Randy Kerns, CIC, ChFC – Proactive Advisor Magazine – Volume 5 Issue 1

WH

Y PA

SSIV

E IN

VES

TOR

SG

ET H

AMM

ERED

By

Mik

e Po

sey

Randy Kerns

MANAGING CLIENTS’ NOW, LATER, & NEVER MONEY

January 8, 2015 | Volume 5 | Issue 1

Active investment management’s weekly magazine

Earnings season already?

HAMMERED

Differentiation with active management

Oil and Dollar divergence

Why passive investors get

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

- A custodian that makes your life as an RIA simpler.

Not if, but when“Risk has to be our first consideration. It is incumbent upon us as advisors to find risk-managed ways to manage client money in today’s ever-changing global environment. There will be another major market displacement and it is just a question of when, not if. Actively managed strategies meet that need and our long-term clients appreciate our active and well-diversified approach.”

Advisor perspectives on active investment management

3January 8, 2015 | proactiveadvisormagazine.com

LOUD & CLEAR

LOUD & CLEARDina Fliss | Milwaukee, WI Global View Capital Management Ltd.

WHY PASSIVE INVESTORSGET HAMMERED

By Mike Posey

“… if all you have is a hammer,everything looks like a nail.”

-Abraham Maslowproactiveadvisormagazine.com | January 8, 20154

Using only asset allocation is like a tool box containing only a hammer—useful in some applications, but hardly a universal wrench.

I

continue on pg. 11

don’t know if American psycholo-gist Abraham Maslow ever met Pete Seeger, but they seem to agree about the use of a basic hand tool. Over

the years, I have heard many variations of Maslow’s statement though the meaning has remained the same—those good with a hammer tend to see every new challenge as a nail.

Unfortunately, many investors get caught up in Maslow’s limited tool se-lection by restricting their choice of in-vestment strategies needed to reach their financial goals. In reality, investors would probably be better off if they could diversi-fy their selection of investment strategies to add depth to their portfolios.

And what a hammer it is! Asset al-location strategies using low-cost index funds, and now ETFs, have become the 800-pound gorilla of the investment world.Don’t get me wrong. I’m not saying that as-set allocation strategies do not have a place in an investor’s portfolio. What I am saying is that asset allocation has its shortcom-ings and should not be the only strategy employed by investors who want to meet their financial goals. Using only asset allo-cation is like a tool box containing only a hammer—useful in some applications, but hardly a universal wrench.

Unfortunately, limited tool selection can affect the quality of the investment. For example, risk management in a passive as-set allocation portfolio is generally expect-ed to come from low correlations among the asset classes chosen. The only problem

In today’s investment world, howev-er, the “hammer” tends to be in the form of passive asset allocation strategies that distribute portfolios among various stock and bond asset classes. A typical allocation might be 60% stocks and 40% bonds, usu-ally based on computerized models follow-ing the concept of Modern Portfolio Theo-ry as developed in the 1950s by Dr. Harry Markowitz.

19901995

20002005

20102015

0

1,000

2,000

3,000

4,000

5,000

6,000Intra-day high of 5,132.52on March 10, 2000

Source: BigCharts.com

NASDAQ Composite historical performance

is that actual experience during bear mar-kets has shown that these low correlations can increase during down market cycles (remember 2008?). The result is that asset allocation’s tool to manage risk may disap-pear just when you need it most.

The same goes for maximum portfolio drawdown, a statistic indicating the port-folio’s largest drop from a peak value to a subsequent valley. During the two bear markets that occurred in 2000-02 and then again in 2007-09, the S&P 500 Index dropped in value more than 40% and 50%, respectively. Since passive asset allocation was the only tool in many toolboxes, there was no way for portfolios to escape the car-nage. What if you needed your money at the bottom of the drawdown? It would be your tough luck.

“If I had a hammer, I’d hammer in the morning, I’d hammer in the evening, all over this land.”

- Pete Seeger and Lee Hays, 1949.

January 8, 2015 | proactiveadvisormagazine.com 5

Q4 14 Q1 15 Q2 15 Q3 15 Full Year2015

0

1

2

3

4

5

6

7

2.50

0.84

3.60

1.45

3.30

1.06

5.60

2.81

6.40

4.19

EPS Revenues

Can it really be earnings season already?

ith investors putting in their first full market week of the New Year, shaking off holiday season distractions

(hopefully of the pleasant nature), and seeing a volatile start to January trading, a new earnings season has likely been a bit off the radar screen. But Alcoa (AA) will semi-officially kick off Q4 2014 earnings on January 12th, and attention will quickly turn to following every earnings beat and miss—and the inevitable twists and turns of myriad conference calls.

The outlook for Q4 earnings, as has been the case for the past few quarters, has moved steadily lower, though still very much in positive territory. According to FactSet Research Systems, the S&P 500 overall projection stands at +2.6% year-over-year EPS growth, versus an estimate of +8.4% at the start of the quarter (September 30, 2014).

The weakness in the Energy sector has certainly contributed heavily to the earnings projection decreases. The going-in estimate back in September had EPS growth for that sector pegged at a positive 8%, which has now reversed to an anticipated 17% decline. And there have been notable lowered expectations outside of energy stocks, with 87 companies in the S&P 500 index issuing negative Q4

W

Source: Bespoke Investment Group

EPS guidance, versus just 21 companies issuing positive guidance. This level of 81% negative guidance is well above the 5-year average of 67%.

However, the gloomy outlook for Energy and the instances of lowered guidance are not totally overshadowing some upbeat sector-specific expectations, with several stock groups still projected to have double-digit Q4 EPS growth, led by Health Care, Technology, and Consumer Discretionary. And despite the recent market gyrations, the major equity indexes remain (at least

for now) in the midst of what Bespoke Investment Group has recently called “the second longest annual bull market winning streak on record and the longest since the 1990s.” Bespoke notes that the continuing slow but steady improvement in consumer confidence, job creation, economic growth, and corporate profits may help the market sustain its run in 2015, but likely not without the long-anticipated heightened volatility called for by so many analysts.

15 moves advisors should make in 2015Now that a new year is at hand, it’s time to re-evaluate your business and take a fresh approach to growing it.

Get set for a new golden age for active investingAlthough passive funds have increased share over the past decade, critics of active investing ignore the fact that the market environment of the past six years is certain to change.

Fun with forecasting: 2014 predictions that missed the markIt’s that time of year again, as all of the usual suspects trot out their forecasts for 2015 on markets, interest rates, gold, oil, economic growth, and unemployment. But what about 2014’s misses?

2015 S&P 500 CONSENSUS EPS GROWTH ESTIMATES (%)


TOPPING THE CHARTS

L NKS WEEK

Managing clients’ NOW, LATER, & NEVER MONEY

Randy Kerns

Randy Kerns believes asset protection is equally as important as asset growth for client portfolios, no matter what “bucket” the money falls into. Clients have money they need for current expenses, money they need to properly manage and grow for intermediate needs, and money they might never plan to touch to ensure an income stream through retirement.

By David Wismer Photography by Martha Rial

8 proactiveadvisormagazine.com | January 8, 2015

Proactive Advisor Magazine: How do you differentiate your practice, Randy?

Randy Kerns: Our business is probably a little different than the normal advisory prac-tice as we have several different business entities under our overall umbrella. I started a property and casualty agency from scratch in 1981 and have grown that business ever since through several acquisitions. From starting at zero with our first policyholder, we now do about $40 million a year in premium as of the end of 2014.

In the latter part of the 1980s, the trend for major insurance and financial services companies was toward building out an array of services that could be combined to serve multiple financial needs of both commercial and individual clients. I thought turnabout was fair play and I decided to get my securities licenses and start our advisory practice. The rest is history, and we have been very successful at both sides of the business.

Are there synergies between P&C and the investment side?

Certainly. We have several major commer-cial clients who have engaged us to handle all of their P&C needs, to institute their company’s 401(k) plan, and to serve the personal financial planning needs of key principals. To a much lesser degree, we will manage both personal and advisory needs for individual clients. That has been very rewarding, as risk mitigation is valuable for individual clients across all areas of their financial lives. One focus going forward is trying to build an even stronger bridge between the two major sides of our parent company—people have far greater exposure in their lives than just their investment risk.

What is your overall philosophy toward investments in the advisory practice?

It all starts with the planning process and becoming a client’s trusted consultant. It is a deep responsibility to help individuals and families to plan for their financial future and I take that very seriously. But at the same time, it is a two-way street and the ideal client is

open to education and in working with me to understand some core concepts, especially around risk management for their investments. The vast bulk of people are incredible in that regard—it is enjoyable meeting and working with them and they are very open to becoming better educated about their investments.

What are some of those core concepts?

After we have the basics squared away and a thorough understanding of their financial picture, I develop broad recommendations on asset allocation, what some might call the “bucket planning” approach. I like to put that in colloquial terms for clients and call it their “now, later, and never money.” They have money they will need right now for expenses whether they are in retirement or not. They have money they will need to properly manage and grow to help fund intermediate expenses. And they should have a portion of their assets that they should never plan to touch to ensure they can have an income stream throughout a lengthy retirement.

The key to the latter two areas is both growth and protection of assets. I made a major change several years ago from being involved as a transactional trader of client accounts to using managed money platforms. It was also a tran-sition from traditional passive asset allocation models to more modern active money manage-ment. In terms of the client, it is important that they understand my job is not to manage their

investments directly, but to engage in finding the best third-party investment managers I can and to meet their individual planning needs. This might involve using a manager with a focus on a pretty specific investment strategy that he or she executes extremely well or using managers who combine multiple risk-managed strategies.

I look at a variety of different asset modeling approaches, depending on client needs. I tend to prefer a combination of strategic and tactical strategies within a client’s overall portfolio so that a number of risk-managed approaches can be employed at the same time. One of our third-party managers does an excellent job of spreading risk by using multiple asset classes in a broad portfolio approach. There can also be highly tactical elements incorporated within this, so the client is really seeing risk manage-ment practiced for their account on multiple fronts.

continue on pg. 10

Randy Kerns CIC, ChFC®

President, United Security Agency Bridgeport, WV

Broker-dealer: Voya Financial Advisors Inc.

Estimated AUM: $50M

Licenses: 6, 7, 63, 65, Life & Health

Experience: Over 20 years

“

“

I tend to prefer a combination of

strategic and tactical strategies within a

client’s overall portfolio so that a number of

risk-managed approaches can be employed at

the same time.

January 8, 2015 | proactiveadvisormagazine.com 9

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

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

or tactical, and employ risk management to help control drawdowns and defend portfolios when risk events hit the market hard. This more modern approach is something my clients are very receptive to, once I explain the philosophy.

How would you characterize your relationships with advisory clients?

Empathetic, proactive, and upbeat. I show clients how they can effectively plan for their future, rather than worry about what might be shortfalls in their prior planning. That usually requires a strong dose of client education. And it also requires clients who are willing to em-brace new ways of thinking about investments and managing the risks that can impact all portfolios.

Does this match up well with client attitudes and concerns you typically encounter?

It does. I remember back to the dot-com and 9/11 era when clients were getting crushed in their equity accounts. It made for some very long nights of worry and troubling phone calls with clients. While there are no ultimate guar-antees with any investment, that kind of deep client loss can be potentially mitigated by using third-party active managers. It is my opinion that my clients fared well through 2008-2009 due in part to the strategies we employed. Our use of products and strategies has evolved through time and experience to include a broad use of active management for many more client accounts.

I tell clients that it is important to take advantage of equity markets in a strategic way

when the wind is blowing favorably and behind your sails. But it is equally important to batten down the hatches with tactical techniques when storm clouds approach. Buy-and-hold investing does not allow you to do that—active manage-ment does. Active management can also allow for the use of leverage when markets are really performing well, or inverse strategies when markets start trending down.

I explain to clients that in the sophisticated investment world we live in, they may find that they are much better off having profes-sionals with active investment management as their exclusive focus minding their portfolios. These managers have the time, knowledge, and sophisticated models to help stay on top of trends in the market and to anticipate changes, such as shifts in the interest rate environment that we will definitely be seeing. Their strategies can include multiple asset classes, be strategic

continued from pg. 9


Theta Research:✦ A dynamic repository of actual performance

data on actively managed investment models✦ Reconstructs historical track records from

statements generated by third-party custodians and brokerage firms

✦ Ranked performance and risk statistics allow for detailed analysis of each model

Limited time offer — Save up to 50% on your first-year subscription. Call today or visit www.thetaresearch.com/proactive for more information.

Because nothing beats verified, actual performance

www.thetaresearch.com512-628-5201

[email protected]

BASE YOUR ADVISOR

SELECTION ON REAL

PERFORMANCE

Evaluate active management models using third-party verified track records


continue on pg. 13

Asset allocation believers offer the standard line that the market will eventually regain value, and for proof, they point to the fact that every drawdown has eventually been erased by the market. Well, every one except for the NASDAQ Com-posite’s 75%+ drawdown, which has still not been erased even after more than 14 years of market action. But buy-and-hold aficionados don’t talk much about that statistic.

But let’s appease the hammerheads and acknowledge that the stock market usually regains its losses eventually—but at what cost?

Unfortunately, the price paid by many investors for fol-lowing a passive investment strategy is often the most valuable commodity of all: time.

While the financial press continues to gloat about hitting new record highs, it conveniently ignores the fact that since the year 2000, the stock market has spent much of the time either losing money or regaining lost ground. And, when we talk about investors meeting their long-term financial goals, time is money.

Common sense tells us that time is an integral part of compounding’s ability to work its wonders. We’ve all seen the

Hammered


What oil’s plunge and the strong Dollar may mean for 2015

HOW I SEE IT

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.

Light sweet crude oil vs. US Dollar

Light sweet crude oil

US Dollar

Jeanette Schwarz Young is the author of the Option Queen Letter, a weekly newsletter issued and published every Sunday and the OPTIONS DOCTOR, published by John Wiley & Son in 2007. She was the first Director of the CMT program for the Market Technicians Association and is the current President of the American Association of Professional Technical Analysts.

hat a great tax break crude oil’s decline has given to the average worker here in the USA. This cost savings has allowed the

average American to have and enjoy a little more financial freedom, and has also helped consumer confidence numbers.

The contraction in crude oil prices felt as though it did more to stimulate the economy than all of the Federal Open Market Committee action did over the past few years. What this tells you is that a tax cut was necessary to stimulate spending. Clearly, flooring interest rates did not help the average wage earner at all. Alas, the Fed does not care a whit what I say.

As investors embrace this perk-up in sentiment and confidence, we must alert you to some not-so-good side effects. Much of the USA’s growth post financial disaster came from the energy industry. Jobs were created to expand drilling and the exploration of shale. The USA produced so much crude oil that it was thought that by 2020, we here in the USA would not need to import any crude oil and in fact could export crude oil, competing with OPEC.

With crude oil prices plummeting, it is not likely that this growth in the energy sector will continue. Not only do the companies exploring for and recovering shale have huge debts to pay off in the way of bonds, but with crude oil under $65 a barrel, it makes little sense to continue to recover that oil. Thus, the permits for this activity have fallen off a cliff (lowest rig count in two years) and unfortunately, so will the jobs that were created. Ancillary businesses that supported those energy workers will also

W

have trouble. The downside to cheap crude oil is a re-dependence on foreign oil.

So long as crude oil remains cheap and commodities remain under pressure, it is not likely that there will be inflation here in the USA. When these items begin to firm up and advance, an increase in inflation will follow. To date, although the cost of food and other expenses have advanced, the depressed levels of crude have helped offset any cost increases.

As for the strong US Dollar, remember that it will impede our ability to compete globally with other countries. A strong US Dollar also makes commodities cheaper for us here in the USA and increases the demand for imported

products, which will tilt our trade balance a bit more off-kilter. This increased demand for products should stimulate the Euro Zone and other markets that export their products to our shores.

This is an early notification that such stimulation could help re-start global economies verging on recession. Naturally, countries with US sanctions, such as Russia, are not in this picture. One final note is that with the USA shutting down its shale production, supply of crude will dwindle and this could have the effect of pushing prices higher.


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


illustrations of how someone starting early with small contributions can end up with a larger nest egg than someone starting lat-er, even though the latecomer may make larger contributions. That’s why we always counsel investors to start saving as soon as they can, even if it’s not a lot of money. Yet periodic significant losses can render the time advantage impotent.

And it gets even worse: not only do losses require you to use valuable time to recoup portfolio losses after a drawdown, but you have to earn a higher return to get there. As we all know, a 40% loss requires a 66% return just to break even. That’s a double whammy if I ever saw one.

What’s needed is a way to sidestep losses during bear markets and major corrections, while remaining invested during up mar-kets. Active investment strategies provide the potential to do just that.

Investment professionals need to di-versify their clients among different in-vestment strategies—both passive and active—and not just within a selection of various equity and bond holdings. Doing so could help portfolios weather the next storm (which some say is overdue) rather than getting hammered.

The financial press conveniently ignores the fact that since the year 2000, the stock market has spent much of the time either losing money or regaining lost ground.

Mike Posey is Director of Marketing for Theta Research LLC, a third-party performance tracking and publishing firm. Mr. Posey has over 35 years of ex-perience in a variety of management roles in the financial services industry.

Hammered


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 WritersMike Posey

David WismerJeanette Schwarz Young

Graphic DesignerTravis Bramble

Contributing PhotographerMartha Rial

January 8, 2015Volume 5 | Issue 1

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.

Active management as a practice differentiator

John McGonagle CFP®, CRPC®

Northville, MI

Asset Architects LLC

Advisory Services offered through EPI Advisors LLC, a MI Registered Investment Advisor.

analysts—that is all they do. There is ‘temperament’—most individ-ual investors, and even advisors, are too easily swayed by emotions and headlines. Active managers take emotion out of the equation through systematic decision-mak-ing. ‘Technology’ is obviously the strong suit of strategies that are quantitatively-based. ‘Training’ re-lates to how these managers con-sistently apply their discipline to their decision-making—it needs to be a repeatable process. And final-ly there is ‘trust’—which is my re-sponsibility in doing extensive due diligence with any manager I would recommend for a client.”

learned from a mentor a long time ago that we are really not just in the invest-ment services business, we

are in the investment services mar-keting business. I do not mean that in the obvious sense that we are trying to sell product or services, but rather we are constantly trying to present objective and complete information to clients to help them make the most informed decisions. That is marketing to me, as in-formed clients become better con-sumers of financial products and services.

Related to this concept, active investment management through third-party money managers has become a differentiator for my practice. It represents a relatively new solution to market volatility, smoother returns over time, and capital preservation—directly ad-dressing the concerns many clients are facing. They may not know it by name at first, but once they un-derstand its principles, they tend to become “advocates” and help spread the word to new prospects for our practice.

I explain to clients that third-par-ty active managers fit in perfectly with my ‘Five Ts’ of any successful business endeavor: time, temper-ament, technology, training, and trust.

There is the importance of al-locating adequate ‘time’ to perfect something, and these managers are full-time market strategists and

I“

14

TIPS & TOOLS

Randy Kerns, CIC, ChFC – Proactive Advisor Magazine – Volume 5 Issue 1

Economy & Finance

Transcript of Randy Kerns, CIC, ChFC – Proactive Advisor Magazine – Volume 5 Issue 1