Robert Kinnun • Madison Avenue Securities, Inc. (“MAS”) - Growth of passive index investing increases the need for active management by Linda Ferentchak - Technology sector tops Q3 earnings season - Brokerage options: an "instrument-rated" approach to 401(k) plans (Mike Jones, ProEquities, Inc.)

1. Tech sector
rules Q3 • pg. 7
Brokerage options
for 401(k)s • pg. 3
November 20, 2014 | Volume 4 | Issue 9
First magazine focused on active investment management
Robert Kinnun pg. 8
Asset growth
& protection
Highly correlated markets
increase risk • pg. 4
What HNW clients want

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3. Active money managers will effec-
tively watch over their portfolios every
day and take up defensive positions if
the market turns. For a pilot who might
be away from home base for many
days, or on a series of long flights, that
is a pretty attractive proposition.
I stress that this can be an easy
process, as they can use the brokerage
option available in many 401(k)s that
allows professionals to manage their
money. And for the die-hard investors
and traders, I also always point out
there is no reason they cannot also fund
a small account to run their own trad-
ing programs—one concession goes a
long way.”
big part of my prac-
tice is helping to bring
third-party active investment manage-
ment to 401(k) plans. My profession-
al network includes people associated
with the airline industry and the mili-
tary, and I have found a very receptive
audience there.
Pilots are intelligent people who
have mastered a challenging and highly
technical skill, and they naturally think
they can bring the same talents to in-
vesting. Many are knowledgeable, but
frankly, their investment success rate is
usually not any better than average.
Like many others, they generally
took a big hit to their portfolios during
the crash of 2008-09. They know they
could benefit from some professional
assistance and a new way of looking at
investments. They know they would only
want someone who is ‘instrument-rated’
to fly their planes, and the same thing
applies to investments.
I spread the word among the
pilot community about how they can
employ actively managed strategies in
their 401(k) plans. When I talk with
them, they see that there’s a process
through active money management
that can provide them with a more dis-
ciplined approach—which is especial-
ly important as they plan for a secure
retirement.
Brokerage options:
an “instrument-rated” approach
to 401(k) plans
Mike Jones
Virginia Beach, VA
ProEquities, Inc.
Patriot Strategic Investments
A“
Mike Jones is an Investment Advisory Representative with Patriot Strategic Investments in Virginia Beach, Virginia. Advisory services offered
through Investment Advisors, a division of ProEquities, Inc., a Registered Investment Advisor. Securities offered through ProEquities, Inc.,
a Registered Broker-Dealer, Member, FINRA & SIPC. Patriot Strategic Investments is independent of ProEquities, Inc.
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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
Linda Ferentchak
David Wismer
Graphic Designer
Travis Bramble
Contributing Photographer
Brad Ziegler
November 20, 2014
Volume 4 | Issue 9
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.
November 20, 2014 | proactiveadvisormagazine.com 3
TIPS & TOOLS

4. Read text only
GROWTH
ACTIVE MANAGEMENT
of passive index investing
increases the need for
By Linda Ferentchak
Read text only
John Bogle has said it for years. Warren
Buffett joined the chorus in his 2013 Berkshire
Hathaway shareholder letter regarding his
estate, “My advice to the trustee could not be
more simple: Put 10% of the cash in short-term
government bonds and 90% in a very low-cost
S&P 500 index fund.” For the average investor,
the popular financial advice is that the best
investment is a passive index fund allocation.
The prevalence of that advice is changing
the nature of the financial markets. It doesn’t
matter how much the phrase “Past performance
is not indicative of future returns” appears,
financial advice tends to be a backward-looking
profession. Unable to see the future, one looks
to the past for trends and future expectations.
What the past does not tell us is how to deal
with a structurally changed financial market in
which an estimated 20% of the U.S. market is
on autopilot—invested in index funds—while a
majority of actively managed mutual funds are
benchmarked to indexes, with some 33% in-
dexed to the S&P 500, according to Investment
Company Institute data.
The use of third-party asset managers by financial advisors has grown dramatically over
the past decade, particularly those managers using active, risk-managed strategies.
A recent industry study, in fact, estimated an AUM growth rate of over 25% for TAMPs
in 2012 and 2013. Paradoxically, passive index funds have increased their share of
total investment assets at the same time, furthering the risks associated with more highly
correlated markets.
Source: 2014 Investment Company Fact Book
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
9.5
10.2
10.9 11.4 11.7 11.5 11.6 11.8
13.4
14.1
14.9
16.4
17.3
18.4
As of year-end 2013, 372 index funds managed total net assets of $1.7 trillion … Mutual
funds indexed to the S&P 500 managed 33% of all assets invested in index mutual funds.
The share of assets invested in index equity mutual funds relative to all equity mutual
funds’ assets moved up to 18.4% in 2013.
Index equity mutual funds’ share
Percentage of equity mutual funds’ total net assets, 2000 -13
proactiveadvisormagazine.com | November 20, 20144

5. Exchange Traded Funds (ETFs), which are
primarily index-based, took over the lead in
index investing in 2014. At the end of 2013,
ETFs accounted for $1.67 trillion in assets with
26% in large-cap funds. By September 2014,
ETF assets had surpassed $1.9 trillion.*
In 2013, the market capitalization of the
U.S. stock market exceeded $17.7 trillion,
roughly half of the world’s $36.5 trillion
total equity valuation. U.S. index mutual
and exchange traded funds held $3.4 trillion.
Assuming 15% of all index fund assets are in-
vested in bond and hybrid funds, it leaves $2.9
trillion in equities, with 20% of the total U.S.
market equity effectively on “autopilot.”
Why does this matter? In their study of the
impact of indexing on the U.S. equity markets,
Dr. James X. Xiong, CFA, senior research
consultant with Morningstar Investment
Management, and Rodney N. Sullivan, CFA,
editor of the Financial Analysts Journal,
conclude, “Our results suggest the fragility of
the U.S. equity market has risen over recent
decades.”** From their findings:
Stocks are no longer selected for
a portfolio based on expectations
of outperformance, or at least
respectable returns. Their inclusion in an index
drives demand and has been shown to add a
premium to their valuation.
Changes to an index fund are
often made at excessive values.
New additions to the S&P 500
have documented price increases of up to 40%
prior to inclusion. Once included in the index,
funds have no choice but to purchase the stock
regardless of price.
Correlation between stocks held
in the indexes increases, reducing
the value of diversification. As new
money flows into index funds, demand for
all stocks in the index increases, driving price
increases.
In capitalization-weighted indexes,
higher capitalization stocks may
mask the underperformance of
other positions.
Index derivatives were major
contributors to the stock market
decline of October 19, 1987, and
the “flash crash” of May 6, 2010, setting up
feedback loops that accelerated selling pres-
sures, while the concentration of technology
stocks among the indexes played a major role
in the market’s 2000-2002 decline.
For the active manager, “feedback loop
selling” is a major concern. In 1987, index in-
vesting was just beginning to make an impact.
Since 2010, indexed assets have increased
by more than 30%. In the 1987 and 2010
444
88 87
143
203
42
211
146
64
247
Large-cap Mid-cap Small-cap Other Domestic
sector
equity
Global International CommoditiesEmerging
markets
Bond and
hybrid
Broad-based domestic equity Global/International equity
ETF total net assets
Billions of dollars, year-end 2013
1.
2.
3.
4.
5.
1.
2.
3.
4.
5.
1.
2.
3.
4.
5.
1.
2.
3.
4.
5.
1.
2.
3.
4.
5.
Source: 2014 Investment Company Fact Book
* “Rising Stocks, $15B Inflow Push US ETF Assets To Record, But Growth Lags 2013,” Barron’s, September 2, 2014.
** “How Passive Investing Increases Market Vulnerability”, James X. Xiong, CFA, senior research consultant, Morningstar Investment Management
and Rodney N. Sullivan, CFA, editor of the Financial Analysts Journal. August 20, 2011.
continue on pg. 11
November 20, 2014 | proactiveadvisormagazine.com 5

7. 75%
70%
65%
60%
55%
50%
45%
40%
35%
30%
50%
60%
51%
45%
52%
50%
53%
50%
57%
54%
60%
49%
61% 63% 62%
57%
64%
50%
66%
63%
71%
67%
Telecom
Utilities
Energy
M
aterialsCons.StaplesCons.Discret
Financials
All
IndustrialsHealth
Care
Technology
Earnings
Revenues
Technology sector tops Q3 earnings season
arnings season for Q3 2014 is
winding down and the results
were generally better than expectations.
The earnings beat rate (percentage of
companies that reported EPS stronger
than consensus estimate) of 62.1% was
the highest quarterly result of the year so
far and roughly equivalent to levels seen
throughout most of 2013.
The revenue beat rate of 57.2%,
according to Bespoke Investment Group,
was below the average for the current bull
market (59.4%) and the average for all
years since 1998 (61%). Still, it was higher
than many quarterly figures seen over the
past two years.
There is little doubt that the technology
sector led all groups in powering the
positive earnings season results. As can be
seen in the chart, technology companies
on average performed better than all
other industry groups on both earnings
and revenue beat rates at 71% and 67%,
respectively. Energy companies were near
the bottom—not surprising given the
recent global retrenchment in oil prices.
The technology sector has also helped to
fuel the powerful and fast rebound from
the market lows seen in mid-October.
E
Source: Bespoke Investment Group
Technology stocks rank a close third among
all of the sectors in performance from
October 15 through November 14, up
10.8%. In fact, the two individual stocks
with the greatest contribution to S&P
500 Q4 gains have been Apple (AAPL)
and Microsoft (MSFT). Apple alone has
accounted for more than 10% of the S&P
500’s rally this quarter and, with a 19.6%
weighting in the S&P, the technology
sector has been a big driver of gains. On the
flip side, there have been some notable tech
decliners, led by IBM’s poor performance.
Overall for Q3, FactSet is reporting the
blended earnings growth for the entire S&P
500 at 7.9%. The slowing of global growth
outside of the U.S. appears to have had a
notable impact. The earnings growth rate
is 9.0% for U.S.-centric companies, versus
6.5% for companies with greater than 50%
of sales outside the U.S.
Read text only
Smart money is already
hedging against inflation
Just because inflation is still a mere blip on the
economic radar screen is no reason to ignore the
potential threat to investment portfolios.
What advisors are talking
about—volatility near the top
Market volatility was the third most popular
conversation advisors initiated with their clients
last month.
Riding out the storm: active
risk management in action
NAAIM (National Association of Active Investment
Managers) publishes its proprietary exposure each
week, showing how active managers are reacting to
the current market environment.
% OF COMPANIES BEATING EARNINGS & REVENUE ESTIMATES BY SECTOR
7November 20, 2014 | proactiveadvisormagazine.com
TOPPING THE CHARTS
L NKS WEEK

8. Read text only
By David Wismer
Photography by Brad Ziegler
Asset growth
& protection
Whether a high-net-worth client is
focused on charitable giving or leaving
a family legacy, moving assets into
active strategies makes sense.
Robert Kinnun
What HNW clients want
8 proactiveadvisormagazine.com | November 20, 2014

9. Proactive Advisor Magazine: Rob, how
do you differentiate your practice?
Robert Kinnun: I am based in Midland,
Michigan, a relatively affluent area of Michigan.
It is a great city, with a healthy business com-
munity and a commitment to the arts, civic
responsibility, and charitable outreach. I have
focused my advisory work on higher-net-worth
clients with some complex planning and estate
needs. Most of my referrals come through at-
torneys and CPAs, as they know I can handle
the most challenging and complicated planning
issues.
What are some specific issues facing this
type of client?
The obvious ones are managing wealth
across generations, handling planning for chari-
table donations and foundations, and providing
for smart business transitions. But the needs of
high-net-worth clients are really no different
than those of any other client: protect and grow
assets.
time that many elements of MPT just do not
go far enough or account for changes in the en-
vironment—there are so many factors and new
investment choices to consider today. MPT is
fine in theory, but in practicality is not always
able to handle all the variables, risk issues, and
the potential emotional behaviors of clients.
How did your thinking evolve?
It has been a process over the years, always
looking to optimize portfolio diversification
and performance while having a strong measure
of risk management. I now utilize third-party
active money managers who can go several steps
beyond the first few generations of portfolio
optimization. They have the ability to be very
responsive to market conditions—to go to
100% cash for example, or to add or remove
asset classes, or to use leverage, or to employ
various hedging techniques.
Some would argue that going to cash is a
very conservative action. I would argue just the
opposite—it is a very aggressive and active move
that is predicated on a technically based model
indicating that the investment environment
has changed significantly. That to me is active
management, not passive. It goes way beyond
just adjusting some allocation percentages or
rebalancing the portfolio. This requires clearly
communicating to clients what they might
expect under different market conditions—
what actions their portfolios might take based
on bearish or bullish conditions.
How do you educate clients around
actively managed investment strategies?
It is an interesting paradigm. I am using
some of the most sophisticated quantitative
strategies out there for clients, but I still start
the process with an old-fashioned yellow pad
and pencil. I want to truly understand who the
client is first, what is most important to them
in life, and their family circumstances. There is
plenty of time to drill down into the specifics
of their financial lives, but the entire process
becomes much easier and more valuable by first
making that personal connection.
Each family has different situations; there
is no cookie-cutter approach. That said, active
investment management, with its focus on
managing risk first, can work for virtually
all of my clients. I have one widowed female
continue on pg. 10
Robert Kinnun
Midland, Michigan
Broker-dealer: Madison Avenue Securities, Inc.
Experience: 25 years in advisory services
Estimated AUM: $180M
Licenses: 6, 63, 65, 27 Supervisory
Member: Financial Services Institute
Charitable involvement:
HopeWell Ranch, Weidman, MI
Global Compassion, Inc., Midland, MI
Music & More, Midland, MI
Avid coin collector
“Third-party managers
give me the ability to
accommodate my clients
no matter their life
circumstances or outlook
on risk.”
We need to make sure that programs are
in place to manage the unfortunate events of
life such as disability, death, and divorce, being
mindful of tax implications. And we need to
make sure clients are well informed about their
financial state of health and fully understand
the objectives and strategies that we have agreed
upon. I have always believed in client education
and full disclosure of everything I do on behalf
of clients.
As it relates to protecting and growing
assets, what is your broad investment
philosophy?
Pretty early on, even before the popularity
of Modern Portfolio Theory (MPT), I was
in the camp of strong diversification for an
investment portfolio. But I have learned over
November 20, 2014 | proactiveadvisormagazine.com 9

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bear market
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client, for example, who is holding a substantial
amount of physical gold. She is very wary of the
stock market. I am not necessarily going to rec-
ommend that she sell her gold, but for her other
assets, active management can provide a way
for her to enhance her returns while providing
some reassurance that defensive strategies will
be in place for the next big market downturn.
Though it has been a long process educating her
on risk concepts, she is slowly introducing some
conservative active strategies into her portfolio.
I have another client family on the opposite
side of the spectrum. They have very ambitious
charitable giving objectives over the long term.
They are perfectly suited to be under the active
money management umbrella, but with a more
aggressive, growth-oriented risk profile than the
first example.
That is one of the real benefits of the
third-party managers I use—having the ability
to accommodate my clients no matter their life
circumstances or outlook on risk. These strate-
gies are a component of a broader financial plan
that has to cover a variety of objectives, but it
can be a very important component. I have a
growing percentage of client assets moving into
active strategies.
The key to everything I do for clients is the
education process. Clients have to understand
exactly what we are doing in terms that are
understandable from a non-professional’s point
of view. They need to understand what the
risks are, what the benefits are, and where the
trade-offs lie. I always explain the parameters
of worst-case scenarios and how they might be
managed.
With virtually all of my high-net-worth
clients wanting and needing both asset growth
and asset protection, active investment manage-
ment is a very logical part of the solution.
continued from pg. 9
Robert Kinnun is a registered representative of and offers securities through Madison Avenue Securities, Inc. (“MAS”),
member FINRA & SIPC, a registered investment advisor.
10 proactiveadvisormagazine.com | November 20, 2014

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scenarios, an outside shock to the market sent
stock prices down, triggering futures selling by
portfolio insurers, which were purchased by
stock index arbitrageurs, who then sold the rel-
atively overvalued stocks, pushing prices down
further. Add in panic selling of index funds by
investors of all sizes and the potential decline
worsens.
There is an important difference between
owning a stock or mutual fund purchased for
sound fundamentals and owning an index
fund. Where an investor might have confi-
dence in the ability of the individual company
or investment manager to weather a downturn
and continue to prosper, the index fund is more
of an unknown. The investor does not have
extensive knowledge of all of the stocks that
make up an index, limiting that confidence in
its prospects for recovery.
Despite the often-repeated message to in-
vestors to buy and hold, there is little evidence
from past market declines that they will do
so. The damage to portfolios from market de-
clines over the last 14 years has further eroded
investor confidence, which has left the markets
vulnerable to rapid and deep episodes of selling.
While there may be valid reasons to own index
funds as part of a diversified, actively managed
portfolio, there can be no doubt their growth
has changed some basic structural facets of the
overall financial markets.
The risk management provided by active
management may be the saving grace for
many advisors and their clients when the
next major market decline comes. And come
it will. Because there is another new factor to
consider that makes active management even
more critical: a substantial portion of the
equity market is now on autopilot.
4.
5.
A substantial
portion of the
equity market is
now on autopilot.
11November 20, 2014 | proactiveadvisormagazine.com