A model approachLowering client financial risk

Pg. 8

Steven Redelsperger

October’s reputation for volatility • pg. 7

Reducing tax exposure • pg. 3

Improving your investor behavior profiles • pg. 4

October 23, 2014 | Volume 4 | Issue 5

First magazine focused on active investment management

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

Most people have done a fairly ade-quate job in the accumulation phase of benefiting from tax advantages. Most people, on the other hand, have very little idea of how to best manage their finances and investments for taxes on the distribution side. So we will design those strategies for clients as a regular part of our planning process.

We can put together a very attrac-tive planning and investment package that will meet clients’ risk tolerances, provide income strength through retirement—assuming adequate assets are there—and create a legacy scenar-io. All with an eye to minimizing tax exposure.”

efore I entered the financial services industry, I worked

for over ten years as an accountant and controller. This has naturally led me to add a strong tax analysis component to everything I do on behalf of my clients.

Our focus as a firm is on middle-American clients, and I have found that to be a largely untapped market for advisors—greatly under-served—and also a group that needs our services just as much as high-net-worth clients. For this group, every dollar counts in terms of building a total financial strategy and providing for their family’s retirement needs.

For each client, we go through a complete financial analysis, building toward setting up a strategy that will meet goals for both the short term and the long term. Most of the clients I work with may have a combination of taxable assets, tax-deferred assets, and tax-exempt assets. As people move closer to retirement, this naturally includes factoring in such elements as the sale of a house, rolling over a 401(k) plan, claiming strategies for Social Security, and how to pass along their estate to heirs.

The point is that all of these assets, potential incomes streams, and their current tax status must be considered in developing a tax-advantaged financial strategy. As a CPA, I feel extremely well-qualified to do the bulk of this analysis, calling upon the services of estate planning attorneys, as necessary.

Creating tax-advantaged financial strategies

Gary StrawnPlano, TX

Transamerica Financial Advisors, Inc. (TFA)

B“

Gary Strawn 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. Tax and/or legal advice not offered by Transamerica Financial Advisor, Inc., Transamerica Financial Group Division or their affiliated companies. Please consult with your personal tax professional or legal advisor for further guidance on tax or legal matters. TFG004852-09/14.

Read text only

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 WritersKellye WhitneyDavid Wismer

Graphic DesignerTravis Bramble

Contributing PhotographerMarla Klein

October 23, 2014Volume 4 | Issue 5

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 23, 2014 | proactiveadvisormagazine.com 3

TIPS & TOOLS

Read text only

Risky BusinessHow to create a better

investor behavioral profile

By Kellye Whitney

proactiveadvisormagazine.com | October 23, 20144

It is hardly news that many investors remain permanently scarred by the credit crisis of 2007-2009. Many research studies since have detailed the long-lasting psychological impact of the largest market declines since the Great Depression. The Federal Reserve’s 2013 Survey of Consumer Finance found that “only 48.8% of Americans held stock either directly or indi-rectly in 2012.” According to CNBC, that was the lowest level since 1995.

So while equity markets have rebounded to make new high after new high in 2013 and 2014, a large cohort of Americans has been ef-fectively sitting on the equity sidelines. They are now suffering from the doubly painful effects of not only having memorialized permanent losses to their net worth, but also mentally calculating “what might have been” had they pursued some other course of investing behavior.

Some investors in this category may be having the exact opposite reaction, refusing to pay any attention to the stock market as it still represents a far too-recent and troubling reminder of the losses suffered. Data from a Wells Fargo/Gallup Investor survey reveals that while 64% of respondents did know that the broad stock market went up in 2013, only 7% knew the average increase was anywhere close to the 30% range.

These attitudes are highlighted by another survey finding: 56% of U.S. investors favor cash holdings or buying CDs versus investing in stocks. This large group is likely suffering from the phenomena of “anchoring bias,” meaning they are “anchored” to a negative frame of reference for investing. This bias, not to mention the trauma of losing significant amounts of money, has left them with a low tolerance for riskier assets.

According to Victor Ricciardi, a finance professor at Goucher College and co-author of Investor Behavior: the Psychology of Finance Planning and Investing, the pain of emotional and financial loss can have a long-term effect on an investor’s willingness to get back into the stock market.

No matter the prospective client’s net worth, an advisor must obviously begin with a full understanding of the individual’s or cou-ple’s financial state of health, current objectives, retirement goals, and hopes for the future. But assuming the advisor applies his or her usual expertise to gaining that full financial picture for planning purposes, what about the specific issue of addressing an ongoing fear of the markets? While a variety of financial asset class or product “buckets” are available to advisors, equities still usually represent the asset class of choice for growth and protection against what is likely to be some future uptick in inflation.

A full and thorough discussion of risk is the fundamental starting point. Establishing meaningful risk profiles can help advisors begin to understand investor behavior and help cli-ents understand their own behavior—so that individuals have a fighting chance to get off the bench and invest again. Time-tested ques-tionnaires or tools evaluate risk perception and risk tolerance—the maximum amount of risky investments an investor would be comfortable within their portfolio. But traditional versions

of these instruments don’t always contain the right questions to elicit enough information to help an advisor make a thorough evalua-tion—nor are they powerful enough alone to effect a change to now ingrained psychological behaviors.

A competent risk tolerance questionnaire identifies specific demographic information and other important objective questions related to identifying suitable investment strategies, such as: level of investable assets, time horizons, the expected frequency of contributions and withdrawals, broad return objectives, and toler-ance for risk. However, there is some likelihood that they may fall short when trying to ascertain an investor’s more-nuanced perception of risk. Advisors who must counsel clients with fears surrounding the markets might delve into more behavioral questions like:

What is your history with investing? What is your family’s history with investing? Do you feel confident about investing? (Why or why not?) Do you get emotional about investing? Do you worry about investing? Are you knowl-edgeable about investing? How do you react to financial news about the markets? What were your emotions and behavior during the 2008 financial crisis?

It may be equally important to probe an in-vestor’s family situation growing up and current life situation.

For example, did their parents fight about money? Was there any stress in their family related to financial issues? When and how did they become financially independent? Did they lose their parents at an early age? What is the financial situation of their children? Are there

continue on pg. 11

Understanding clients’ behavioral biases and employing active risk management can help overcome negative attitudes toward investing

The long-lasting effects of the Great Recession

Going beyond planning basics

Investor PreferenceIf you had an extra $10,000 to save or invest, what would you do with it?

Invest in the market

Keepin cash

Buy a CD Other/No opinion

41% 36% 20% 3%

Wells Fargo/Gallup Investor and Retirement Optimism Index, Jun 27 - Jul 9, 2014Source: Gallup, Inc.

October 23, 2014 | proactiveadvisormagazine.com 5

10131619222528

Date

N D2013

J2014

F M A M J J A S O

VIX Close VIX Futures

Valu

e

October lives up to volatility reputation

lobal markets have experienced what Barron’s this past weekend

called “extraordinary” moves over the last few weeks, with October living up to its reputation as the most volatile of market months.

While broad major U.S. equity indices finished last week with relatively modest losses (down 1% on the S&P 500 and only off 0.4% on the NASDAQ Composite), the ride was anything but calm. The Dow (DJIA) fell over 700 points, or 4.5%, from last week’s highs to the low point, while ending the week with a loss also of around 1%. The low point of 15,885 on the Dow was the first excursion below 16,000 since February of this year. For the S&P 500, the low point of last week marked a 9.9% correction off of recent intraday all-time highs set in September, fulfilling, at least temporarily, the widespread calls for a 10% correction.

Volatility was also widespread around the world, with European markets hit especially hard on lowered growth expectations. For the past month, none of the world’s larger stock indices were in the green as of last Friday (10/17), and only 14 of the top 46 markets were positive for the year. The world’s worst-performing equity market, according to Global Guru Capital, was Greece, which is facing issues that go far beyond the slower growth story. Greece was down over 30% for the year as of 10/17.

G

Source: Barron’s/CBOE

Volatility was also found in the U.S. in the fixed income and treasury markets, with the 10-year benchmark note “slicing through 2% on Wednesday (10/15) all the way to 1.86% in a manner reminiscent of the infamous flash crash of 2010” (Barron’s). However, the market reversed itself, as with the flash crash, and the 10-year finished last week little changed at 2.20%.

In response to all of these moves, the CBOE’s Volatility Index (VIX) made a major move off of the consistently low levels of 2014. The VIX broke briefly above 30 last week and closed above 25, after trading for much of the year in the 12-16 range. That such an occurrence hit

the markets in October is hardly a surprise, with October historically the most volatile (though not worst-performing) of all market months. Since 1950, October is the clear “winner” of all months showing 10% up or down market moves, with 17 occasions, followed next by January with 13.

According to Bespoke Investment Group, since 1965, “the average spread between October’s closing high and closing low for the SPX has been 8.1%, while the median has been 5.3%. At a range of 5.7% so far, this October through mid-month has actually been a bit below average in terms of relative movement.”

Read text only

5 critical marketing questions financial advisors must ask themselvesAs a financial advisor, progression is key when it comes to marketing. Relying on the same tactics and strategies used for previous years will not provide an advantage.

On the tendency of large market losses to occur in successionThe distinctions between an overvalued market that becomes more overvalued, and an overval-ued market vulnerable to a crash, come down to discernable shifts in risk aversion.

Half of HNW NextGen investors keep parents’ advisorsRecent survey findings show better results due to improved education and engagement by advisors, but still substantial room for improvement.

CBOE VOLATILITY INDEX

7October 23, 2014 | proactiveadvisormagazine.com

TOPPING THE CHARTS

L NKS WEEK

Steven Redelsperger

By David WismerPhotography by Marla Klein

A model approach

Read text only

Lowering client financial risk has been a top priority for Steve Redelsperger since 2008. Integration of the strategic models of active money managers with his firm’s financial planning model has worked for the good of his clients and the growth of his practice.

8 proactiveadvisormagazine.com | October 23, 2014

Proactive Advisor Magazine: Steve, what are some issues you work through with clients?

Steve Redelsperger: It is really the same macro issue over and over for most of my clients. People generally just do not have a systematic tool or model to pull together all of the elements of their financial life and to track their progress versus their goals. They have many financial tools or products that they have accumulated over the years, but no systematic way of making sure they are working together in the most efficient and coordinated fashion. Since one of my top priorities is helping clients in lowering their financial risk overall, I am very process-oriented, especially in the area of risk management.

Can you describe the process?

We use a model that breaks elements of financial planning into three broad categories: protection, savings, and growth. Without going into a great amount of detail, the protection component covers all elements of insurance products, disability coverage, personal liability, Social Security, wills and trusts, etc. The savings bucket covers liquid assets, CDs, savings ac-counts, 401(k)s, IRAs, annuities, the cash value of life insurance policies, etc. And growth refers to investment assets outside of tax-deferred vehicles, whether it is stocks and bonds, real estate, MLPs, or other asset classes.

In all of these areas we are looking to reduce risk while allowing for financial growth and stability over time. The real beauty of our model is how it can capture the most detailed information and organize and illustrate it in simple and highly visual one- or two-page exhibits. It is a very fluid process that can be up-dated frequently and efficiently, and also tracks changes in debt obligations and cash flow. Let’s focus in on the growth component. What is your broad investing strategy for clients?

It is all about risk management—I am not interested in trying to hit home runs for clients all of the time. I’m looking for decent rates of return. I can see from my models that if I can eliminate or limit those occasional negative annual rates of return, then the portfolio can have a decent rate of return over time. It is about trying to avoid the one or two years of

deep losses that can derail a portfolio’s total performance.

This is a prime reason why I’m using active money management—to protect that down-side, without losing too much of the upside. I will also consider using insurance products, especially for retirees who need to count on stable sources of income. If our active money managers, for whatever reason, have a lackluster year, we know there will be an income stream available without market risk for those retirees. So we’re looking at all different ways to reduce risk. If I can reduce risk overall in the portfolio by combining products, then I will do it that way, rather than use just a single product. How did you first get introduced to active money management?

I have been in the business for quite a few years and started out with a pretty typical investment approach: heavy on mutual funds, smart allocation models, and rebalancing and reallocating. My clients were well-diversified going into the dot-com era of the early 2000s, but still, the anxiety and depth of the losses were very tough to swallow.

I believe buy-and-hold investing may work in theory over a very long time frame. The issue is that most people are not mentally prepared to accept large losses that come with downturns—nor should they be. It is a natural reaction to want to run to cash near the bottom in a downturn. 2008 was really the last straw for me and I knew my clients needed more protection from market crashes going forward.

Frankly, it was a little tough for me to turn over some control of my clients’ portfolios. I have a strong mathematical background, have always been a student of the markets, and I think am pretty sophisticated in terms of investment strategy. But it has become apparent to me that active money managers have tremendous resources and models that I cannot replicate on my own, nor would I have the time to monitor anywhere near as effectively.

I also like the fact that some of the active managers we use have tactical components built into their strategies that allow for prof-iting during down markets. That is a very appealing strategic element for clients. The more scientific and disciplined approach of third-party active managers also fits in well with my quantitative orientation in general.

continue on pg. 10

Steven RedelspergerPresident, Redelsperger Financial GroupMinneapolis, Minnesota

Broker-dealer: Cadaret, Grant & Co., Inc.

Licenses: 7 & 63

Estimated AUM: $44M

B.S., Mathematics: University of Minnesota

Practitioner: Lifetime Economic Acceleration Process TM

2012 Agency Leader: Wisconsin Financial

October 23, 2014 | proactiveadvisormagazine.com 9

Steve Redelsperger is a Registered Representative offering securities through Cadaret, Grant & Co., Inc. member FINRA/SIPC. Branch Office: 232 1st Avenue E., Shakopee, MN 55379. Redelsperger Financial Group is not affiliated with Cadaret, Grant & Co., Inc.

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

What other reactions do clients have to active management?

I told you I am very process-oriented, but that does not mean that there is just one solu-tion for every client. Clients like the fact that the managed accounts we use are completely tailored to their specific risk profile and their financial plan. While we use some excellent risk profiling tools, we have to make sure that each client’s response is fair and accurate, so I tend to walk them through that very specifically.

We also need to make sure that those assets earmarked for active money management carry an appropriate risk level in the context of every other element of a client’s financial plan. Clients appreciate that we treat their

needs as very unique, linking them to the appropriate method of professional investment management.

There is also a secondary benefit to active management in terms of client attitudes. Many clients, especially prospects and new clients, are still overall very concerned with the risk in the stock market after two major crashes this cen-tury. Explaining the active management story and its risk management focus helps overcome at least some of those fears.

As my practice continues to grow, I contin-ue to move more and more client money into active management. This approach has benefit-ed the clients of our firm for several years, and I believe it will remain a successful approach going forward.

continued from pg. 9

10 proactiveadvisormagazine.com | October 23, 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

any special circumstances surrounding anyone in their immediate family, such as health issues or physical or intellectual special needs? What is their role and financial responsibility for their parents’ or other relatives’ elder care? How do they view their current job stability and salary expectations?

These answers will also inform their behav-ioral risk tolerance.

assigned to different “buckets” of client assets or those assets earmarked for different “purposes,” i.e., imperatives such as funding retirement income, purchasing a first or second home, saving for college educations, assisting in elder care, starting a new business, making charitable contributions, or creating a transferrable legacy.

There are many types of risk. Systemic risk covers broad external factors: how changes in Fed policy might affect the current market outlook or the possible adverse impact of geo-political risk abroad. Then there’s investment risk: what factors might be affecting a specific company or large sector of companies. There’s also sequential risk: how an individual investor is affected by changes in their portfolio’s invest-ment value at a specific point in their overall time horizon. While all of these are important considerations, it is really the latter that advisors must carefully evaluate for each client.

For those clients still very nervous about investing, reducing the fear of that portfolio-destroying sequential risk is critical.

Gaining a deep understanding of a client’s behavioral profile and biases is a major part of the equation—employing investment strategies with a strong risk management component and non-emotional defensive capabilities can be equally important.

Investments really fall into two broad categories, says DALBAR’s Harvey: capital appreciation and capital preservation. “It’s the capital preservation side where we see a key role for the active manager,” he explains. “In other words, providing the tools that prevent the investor from being out of the market (or in) at the wrong time. If you’re invested in an index and the index goes down, nothing is going to change (with a buy and hold investing strategy). If you look at market conditions and the prudent action is to stand on the sidelines, passive management doesn’t allow you to do that—active management does.”

continued from pg. 5

Client risk profiles may vary over time and by purpose

Louis Harvey, President of DALBAR, Inc., a prominent national financial services market research firm, agrees with Ricciardi that many investor risk profiles often fall short when informing investor behavior. Traditional pro-files assume an individual has one level of risk tolerance, which is not always the case. Factors change over time and risk profiles have to be periodically reassessed. DALBAR goes so far as to suggest different risk assessments might be

11October 23, 2014 | proactiveadvisormagazine.com