January 15, 2015 | Volume 5 | Issue 2

Active investment management’s weekly magazine

Expansion of gold/oil ratio

Dissing the investor

More touches, more referrals

Next bear market: Grizzly or Teddy?

Trish Beine

In tunewith thetimes

The dismaying trend among behavioral finance experts and the business media

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Advisor perspectives on active investment management

3January 15, 2015 | proactiveadvisormagazine.com

LOUD & CLEAR

Dissingthe InvestorThe dismaying trend of behavioral finance experts and business media of looking down on investors is unwarranted and counterproductive.

By Linda Ferentchak

proactiveadvisormagazine.com | January 15, 20154

opular financial advice all too often can be summed up with the statement that the average person is incompetent when it comes to investing, either making bad deci-

sions or paying too much for too little—whether professional advice or investment returns. It’s all “because of their bad behavior” says one psychologist and behavioral finance expert, sounding like a frustrated parent dealing with a two-year-old.

This attitude is part of what seems to be a growing trend that views the investor as incapable of making the right decision and who therefore requires laws and institutions to impose “correct” behavior. But disrespecting the investor is a corrosive trend that could cause far more damage than the so-called “bad behav-ior.” The reality of behavioral finance is that it helps establish the need for active investment management.

The average investor is not a foolish person. To accumulate the funds to invest, they had to first acquire those funds and then have the dis-cipline to save rather than live for the moment. They had to be able to envision the future

consequences of having or not having money and make decisions based on what they per-ceived as good for their future. To some degree, they had to be cautious, aware that maintaining sufficient financial resources is critical, and that the wrong investment at the wrong time could cost them their savings.

When one looks at what the behavioral financial crowd has branded as counterproduc-tive investment behaviors, it becomes obvious that these are deeply embedded and common human tendencies, and even survival tactics. Traits that have enabled mankind to prosper as a species can be strengths in the investment process. Instead of denying the value of behav-ioral traits, it is more effective to acknowledge their reality and put them to work.

Emotional decision-making

Great businesses are generally built by vision-aries, the individuals who are emotionally involved in the success of the product and who make decisions based on their emotional involvement— decisions that often make no sense in terms of the numbers. An investor who is not emotional-ly involved in the success of his or her portfolio would seem to have no reason to invest in the first place. The trick is channeling that emo-tional commitment to positive outcomes over the long term, rather than spur-of-the-moment decision-making driven by the emotions of fear and greed.

continue on pg. 11

PDisrespecting the investor is a corrosive trend that could cause far more damage than so-called “bad behavior.”

In choosing to work with a financial advisor, investors acknowledge that they are not experts at investing and that someone else may have a better insight on how to help them reach their financial goals. It’s similar to accepting that there is a knowledge base and skill set behind being a good plumber that can’t be replaced with guesswork and “do-it-yourselfism.” Yet, ironically, working with a financial advisor is viewed by many in the media as foolish because it entails paying fees that could reduce returns.

January 15, 2015 | proactiveadvisormagazine.com 5

30

25

20

15

10

5

(One ounce of gold would buy 24 barrels of oil, the highest since 1998)

‘90 ‘92 ‘94 ‘96 ‘98 ‘00 ‘02 ‘04 ‘06 ‘08 ‘10 ‘12 ‘14

Barr

els o

f oil

per o

unce

of g

old

Ratio of gold to oil hits levels of the 1990s

he majority of market-related lead stories earlier this week were devoted to new and different takes on the remarkable global plunge in oil prices. On Monday, two of the

major headlines came from disparate sources, as Goldman Sachs published an attention-grabbing report and comments by Saudi Prince Alwaleed added “fuel” to the oil market turbulence.

Goldman’s analysis, according to the WSJ, effectively said oil prices should remain “lower for longer” than most market participants currently expect, a condition that may “curtail investment in shale until the market has re-balanced.” The investment bank slashed its Nymex 2015 crude forecast to $47.15 a barrel, from $73.75 a barrel, and cut its Brent estimate to $50.40 a barrel, from $83.75 a barrel.

The global oil sector is getting increasingly squeezed by the slump in oil prices and future investments worth trillions of dollars may be scrapped, according to Goldman analysts. Goldman found in its review of the world’s largest new oil-and-gas fields that pre-sanctioned projects will be “uneconomic” at $70 a barrel, with around $2 trillion worth of future investments at risk.

Prince Alwaleed’s perspective also roiled markets, as he commented in an interview, “I’m sure we’re never going to see $100 (per barrel) in the future. I said a year ago that the price of oil above $100 is artificial.” At virtually the same time, Venezuelan President Nicolas Maduro told Middle Eastern OPEC members that prices

T

Source: Thomson Reuters

“need to return to $100 a barrel for economic equilibrium.”

Reuters noted that the collapse of oil has taken its relationship to gold prices back to levels not seen since the 1990s (see chart). Reuters’ analysis notes:

“During the latter part of the Clinton years, the price for a barrel of West Texas Intermediate oil was barely in the double digits and gold

checked in at a touch under $300 per ounce, both of which seem like misprints by current standards. But, historically, gold has cost about 15 barrels of oil per ounce, and while an increase in this number can sometimes be seen as a sign of deflation, this time analysts believe that oil’s free fall is due to oversupply and obstinate attitudes—and gold is rising chiefly on global economic and geopolitical concerns.”

RATIO BETWEEN GOLD AND U.S. OIL PRICES

7January 15, 2015 | proactiveadvisormagazine.com

TOPPING THE CHARTS

Like the rapid advances in the delivery of entertainment and music to consumers, technology can make a good thing even better. Modern investment strategies and tools provide a level of sophistication required by today’s financial markets.

IN TUNE WITH

THE TIMES

Trish Beine

By David WismerPhotography by Sarah Stathas

8 proactiveadvisormagazine.com | January 15, 2015

continue on pg. 10

Proactive Advisor Magazine: Trish, could we talk a little about your background?

Trish Beine: I grew up in the beautiful Monroe County area of Wisconsin on an active dairy farm. I think I learned through that ex-perience the values of diligence, hard work and patient persistence. I earned a scholarship to college, studied business finance and went on to work for several years in the banking indus-try. I have been in the business since the early 2000s, and I am now a financial advisor with The Strategic Financial Alliance and market through ClearPath Financial Partners. That was a smart career choice and every day is a pleasure working with the management and clients of our firm.

What do you most enjoy about being a financial advisor?

I like helping people honestly face and take action to solve their financial issues. After the market downturns and recessions we have had since 2000, a lot of people have felt like they were trapped in a “burning building.” While it is easy to understand that feeling, a calm and rational approach to financial planning and investments can make a huge difference in people’s lives. I believe our firm can make a difference in how clients address their financial issues, as well as in the practicalities of sound strategies and implementation. That is very rewarding to me.

How do you approach the implementation phase in terms of investments?

Let’s assume we have completed the fi-nancial planning stages and have reached the recommendation and implementation phase. If we recommend that it is appropriate for a client to have an investment allocation for their longer-term assets, I will help them select professional third-party asset managers whose

investment philosophies and strategies are consistent with their specific objectives and risk tolerance.

We have access to several third-party active managers and can use them individually or in combination. We recommend them based on several factors: their overall strategic philosophy, their track record, their service and platform, and their success in implementing their specific strategic vision.

These are highly skilled professionals who do nothing but manage money all day long and are watching many technical aspects of the markets and different sectors and asset classes. These managers are operating within rigorous predetermined guidelines matched to a client’s risk profile. From a total portfolio perspective, their combined approaches attempt to fit a client’s specific personal profile as an investor.

Do clients understand the concepts of managed money and active management?

Education is a big part of what we do and the levels of financial sophistication can be all over the map. I talk with almost everyone about how the investment world has evolved over time. Just like the digital world or commu-nications or entertainment, the financial world has changed rapidly over the last 20 years. I ask

clients if they are still using their eight-track tapes to listen to music, and of course, the answer is no. It is the same thing with invest-ments in the sense that financial tools have changed and what may have been appropriate in the past is not necessarily in tune with the times right now.

Technology continues to evolve rapidly and the world is more interconnected than ever, making sophisticated modern investment tools mandatory. Static allocations to asset classes may have worked fine at one time, but that approach may not offer the flexibility and re-sponsiveness we believe is needed to best handle risk mitigation during the types of market stress we have seen in the 2000s—and will surely see again.

We have access to professional third-party managers that can make adjustments in real time. I sometimes use a horse racing analogy with clients, not that I would ever recommend that anyone bets on the horses! I ask clients to imagine they were at the races and had a choice of placing a final bet before the race started or having the ability to change their wager at each furlong post as the race unfolds—which would they choose to do? That is similar to the way active managers can adjust to market condi-tions as they develop in a very systematic and quantified fashion.

Trish BeineClearPath Financial PartnersGreenfield, WI

Broker-Dealer The Strategic Financial Alliance

Licenses 6, 63, 65, Life & Health

Recognition Named a Five Star Wealth Manager in Milwaukee Magazine, 2013 & 2015

January 15, 2015 | proactiveadvisormagazine.com 9

“Financial tools havechanged. What may

have been appropriatein the past is not

necessarily in tune with the times today.”

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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.

L E A R N M O R E

Trish Beine is a registered representative and investment adviser of The Strategic Financial Alliance (SFA). Securities and advisory services offered through SFA, member FINRA/SPIC which is unaffiliated with ClearPath Financial Partners. There is no guarantee that active management will outperform a buy-and-hold approach to investing. Investing involves risks, including the potential loss of principal. Current performance may be lower or higher. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results. Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice. Supervising office: 414-545-0404.

continued from pg. 9

Has there been any change in client attitudes over the past five years?

It is really so dependent on the client or client couple and their specific circumstances. Our firm has many clients who weathered the financial crisis in fine shape. A good deal of credit has to go to our active managers who employed risk mitigation measures and avoided much of the worst of the market declines in 2008 and 2009.

Other clients who are newer to the firm are often afraid of investing in equities at all. They may have sold their portfolios on the way down or at the bottom and are very hesitant even now to get back in. That is where the ed-ucation piece comes in and explaining the core concepts of active money management. Our firm certainly does not have a crystal ball as to

What are the most important criteria for you in selecting a third-party active manager?

Our firm looks very deeply into all aspects of a manager in terms of their history, track record, strategies and philosophy. But I would say it is a combination of the pragmatic and the philosophical. Each manager that we use has an area of focus or something that differentiates their approach, so that is the broad strategic picture we will look at and how that will fit in with our clients’ portfolios. But the pragmatic is important as well. How good are they at execut-ing their strategies? How are they at reporting and in terms of ease of doing business? Is the leadership of their company stable? These are the kinds of things we also consider.

Trish Beine

future market direction, but we collectively do have a sophisticated set of investment models, many approaches to diversification, and strong risk management tools. That is an important concept to communicate clearly and it helps risk-averse clients see that they can still partic-ipate in equity markets as appropriate for their objectives.

I liken it to the tortoise and the hare story. Risk-managed strategies will not always deliver the highest returns in strong bull markets, but they also will likely not see the worst declines in poor market conditions. Creating this smoother ride for clients over the long run and keeping their overall financial plan on track has defi-nitely helped to fortify my client relationships. Helping clients work toward their financial goals is an amazing opportunity and responsibility and it makes my career very rewarding.

10 proactiveadvisormagazine.com | January 15, 2015

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Loss aversion

Loss aversion is a great investing trait as long as it doesn’t paralyze the investor. Bob Maynard, Chief Investment Officer at the Public Retirement System of Idaho, makes the observation that the cock-roach has one of the best long-term success rates of any creature. Yet, it has only one defense mechanism: running in the opposite direc-tion from a puff of air. Minimizing losses keeps investors committed to investing and more willing to invest when markets move upward.

Mental accounting

Mental accounting is another trait that makes good sense for individuals. Mental accounting refers to the tendency of people to put their assets in different mental compartments—i.e. the holiday gift fund, the college fund, the vacation fund, the retirement fund, the mad-money fund, etc. The challenge is that it may make it difficult for people to grasp their financial situation as a whole. Yes, all assets are the same in the end, but compartmentalizing makes it easier to make decisions about money and it may help individuals diversify their investments, taking greater risks in accounts with longer time frames, while protecting other funds that are essential to shorter-term needs.

continued from pg. 5

continue on pg. 13

Dissing

The lessons of oil

The “failure of imagination”—the inability of most people to imagine extreme outcomes—has been highlighted again by oil’s price drop and its potential second-order consequences.

Arguments for activemanagement get stronger

More financial advisors and market analysts are favoring active management for its ability to navigate risk in 2015, according to an Investment News survey.

10 ways wealth management firms can beat rivals

Mercer identifies the important and manageable things advisors can do to better compete in today’s environment.

L NKS WEEK

January 15, 2015 | proactiveadvisormagazine.com 11

What will the next bear market look like: Grizzly or Teddy?

Marshall Schield is the chief strategist for STIR Research LLC, a publisher of active allocation indexes and asset class/sector research for financial advisors and institutional investors. Mr. Schield has been an active strategist for four decades and his accomplishments have achieved national recognition from a variety of sources, including Barron’s and Lipper Analytical Services.

Bear Market withinSecular Bull

-21.7%

Bears within SecularBull with a Recession

or Financial Crisis

-23.6%-28.2%

All Bear Markets

-34.7%

Bear Markets withinSecular Bear

-39.8%

Bears within SecularBear with a Recession

or Financial Crisis

% Market Declines

Source: STIR Research LLC

he average bear market decline is 28%, but there is nothing average about them. Some are grizzly bears falling almost 40% and lasting years while others are smaller and

shorter—teddy bears in comparison. Are there ways you can tell in advance which bear is in the cave? Yes.

Investors over the past fourteen years saw retirement dreams evaporate as two grizzly cyclical bear markets took the equity markets down more than 50%.

Today we would be better served focusing on bears to come and putting them in perspective. Not all bear markets are the same, and therefore each does not deserve the same degree of concern. So let’s look at history for a clearer perspective on cyclical bear markets.

Looking back over the past 65 years with 16 bear markets and corrections greater than -14%, two important criteria separate grizzly bear markets from teddy bears:

• Are we in a secular bull or secular bear market?

• Is the economy in a recession or ‘financial crisis’?

First step, determine what type of secular market we are in. The stock market by definition is either in a secular bull or a secular bear. Long periods of rising prices, mark a secular bull (1949-68, 1982-2000, 2011-?); a lengthy period with no progress or losses (1968-82, 2000-11) marks a secular bear.

Within each secular cycle, investors will experience a number of cyclical bear and bull markets. By studying cyclical bear markets within the last two secular bears and the last two secular bulls we can see a significant difference: the average bear market within a

T

secular bear is almost 60% rougher (-34.7%) than a bear market during a secular bull (-21.7% average)! Additionally, the pain of a cyclical bear within a secular bear has lasted over two times longer: 478 days versus only 207 days during a secular bull.

Another essential element in identifying the potential of a grizzly bear versus a teddy bear is whether the country is in a recession and/or financial crisis. Since 1949, the market has had 16 corrections or bear markets over -14% which were accompanied by 11 recessions/financial crises.

Interestingly, recession or financial crisis during secular bulls has had little effect on the decline in cyclical bears. In contrast, a recession or financial crisis in a secular bear takes the bear market to a 40% loss of capital and lasts much longer, 523 days on average—a grizzly bear.

Currently the economy is clearly in a growth mode, with the past six months being one of the best such periods in a decade. No

recession in sight. In my book, “Dow 85,000! Aim Higher,” I make the argument that a new secular bull market is in progress and has the potential to produce 700% gains by 2030. If history is to repeat itself, expectations should be that the next bear/correction will probably fall into the teddy bear camp, not a grizzly.

That does not mean or imply that risk management needs to be forgotten. All risk management defenses need to stay in place, in case history doesn’t repeat itself or what starts out as a teddy bear is suddenly surprised by a financial crisis (1987) and becomes grizzly bear.

Risk management has two sides: protection of capital during the inevitable market declines and participating in major bull market moves. A bigger concern today may not be worrying about the next bear market, but making sure you are fully participating in the current secular bull.

Proactive Advisor Magazine presents weekly commentary provided by well-known market analysts, financial authors, investment newsletter publishers, and economists. The opinions expressed each week represent their personal perspectives and not necessarily those of the magazine.

proactiveadvisormagazine.com | January 15, 201512

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continued from pg. 11

Framing

Framing refers to the use of  anec-dotes  and  stereotypes  that become mental emotional filters for individuals to rely on to understand and respond to events. Framing can be a means of making complex concepts and situations easier to understand. However, fram-ing can also be used to mislead investors. The transition in terminology from “junk” bonds to high yield bonds is one of the great “re-fram-ing” stories of the financial world. Eliminating the word “junk” helped reduce the perceived riskiness of the investment.

Familiarity bias Familiarity bias is the inclination of indi-

viduals to invest in areas that they are familiar with, such as investments centered on specific U.S. sectors, their employer’s stock, or a well-known consumer company. One could easily accuse Warren Buffett of familiarity bias. Again, familiarity bias makes perfect sense and can be a much better long-term investing practice than

jumping into investments with no information other than the fact that they are currently going up. The downside is that familiarity is not necessarily actionable knowledge of the inner workings of the company.

All of these behavioral finance traits are a reality, not something to be nagged out of investors. They can even be strengths when ac-knowledged and used correctly. Active manage-ment provides the framework to accommodate behavioral finance traits and can focus those traits to investors’ advantage.

Active investment management provides a systematic approach to investing that helps remove the need for emotional decisions. It recognizes the individual’s need to minimize losses as the tradeoff necessary for a long-term

commitment to investing. Mental accounting can actually be used to diversify assets by time frame, strategy, and manager. Framing can help investors understand market cycles and the value of bear markets as both an opportunity for gains and a reality check on why defensive strategies matter. And adding risk management to investments in the “familiar” can provide the balance needed to make those investments work for the individual.

Behavioral finance traits are not always “bad behavior.” They can have considerable value when accepted and integrated into the investment ap-proach through active management.

Dissing

Linda Ferentchak is President of Financial Communications Associates Inc. She has worked in financial industry communications since 1979 and has an extensive background in investment and money management philosophies and strategies.

Instead of denying the value of behavioral traits, it is more effective to acknowledge their reality and put them to work.

13January 15, 2015 | proactiveadvisormagazine.com

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Copyright 2015© 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 FerentchakMarshall SchieldDavid Wismer

Graphic DesignerTravis Bramble

Contributing PhotographerSarah Stathas

January 15, 2015Volume 5 | Issue 2

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.

Frequency of client touches leads to referrals

Randy Kerns CIC, ChFC®

Bridgeport, WV

Voya Financial Advisors Inc.United Security Agency

Securities and investment advisory services offered through Voya Financial Advisors Inc., (member SIPC). United Security Agency is not a subsidiary of nor controlled by Voya Financial Advisors, Inc. 21423006_IAR_1215

the original goals that were set up and make sure everything is still on track compared to client expectations.

We will also ask clients for feedback to see if they are happy with me and my staff. Satisfied with what we’re doing? Is there anything that they’d like us to be doing that we’re not? We find that the frequency of these client touches helps translate into the high number of positive referrals our firm receives.”

ur company has several distinct business lines. Property and casualty insurance and our in-

vestment advisory practice are the most prominent. Almost 100% of our new clients come in through word of mouth and referrals.

P&C for both commercial and indi-vidual clients is a relatively high-volume business with a low number of client touches. Client service is very import-ant, but the bulk of that occurs during the preparation of proposals and the claims process. Clients are generally in pretty good shape until the next renew-al, assuming no major claim issues.

The investment advisory and finan-cial planning side of the business is almost the opposite—fewer clients but a very high frequency of client touches. I help individuals solve a lot of potential household problems. They may be insur-ance related, in the sense of risk mitiga-tion, or any other element of their finan-cial lives. People have come to see us as a trusted advisor and we have strong re-lationships with lawyers and CPAs who will act as a team with us.

Keeping the client touches frequent is a priority. We schedule meetings with distinctly different purposes and phases, like reviewing wills, trust docu-ments, or investment policy statements to keep everything current. If we have completed a retirement plan or asset al-location analysis, we will refer back to

O“

14

TIPS & TOOLS