The fund Eagle Mountain uses a computer model that

identifies and exploits statistically predictive pat-terns in the daily movement of the broad S&P 500 market. An adaptive algorithm identifies investor sentiment, which the firm maintains manifests in the market as predictable and trad-able patterns in the up and down swings of the S&P 500.

Good Life Asset Strategies

DeWayne Hall of Good Life Asset Strategies brought an options-based strategy, the Good Life Theta Program, to the auditions. The Theta Pro-gram pursues growth through the accumulation of large numbers of small, profitable trades in deep out of the money (DOTM) put options in select equities. Active management techniques are used to limit the number and severity of los-ing trades.

Capital Research Advisors LLC

Ken Graves of Capital Research Advi-sors also presented a long/short/leveraged trading strategy designed to buy representa-tions of the S&P 500, DJIA, Russell 2000, Nasdaq 100, or Mid Cap 400. The model is 100% invested, or not, with extended pe-riods when no trades are made. Results for both the short-term and intermediate-term variations of the strategy were presented, resulting in considerable interest from the audience.

Potomac Advisors Inc.The auditions saw the return of Rich

Paul to NAAIM with his Evolution Market Timing System (EVO). Rich was one of the 1989 founding members of NAAIM and wrote its original performance measurement stan-dards. He also founded Potomac Advisors and Potomac Fund Management. Rich thought he was ready to slow down, but retirement was

SInnovative

investment strategies reflect different

approaches to riskand return.

invests the majority of its assets in a diversified basket of fixed-income investments from in-vestment-grade corporate bonds, to floating rate instruments, preferred shares, mortgag-es, and REITs. But then, this seemingly stan-dard income approach takes on high-octane potential by investing income generated from the fixed income allocation in equity alterna-tives. The goal is upside equity participation while protecting the fund from losses in down markets.

Eagle Mountain Advisors LLCAlso ranking high in the judging was

Dudley Lehmer of Eagle Mountain Advisors LLC with a long/short/leveraged S&P 500 strategy using funds from Guggenheim Rydex.

December 4, 2014 | proactiveadvisormagazine.com 5

15

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0

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-15

Dec-13

Jan-14

Feb-14

Mar-14

Apr-14

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Jun-14Jul-1

4Aug-1

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Nov-14

Cons. Discret. (+7.3%)

Energy (-10.1%)%

gai

n or

loss

Oil price decline has divergent impact on stock sectors

he big news in last week’s holiday-shortened trading was undoubtedly

the continued free fall in oil prices and its impact on energy sector stocks. With the S&P 500 trading last week near all-time highs—and up about 12% YTD through Friday, November 28th—stocks included in the S&P 1500 energy sector were down 37% on average from 52-week highs.

OPEC’s decision on Thanksgiving Day to continue member-country production at roughly current levels was obviously the major contributing factor to another leg down in global oil prices. According to USA Today, economists and analysts believe OPEC’s position could threaten financing for some U.S. oil industry expansion and trigger market consolidation in an “only-the-strong-survive” scenario. They also speculated that the somewhat unusual move to maintain production in response to weaker prices is likely geared to secure market share amid stronger competition from U.S. shale oil producers.

While OPEC’s decision was reportedly not unanimous, statements from Saudi Arabia and the United Arab Emirates were telling, with the UAE’s energy minister saying, “OPEC countries

T

Source: Bespoke Investment Group

will compensate any decline in the world supply as we are the most cost-effective producers compared to unconventional (sources).”

Energy analyst WTRG Economics boiled down the dilemma facing OPEC oil ministers as a question of “whether to endure short-term pain for longer-term gain”—with lower intermediate-term oil prices possibly helping shaky global economies and leading to increased energy demand over the long run.

While declines in oil sector stocks are of concern to many investors, the significant

upside of lower energy prices can be seen in both the impact on consumers’ discretionary spending budgets and lower material input costs for many industrial, transportation, and consumer U.S. sectors.

The wide divergence between S&P 500 energy stocks and those of the consumer discretionary sector can be seen in the accompanying chart. While energy stocks were generally outperforming discretionary stocks for much of 2014, the relationship has completely reversed with oil’s price decline.

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FPA Study: Advisors fall short on business growthSignificantly improved growth is reported for advisors with defined, actionable business plans and focused marketing tactics.

Mean-reverting profits and other concernsCost-cutting and productivity increases have fueled an impressive run of corporate profits since the Great Recession, but optimistic future growth rates are at unprecedented levels.

SRI assets up 76% since 2012

Socially responsible investment assets in the U.S. have grown 76 percent over the past two years, constituting a $6.57 trillion sector at the start of 2014, according to a new report.

S&P 500 ENERGY SECTOR VS. CONSUMER DISCRETIONARY SECTOR: YTD

7December 4, 2014 | proactiveadvisormagazine.com

TOPPING THE CHARTS

L NKS WEEK

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By David WismerPhotography by Steve Puppe

problems with buy-and-hold

The impact of severe bear markets spurred on Rodger Sprouse to find client investment solutions beyond buy-and-hold. Active money management has come out on top.

Rodger Sprouse

4

8 proactiveadvisormagazine.com | December 4, 2014

Proactive Advisor Magazine: Rodger, what influenced you to become a financial advisor?

Rodger Sprouse: There were several differ-ent factors. I was raised in a family that was all about teaching and helping others—my father was a pastor and my mother was a math teacher. I think I picked up an affinity for counseling and education and a strong inclination toward math and problem solving. My grandfather was passionate about investing and introduced his grandkids to the basics, which helped us buy our first stock—and I mean stock as in one or two shares. I invested on a regular basis in college and I knew that financial services was the area I was going to pursue after graduation.

Did your investing philosophy change over time?

Certainly. When I began as an advisor in the 1990s, it was all about mutual funds and spe-cific asset allocation styles—I also had a strong grounding in insurance products and annuities. Everything was basically long-only and advisors and clients were conditioned to accept the ups and downs of the markets.

The tech bubble of the early 2000s was a real eye-opener for me—even my grandfather remarked how fundamental analysis and real-istic pricing had gone out the window. Though my clients were not fully exposed to equities at the time, it was hard to accept the kinds of losses that occurred. I did not feel it was justi-fiable to tell clients that those were only paper losses—that they had to wait for the market to come back.

Since then I have been engaged in finding solutions outside of buy-and-hold investing, which led me to active money management for many of my clients.

How do you explain concerns about buy-and-hold investing?

There are a lot of misconceptions about buy-and-hold and indexing out there. Clients are influenced by the latest thing they read, and people have very short memories. I explain four problems with buy-and-hold in a systematic fashion that I feel is pretty persuasive.

First, people can be seduced by the arguments about average annual returns for the S&P 500. Over time market returns on

an average annual basis are clearly positive and markets have historically trended higher. But looking at average returns only is not a sound basis for an investment strategy. For example, if the market is up 20%, down 50%, and then up 30% in three years, the average percentage gain or loss is basically flat. In reality, $100,000 invested under that scenario is down to about $80,000 at the end of the three years. People just do not understand that math until it is explained to them.

Second, buy-and-hold really only works effectively over very long time frames and when dollars are not being withdrawn to fund retirement income or other needs. The sequence-of-returns dilemma is something people facing retirement or already in retire-ment need to be aware of.

Third, the emotional pain of going through steep drawdowns in bear markets is not some-thing most people are willing to endure. And it

can make for some very poor decision-making under fire, even for those with the best of intentions.

Fourth, why shouldn’t investors look for a way that may deliver a good portion of the gains of buy-and-hold in bull markets, while avoiding big losses in bear markets? It makes perfect sense to me to use a different investment approach, and my clients tend to agree once it is fully explained.

Can you expand on that?

I want to be clear that I am not advocating for or against any specific asset class or invest-ment vehicle. Everything has to be predicated on an individual’s or couple’s financial planning needs, time horizon, and a proper risk assess-ment for their situation. I am an advocate of a bucket investment approach to plan for the use of retirement assets—short-, medium-, and long-term assets.

Within that framework, there can usually be a place for just about any kind of investment. But I tell clients that not all investments are created equal and each may have a specific role depending on the proper planning objectives. That said, I am placing more and more client money into the hands of third-party active managers, especially for longer-term growth assets.

I feel fortunate to have affiliated with Titan Securities as my broker-dealer. They allow me the flexibility to use a wide variety of invest-ment products and strategies, and have access to many third-party active managers. While they conduct their own thorough due diligence, I also conduct my own, particularly to fully understand a manager’s strategic approach and philosophy.

continue on pg. 10

Rodger SprouseFounder/CEO: Sprouse Financial Group, Inc.

Broker-dealer: Titan Securities

Estimated AUM: $90M

Licenses: Series 7, 63, 65

Advisory Board: Senior Market Advisor

Public speaker: United Professionals;The Naylor Group; BCA

Co-host: Financial radio show

“Since the early 2000s, I have been finding

solutions outside of buy-and-hold ... which led

me to active money management.”

December 4, 2014 | proactiveadvisormagazine.com 9

Show your clients a

friendlier

bear market

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The opportunity for profits

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L E A R N M O R E

There are many alternatives out there, and I tend to use multiple active strategies within a portfolio. The overriding message I give to clients is that we attempt to find the right strat-egies to navigate volatile markets and manage risk, while hopefully achieving the returns they want. We recognize that there will always be bumpy roads in the markets, so we use man-agers that can make adjustments to portfolios according to market conditions.

Another major point about the active man-agers I use is their ability to construct active strategies across the risk spectrum. Although I primarily work with clients focused on retire-ment needs, I do have many younger clients as well. Recently I was working with a fortyish client, who had a long time horizon and fairly strong appetite for risk. We were able to con-struct an actively managed portfolio for him that was oriented to more aggressive growth, but also managed for risk with defensive mech-anisms if markets really go south.

How do you distill this down to a core message for prospective clients?

Many people are still terrified of the stock market, especially as they approach retirement. They naturally feel they have to gravitate toward what they think are the safe havens of bonds, CDs, or even cash. I tell them that they do not have to accept pitiful returns and can grow their assets with a higher level of risk management than they might think exists.

This can be through a combination of asset management approaches and products, includ-ing insurance products, annuities, alternative investments, and actively managed portfolios. It is very reassuring for people to learn that they can continue to grow their nest egg at attractive rates of return without all of the risks of the stock market or the changing prices of bond portfolios—they do not have to settle for excessively low rates of return.

continued from pg. 9

Rodger Sprouse is a registered representative of and offers securities and investment advisory services through Titan Securities, member FINRA/SIPC. Sprouse Financial Group is not affiliated with Titan Securities. All investments contain risk, including the loss of the entire principle invested. There can be no assurance that any investment product will achieve its investment objective(s). Investments should be considered based on personal investment objectives and suitability.

10 proactiveadvisormagazine.com | December 4, 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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continued from pg. 5

too tame for someone who can’t stop trying to conquer the market. With EVO he offered twelve years of outstanding performance from a system he clearly identifies as market timing.

ProfitScore Capital Management Inc.Long/short U.S. Treasuries were the invest-

ment of choice for John McClure of ProfitScore Capital Management in his LSGB approach. Advantages of the LSGB strategy include liq-uid transparent investments, tactical models to minimize systematic risk, and multiple models to mitigate model-specific risk, along with the ability to take long and short positions.

Brighton Wealth Management Inc.Alan Battles of Brighton Wealth Manage-

ment, Inc. had a completely different take on active management by focusing on Utilities (electric, gas, water) with the highest project-ed dividend growth rates. Five top Utilities are

held in the portfolio with periodic reallocation based on the availability of better performing investment alternatives. The strategy offers in-creasing dividend income, appreciation poten-tial, and low correlation to S&P stock indexes.

MESA Software

John Ehlers of MESA Software introduced the group to the MESA PHASOR, a short-term trading system for S&P 500 stocks. The unique feature of John’s approach is his use of market cycles in the investment decision. MESA stands

for Maximum Entropy Spectral Analysis. The MESA algorithm makes a high resolution es-timate of the entire range of potential cycles. Digital signal processing techniques are used to identify tradable cycles in the market on a stock-by-stock basis.

These presentations were profiled due to their high judging scores and to show the diversity of the thought processes on display at the auditions, but are not by any means a recommendation. As always, investment managers and advisors should perform their own due diligence. Whether any of these eight presentations or their competitors caught the interest of the judging panel and au-dience members often came down to the listener’s background and expertise. But one fact was loud and clear: active management is alive and well among the inquiring minds of the NAAIM mem-bership.

Active managementis alive and well among

NAAIM members.

11December 4, 2014 | proactiveadvisormagazine.com