Randy Kerns, CIC, ChFC • Voya Financial Advisors Inc. - Why passive investors get hammered by Mike Posey - Can it really be earnings season already? - What oil's plunge and the strong Dollar may mean for 2015 by Jeanette Schwarz Young - Active management as a practice differentiator (John McGonagle, CFP, CRPC, Asset Architects LLC)

1. WHYPASSIVEINVESTORS
GETHAMMEREDByMikePosey
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

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3January 8, 2015 | proactiveadvisormagazine.com
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4. WHY PASSIVE INVESTORS
GET HAMMEREDBy Mike Posey
“… if all you have is a hammer,
everything looks like a nail.”
-Abraham Maslow
proactiveadvisormagazine.com | January 8, 20154

5. 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.
1990
1995
2000
2005
2010
2015
0
1,000
2,000
3,000
4,000
5,000
6,000
Intra-day high of 5,132.52
on 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

7. Q4 14 Q1 15 Q2 15 Q3 15 Full Year
2015
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 2015
Now 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 investing
Although 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 mark
It’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 (%)
7January 8, 2015 | proactiveadvisormagazine.com
TOPPING THE CHARTS
L NKS WEEK

8. 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

9. 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

10. Show your clients a
friendlier
bear market
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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
10 proactiveadvisormagazine.com | January 8, 2015

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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
11January 8, 2015 | proactiveadvisormagazine.com

12. 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. Notonlydothecompaniesexploring
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.
12 proactiveadvisormagazine.com | January 8, 2015

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continued from pg. 11
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
13January 8, 2015 | proactiveadvisormagazine.com

14. Advertising
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Reprints
proactiveadvisormagazine.com/reprints
Contact
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Proactive Advisor Magazine
Copyright 2014 © Dynamic Performance Publishing,
Inc. All rights reserved. Reproduction of printed form,
whole or in part, without permission is prohibited.
Editor
David Wismer
Associate Editor
Elizabeth Whitley
Contributing Writers
Mike Posey
David Wismer
Jeanette Schwarz Young
Graphic Designer
Travis Bramble
Contributing Photographer
Martha Rial
January 8, 2015
Volume 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