gary ziegler – proactive advisor magazine – volume 3, issue 7

Jobless claims support S&P pg. 7

Finding a “value void” pg. 3

Active management for mass affluent pg. 4

Portfolio climate controlpg. 8

Gary Ziegler

August 14, 2014 | Volume 3 | Issue 7

First magazine focused on active investment management

information they have never heard anywhere else. They are very ap-preciative and this becomes a great source of referrals.

I have developed seminars and marketing materials covering the specific needs of women, whether it be widows facing retirement alone, high-achieving professionals with little time, or simply someone who wants to be as knowledgeable as pos-sible. My goal is to make sure they are all empowered and inspired to be independent and free of financial worry. Life is too short to spend time worrying about your financial situ-ation when there are so many other things that matter.”

y personal value proposition as an ad-

visor is empowering and educating cli-ents so they can feel confident in their financial decision-making. This starts with respecting their intelligence and ability to absorb information—not trying to dictate solutions. I take the time to expose all clients to invest-ment concepts and strategies that can often be unfamiliar, including tactical active investment management and the relationship of risk to return.

One of my personal initiatives is called Wealth to Women. This is a pro-gram I have developed and registered that is specifically geared to the finan-cial needs of women, who I think have been underserved by the financial ser-vices industry. The investment field, in my opinion, has been discounting and ignoring women for too long.

I am not going to tell any other advi-sor this is the route they should follow, but I will tell them they should find a specialty they enjoy to help round out and expand their practice and find areas where there is a ‘value void.’

I found this simply by working with my female clients and discover-ing that void. It gives me great sat-isfaction to sit down over a series of three to four sessions and deliver

Find a “value void”—grow your practice

Jay BlanchardWilliamsville, NY

NEXT Financial Group, Inc.The Financial Guys LLC

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Managing risk

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TIPS & TOOLSPOLLS

Active managementFOR THE MASS AFFLUENT

Bringing dynamic, risk-managed strategies to all clientsBy Katie Hebert

advisor brought in over $1 million of assets in a month from accounts under $50,000.

Today, more financial advisors think it makes great sense to not just focus on serving the relatively narrow universe of high-net-worth clients when there are millions of potential customers needing their expert services and those of third-party active managers. Indeed, 40 million people in the U.S. have assets of $100,000 to $1 million outside of the value of their home, according to Forrester Research.

There is a misconception among some financial advisors that active risk management should be reserved for only the wealthiest of clients.

Not so. A growing number of financial advisors say they are finding a wealth of opportunity in helping the mass affluent actively manage their investments, as more modest portfolios can have an even greater need for the most so-phisticated risk-managed strategies than those with seven figures. And just like Walmart or McDonald’s, serving volumes of customers can quickly add up—one financial

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4 proactiveadvisormagazine.com | August 14, 2014

And many within the mass affluent sector now value the exper-tise of a financial advisor more than ever, considering that millions suffered major losses due to the recent financial crisis. Indeed, many potential clients have become much more risk-averse in their subsequent investment decisions. And though many “buy-and-holders” have since recovered their losses, many exited the markets at the worst possible time and have yet to return.

A study by consulting firm Deloitte LLP notes the post-2008 increase in risk-averse behavior on the part of the mass affluent segment. According to the data, these types of investors are twice as likely to rank themselves as “very or somewhat conservative” since the financial crisis. As the chart shows, “protecting principal” is the most highly-rated investment attribute they seek, closely followed by “long-term growth.”

Since long-term asset growth is so important for the mass afflu-ent as they enter or plan for retirement, there is clear opportunity for financial advisors to help find the appropriate balance of risk and return. That’s where financial advisors who utilize active-ly-managed and risk-mitigating strategies might find a significant competitive advantage.

Active management relies heavily on risk management prin-ciples, offering a potential solution to the “market fear” still prevalent for many mass affluent investors. Active management seeks favorable risk-adjusted returns in any market environment, generally employing sophisticated algorithms and models to cap-ture gains and protect against losses in a wide variety of sectors and asset classes.

People who are less affluent actually have less wiggle room for losses within their retirement portfolios and, as such, a much great-er need for active risk management by their financial advisors. For example, a retired ultra-wealthy client with a multi-million-dollar portfolio could likely better absorb a 30% hit to his/her portfolio and corresponding annual income, than could a mass affluent investor taking the same percentage hit on his/her more modest retirement assets and associated income stream.

Mass affluent investors might also need the expertise of a finan-cial advisor who practices active risk management to help them get out of their “comfort zone”—so they can make the kinds of decisions necessary to have optimal risk-adjusted returns on their portfolios. According to well-known psychologist and consultant Alasdair White, the concept of a comfort zone is “a behavioral state within which a person operates in an anxiety-neutral con-dition, using a limited set of behaviors to deliver a steady level of performance, usually without a sense of risk.”

In other words, to avoid anxiety, many mass affluent investors remain in comfort zones by making one of two equally poor choices: a) traditional buy-and-hold portfolio management strate-gies—even when such strategies came back to bite them when the financial crisis hit, or b) avoiding equity markets altogether and instead investing in asset classes delivering low returns in today’s low interest rate environment.

However, a financial advisor who utilizes active risk manage-ment strategies can demonstrate the wisdom of breaking out of such comfort zones, so that mass affluent portfolios can deliver a fair share of equity market returns, while being extremely mindful of current market conditions.

An advisor can coach such investors that it is okay to feel a certain level of anxiety when stretching one’s perceptions—in fact, such a feeling can be the “optimal anxiety” experienced when one truly begins to grow. To greatly simplify, behavioral psychology encourages the conquering of fears and those who seek to take sensible control in situations full of unknowns.

continue on pg. 11

Percent of respondents rating the following as “extremely/very important”

Protectingprincipal

Opportunityfor long-term

growth

Balancing riskand reward

Minimizingtaxes

Minimizing costof investing

A guaranteedincome stream

Minimizingvolatility

Opportunityfor large

gains

Opportunityfor short-term

gains

72% 68% 55% 53% 53% 49% 46%39% 27%

Source: Deloitte Center for Financial Services

RESPONDENTS RATED THE FOLLOWING “EXTREMELY/VERY IMPORTANT”

... to avoid anxiety, many mass affluent investors remain in comfort zones by

making one of two equally poor choices.

5August 14, 2014 | proactiveadvisormagazine.com

INITIAL JOBLESS CLAIMS (SEASONALLY ADJUSTED): 2005-2014

INITIAL JOBLESS CLAIMS (INVERTED) VS S&P 500:MARCH 2009-2014

Jobless claims continue tosupport U.S. equity markets

ast week saw another roller-coaster U.S. equities market performance, as headlines over Ukraine and the Mideast dominated trading, along

with increased concerns over weakness seen in many European economies. The VIX hit a high of 17.6, its most elevated level since April, and up 71% from lows in July. The week’s ending relief rally, largely driven by Russian headlines, brought the VIX back down to a close of 15.8.

Another part of last week’s story, however, was the continued pace of improvement in U.S. jobless claims. Throughout the bull market run of 2010-2014, the consistent decline in U.S. jobless claims has been a steadying influence on markets, supporting the belief that the outlook for U.S. consumers is on the road to recovery.

Last week was no exception, as for the fourth time in the last five weeks, claims came in below forecasts. While economists were forecasting a level of 304,000, the actual reading came in 15,000 claims below at 289,000. With last week’s decline, the four-week moving average dropped to a post-recession low of 293,000, which is the lowest level since February 2006.

Bespoke Investment Group notes that this was the fourth straight week exhibiting a new low in the four-week moving average of claims, “underscoring how strong this data has been of late.” The chart below compares the S&P 500 over time to jobless claims (on an inverted scale). This illustrates how closely market performance has tracked with jobless claims throughout the bull market, and, according to Bespoke, provides a level of reassurance that the recent decline in stocks may be “more of a blip than beginning of a major downtrend.”

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Source: Bespoke Investment Group

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Source: Bespoke Investment Group


TOPPING THE CHARTS

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business media and some famous investors who are always giving interviews. They were pretty sold on the idea that you cannot time the mar-kets and that low cost index funds were the way to go, despite how painful 2008 was.

How did you go about convincing those who were unsure?

First of all, I think there is a role for many types of strategies and vehicles in a portfolio. It is not necessarily all or nothing. I have many clients for whom a blend of active and more passive strategies is appropriate. We also use many other vehicles aside from equities and bonds, most frequently variable annuities and variable life insurance.

On the tactical side, TFA has developed some excellent client materials and presentations that

consistent with the principles of buy-and-hold investing.

The financial crisis of 2007-2009 totally changed my thinking. I really saw no reason to ever have clients fully exposed to that type of risk and drawdowns—and the uncertainty about how long it would take to recover.

How did your clients react as you intro-duced more tactical strategies to them?

Most were very excited about it. They agreed that “buy-and-hope” was becoming a less viable way to go about planning for their future security.

Some were hesitant, as the concept of active management was very new to them. It flew in the face of things they had read from the

Proactive Advisor Magazine: Gary, when were you first introduced to active investment management?

Gary Ziegler: It was in the 2006-2007 time frame, well after the dot-com crash. Our firm began introducing the availability of active strategies from several third-party managers.

It was a relatively long process for me to fully embrace active or tactical investment man-agement. I had been brought up in the business on the theories of traditional style-box portfolio allocations. Though it was difficult to watch my clients’ portfolios go through volatility at times, that all came with that style of asset manage-ment. Portfolios did historically rebound over time, generally speaking, and that was pretty

Portfolio climate control

By David Wismer

A Wisconsin native, Gary Ziegler has weathered scorching summers and frigid winters. Like the thermostats he relies on for climate control, active management is at work around the clock—adjusting his clients’ portfolios in all market conditions.

Gary Ziegler


help explain active management. So have many of our third-party managers.

I will thoroughly go through these materials with clients, explaining about market cycles, risk and return, the math of drawdowns, and the need to play both offense and defense with your portfolios. We look together at some numbers showing how portfolios protected against down-side risk, and minimizing those drawdowns, can perform over time versus just sticking with the performance of a market index.

I also use some simple analogies. My favorite involves a thermostat. I will ask my client what their ideal temperature is in their house all year-round. Let’s say they answer 70 degrees. In Wisconsin, weather can go above 90 degrees in the summer and below zero in the winter. However, if you have a thermostat, a furnace and

an air conditioner, you can keep your home at a comfortable temperature all of the time. That is the goal of tactical money management—to make your investing experience less volatile. Sometimes you need to run the furnace and other times you need the air conditioner. It is nice to have a ther-mostat to help keep things comfortable and under control. I try and relate this back to the markets and the fact that you cannot do the same thing in all market conditions—it just does not make practical sense.

How do you counter some of those client beliefs on market timing and low-cost index funds?

Tactical strategies, to my mind, are not exclusively about market timing. Far from it. It

is a disciplined, quantitative approach that is fol-lowed week after week, not some dramatic one-time call on the markets. Active management can include a wide variety of different philosophies, strategies, hedges, and diversified asset classes. It is not just a market timing approach.

On the low-cost index funds, there is certain-ly a place for them, but not an exclusive place. Strictly investing in that fashion is the essence of buy-and-hold. Even though markets are healthy right now, investors that invested passively from 2000 to 2013 experienced two downturns of over 40% that dramatically impacted their port-folio returns.

continue on pg. 10

Photography: Nick Berard

Gary Ziegler 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.


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How do you set expectations with clients about active strategies?

It entirely depends on their risk profile and the overall objectives we are trying to reach with each client or couple. But to generalize about tactical management, I will tell clients that some of the strategies might underperform a bit in a strong bull market, but should outperform by a wide margin in a down market.

That relates back to the math piece, and how hard it is to recover in your portfolio from steep losses. We want the power of compound-ing—the Rule of 72, if you will —to work on portfolios that have more consistent, less vola-tile performance, not wild swings. That makes sense to most clients.

For clients with more appetite for risk, we do have available some leveraged strategies that have done quite well in both bull and bear mar-kets, but they carry with them more volatility and the potential for larger drawdowns. That all has to be carefully explained in detail and understood by the client.

We have a very wide range of tactical managers and strategies available to us, and different ways to structure portfolios. It is my

job to put together the most appropriate com-bination of strategies for clients. It is the job of our third-party managers to maintain their disciplined approaches and execute well against their specific strategies.

With both of those elements working well together, I explain to clients that we can better manage market cycles and help them in meet-ing their long-term investment and planning objectives.

What types of clients do you tend to work with?

I have in the neighborhood of 800 clients, coming in all sizes and shapes and with all sorts of life circumstances. That is what makes the job interesting and enjoyable, as I love helping people with their unique challenges.

Our organization is totally vested in helping all families with their financial needs, so my clients range from the very affluent to those just starting out—with perhaps relatively little to invest right now. It is gratifying to be able to bring the most sophisticated investment strategies to a wide universe of clients.

continued from pg. 9


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Financial advisors who practice active risk management have the expertise to explain to clients the balancing act of risk and return. For most mass affluent investors, such a balancing act is even more critical as they typically have a myriad of specific goals that can each carry specific risk characteristics and time frames.

For example, many within the mass affluent sector seek exper-tise on how to best invest for their children’s college education, save for an eventual retirement home purchase, or manage their retirement income so they won’t outlive it. Since meeting these specific life event goals can result in differing time horizons for investment risk, active management can simultaneously handle the multiple horizons, and then tailor the strategy even further to satisfy the investor’s comfort with risk and appetite for growth.

It is not unreasonable to suggest that mass affluent investors—more than the ultra-wealthy—fundamentally need the expertise of active risk management to meet such life event goals, because “the rich” simply have less concern on whether they can afford such things—they already have the wherewithal for such life events.

Many financial advisors have also found that serving the mass affluent can be just as—if not more—profitable than strictly serving the wealthy.

Take advisor Scott Hanson, who wrote about this topic in a 2013 Investment News article. Since his Sacramento, California firm uses a sliding scale fee structure based on the level of client assets, fees on smaller accounts are higher as a percentage of assets than fees on larger accounts. Hence, serving volumes of clients with smaller portfolios can add up.

“As an advisor, I would rather have a hundred $1 million accounts rather than five $20 million accounts,” Hanson writes. “The revenue generated on those 100 mass affluent clients would be much greater than the revenue generated by the five ultra-wealthy clients.”

Not all financial advisors may see it this way, but it is clear that expanding one’s practice to further serve the mass affluent could very likely strengthen the bottom line, as millions more potential clients need to be helped. A recent WSJ article cites research by Cerulli Associates, showing only 15% of U.S. financial advisors focus on households with $100,000 or less in assets.

Those advisors using active risk management principles may well have a competitive advantage with such prospects (or those with assets somewhat higher), as investors with more modest portfolios arguably have much more at stake when fulfilling their lifelong goals.

continued from pg. 5


The opinions and forecasts expressed herein are those of the author and may not actually come to pass. Any opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. The analysis and information in this edition and on our website is for informational purposes only. No part of the material presented in this edition or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any portfolio constitutes a solicitation to purchase or sell securities or any investment program.

EditorDavid Wismer

Marketing CoordinatorElizabeth Whitley

Contributing WritersKatie Hebert

David Wismer

Graphic DesignerTravis Bramble

Contributing PhotographerNick Berard

August 14, 2014Volume 3 | Issue 7

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.

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gary ziegler – proactive advisor magazine – volume 3, issue 7

Economy & Finance