Mike Jones • ProEquities, Inc. - Bucket investing with risk-managed portfolios by David Varadi, Jerry Wagner, J.D., George Yang, Ph.D. & CFA - Employment increases set new record - Referrals fueled by process management (James Franke • Harbour Investments, Inc.)

1. Mike Jones
ASSET
MANAGEMENT
ON “AUTOPILOT”
Pg.8
Jobs streak
sets record • pg. 7
Fuel referrals with
process management
• pg. 3
November 13, 2014 | Volume 4 | Issue 8
First magazine focused on active investment management
Risk management for
bucket investing • pg. 4

2. 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

3. This entire exercise is an ongoing
process that can add peace of mind and
a high degree of satisfaction to clients.
They finally have a sense of organiza-
tion and control over their financial
affairs that might have been previously
lacking. In addition to contributing to
the referral process, it is a wonderful
tool for client retention.”
ersonal referrals are a
cornerstone for the growth
of our practice. Ultimately, it is really
the positive word-of-mouth from our
clients that counts the most.
I know that our focus on client
education and the process we use for
helping clients organize their personal
finances is a driver for much of the pos-
itive feedback we receive—and clients
will share this experience with their
friends, co-workers, and relatives.
Because of the increasing complexities
within the financial world today,we make
certain that our clients have their finan-
cial papers organized, coordinated, and
current. One of the biggest mistakes we
find is people making financial decisions
in isolation—everything needs to work
together.
We provide a ‘financial organizer’
as a value-add system for clients that
helps identify any specific financial
areas that might need analysis and
determine an appropriate course of
action.
During client reviews, this finan-
cial organizer assists in identifying
any necessary changes to a portfolio,
keeps clients current, and serves as
a platform to discuss other financial
needs. It also serves the purpose of
being a complete record of all finan-
cial matters in the unfortunate case of
a stakeholder passing away suddenly.
Referrals fueled by
process management
James Franke
Milwaukee, WI
Harbour Investments, Inc.
Franke Martens Group
P“
James Franke is an Investment Advisor Representative offering securities and advisory services through Harbour Investments, Inc., member
FINRA/SIPC. Franke Martens Group is independent of Harbour Investments, Inc.
Read text only
Advertising
proactiveadvisormagazine.com/advertising
Reprints
proactiveadvisormagazine.com/reprints
Contact
proactiveadvisormagazine.com/contact
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
David Varadi, Jerry Wagner,
and George Yang
David Wismer
Graphic Designer
Travis Bramble
Contributing Photographer
Chris Winton-Stahle
November 13, 2014
Volume 4 | Issue 8
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 13, 2014 | proactiveadvisormagazine.com 3
TIPS & TOOLS

4. David Varadi
Jerry Wagner, J.D.
George Yang, Ph.D. & CFA
By
Read text only
Bucket investing with
risk-managed portfolios
The “bucket” approach to asset allocation
by wealth advisors has deservedly grown in
popularity for retirement planning. It can be
enhanced through the use of actively managed
investment strategies.
Designing an asset allocation approach
to meet a client’s financial objectives often
is cited as the most important component of
the investment advisory process. Despite the
advent of Markowitz and Modern Portfolio
Theory, this process cannot be easily reduced
to a financial engineering problem. Economists
have long made a key assumption within their
models that is highly flawed for the purposes of
simplifying the mathematical implementation:
they assume that human beings only make
rational decisions.
Empirical evidence has shown that investors
are indeed far from rational. In a classic study
by DALBAR, the average equity mutual fund
investor made a return of 5.02%, while the
S&P 500 made 9.22% over the same 20-year
period. The 4.20% return differential could
not be explained by financial theory, and was
famously dubbed “the behavior gap.” Investors
lost over 60% of the returns available to them
through poor market timing that was driven by
emotional decision-making.
It can be argued that the most important job
for an investment advisor or financial planner
is simply to protect investors from themselves.
Creating an asset allocation approach that can
proactiveadvisormagazine.com | November 13, 20144

5. continue on pg. 11
keep them invested and avoid selling risky
investments at the wrong time is a difficult
challenge. The “bucket” approach to invest-
ing has emerged as a popular asset allocation
methodology in the financial planning and
advisory community because it is specifically
designed to account for actual investor behav-
ior. Furthermore, it is highly compatible with
the traditional financial planning objectives
which require matching assets to meet future
liabilities.
The essence of the bucket approach is to
divide a client’s portfolio assets into several
pools, or “buckets,” each with different
planned goals, needs, or time horizons, and
then design a separate asset allocation policy
for each “bucket.” For different investors,
an individualized bucketing approach also
reflects financial planners’ and advisors’
emphasis on case-by-case tailored solutions for
their fee-paying clients. Asset allocation using the bucket approach
utilizes discrete “buckets” assigned to asset type,
such as bonds for income and capital preserva-
tion, or equities/stocks for capital appreciation.
The simplest implementation of bucket invest-
ing would use only two buckets: bonds or cash
to meet short-term expenses, and stocks for
long-term growth.
There are also more complicated “buck-
eting” strategies that use three to six buckets.
Intermediate “buffer buckets” can have more
refined planning time horizons designed for
growth or spending goals and thus be targeted
at layered return objectives. From an invest-
ment management standpoint, a more complex
bucket approach could use different portfolios
for each bucket, and these portfolios could be
formed using either assets or strategies (or both)
with either a passive or active management
overlay.
There are many reasons why a distinct
bucketing strategy design might be appropriate
for different investors, such as different tax
brackets and/or opportunities to shelter income
from taxation, or different planning objectives.
For example, some investors have relatively
short term objectives, while others may have
longer-term goals like saving for college tui-
tion payments, retirement spending, or estate
planning.
In addition, part of the reason the bucket
approach has gained popularity in the in-
vestment advisory and planning community
is the anecdotal evidence from peers that it
improves client communication and retention.
Behavioral finance proponents attribute this
success mainly to the fact that most investors
have a “mental accounting” bias. “Mental
accounting” describes a person’s tendency to
categorize and evaluate economic outcomes by
grouping their assets into a number of non-fun-
gible (non-interchangeable) “mental accounts.”
A time-horizon-based “bucketing” approach
for wealth management was designed to address
psychologically both the safety of near-term li-
quidity need and the goal of long-term growth
of wealth. In practice, a floor level of assets
designated as a short-term “spending bucket”
is often kept as cash or in short-term securities
that have little or no investment risk. Further,
from a portfolio management perspective, plan-
ning “buckets” of capital under the framework
of “goals-based investing” does institute benefi-
cial risk discipline into the investment process.
The 3-bucket strategy
income for life
+
70% of
investments
Cash Bonds
Keep enough
cash for that
year’s bills.
Sell bonds
to replenish
cash for the
first 15 years.
30% of
investments
Stocks
Let your stocks
grow for the
first 10-15 years
of retirement.
Waterfall bucket approach
Corporate,
muni bonds,
preferred stock
Money
Markets
5%
Near
Cash
25%FixedIncome
70%Risk
Assets
U.S. & international
stocks and commodities
Monthly
spending
bucket
to retirement income
November 13, 2014 | proactiveadvisormagazine.com 5

7. 0
600k
400
200
-200
-400
-600
-800
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
{
Longest streak of monthly job gains
since WWII: 49 months.
Previous best was 48 months
ending June 1990.
Employment increases set new record
hile last week’s employment
report was somewhat below
expectations (214,000 jobs added versus
235,000 expected), the 49th consecutive
month of job increases hit a significant
milestone.
According to Bespoke Investment
Group, the current expansion in the job
market (as measured by months in a row
with increases in total Nonfarm Payrolls) is
currently the longest since World War II,
eclipsing the streak of 48 straight months
of higher payrolls achieved in the four years
ending in June 1990. Payroll increases, says
Bespoke, have bounced between 140,000
and 300,000 since the start of 2012 and
show “no signs of slowing (or accelerating
above) that performance for the time
being.”
There were both positives and negatives
within the internals of this month’s report.
The unemployment rate dipped to 5.8%
in October from 5.9% in September,
hitting a new 6-year low. The labor force
participation rate, although still at low
levels not seen since the 1970s, shows
some signs of stabilizing and has trended
sideways for months now, bouncing around
W
Source: Bespoke Investment Group
the 62.8% level. A steadying in levels for
the labor force participation rate may be
contributing to the slightly more positive
trend of hiring among part-time workers
and the long-term unemployed.
Total hours worked and wage growth also
are showing some signs of improvement,
albeit at a slow pace. However, wage
growth is still relatively soft, essentially
just maintaining a breakeven pace with
inflation. Average hourly private-sector
wages rose a mere 0.1% in October and
over the past year have risen about 2%.
But the overall good news remains a
stream of consistent monthly job additions
to the total labor picture. Says the NY
Times, with the 3-, 6-, and 12-month
average monthly job gains all in the
220,000 to 235,000 range, “that is about as
steady as it gets.”
Read text only
The significance of a secular
market should not be
underestimated
Several factors point to a new secular bull market
that could run for many years.
How to get prospects off
the fence
Incorporate a “value trigger” into prospect
communications.
Primal fear: Thinking differently
about risk tolerance
Advice on thinking differently about clients’ risk
tolerance and debunking some common myths.
CHANGE IN NONFARM PAYROLLS
7November 13, 2014 | proactiveadvisormagazine.com
TOPPING THE CHARTS
L NKS WEEK

8. By David Wismer
Photography by Chris Winton-Stahle
Mike Jones, CRPC®
Virginia Beach, VA
Patriot Strategic Investments
Broker-Dealer: ProEquities, Inc.
Nine years active duty, United States Marine Corps
Lieutenant Colonel, Marine Reserves
20 years as an airline pilot
While flying as a commercial
airline pilot, Mike Jones built
an investment advisory practice.
Third-party active managers
provide him and a growing
number of financial advisors
with research-driven strategies
—a controlled and systematic
approach to portfolio management.
ASSET
MANAGEMENT
ON “AUTOPILOT”
8 proactiveadvisormagazine.com | November 13, 2014

9. Proactive Advisor Magazine: Mike, how
would you describe your client base?
Mike Jones: I think I have a fairly unique
perspective and different career path from most
advisors. I have been a financial advisor since
the early 2000s and have received my Chartered
Retirement Planning Counselor designation.
But I also spent nine years on active duty in
the Marine Corps, was a Lieutenant Colonel
in the Marines Reserves, and now have over
20 years as an airline pilot. During all of those
career phases, I have built up a large network
of friends and colleagues, many of whom have
employed my services as a financial advisor.
My clients vary in terms of income, assets,
and financial sophistication. No matter what
their income level, whether it is $50,000 or
$500,000, I see the same issues over and over
when I first sit down with a client. People tend
to spend up to their income level, often neglect-
ing to “pay themselves” first, especially when it
comes to how they approach their retirement
savings. My number-one priority is trying to
bring discipline to the retirement planning pro-
cess and to show clients how they might grow
their assets in a risk-managed fashion.
What are those retirement issues?
The biggest problem for most people—and
it is well-documented in financial studies—is
that they will not have enough money for the
kind of retirement they envisioned, especially
with increased life expectancies and health
care needs. The reasons are all over the place,
from job layoffs to lower salaries coming out of
the recession, to the housing crisis, to simply
not having developed a good plan at an early
enough age.
Others may have lost a lot of money in
2008-09 and bailed out at the wrong time, or
they did not have an advisor who might have
been able to put them into active investment
strategies with a defensive plan for the crash.
Some who used a buy-and-hold approach may
have recovered by now, but look at how long it
has taken. Many people were not as fortunate
and just left the market with their losses and
have not returned to equities.
Consequently, a lot of people will have to
work longer than they planned and rely on
Social Security as an important part of their
retirement. But I also think it is never too late
to get things back on track and that is what I
focus on for each individual or couple.
How were you introduced to active
money management?
My real mentor in the business, whom I still
work with today, was investigating third-party
money managers when we were first intro-
duced. The timing was just about perfect and
I have been able to work with him through
the due diligence process of vetting a variety of
third-party managers. We both have endorsed
the concept of trying to find a better way for
managing clients’ money, putting a strong
emphasis on risk management. I have to say,
with my military and flying background, this
makes sense to me on so many levels—the
idea of having a solid plan in place for emer-
gencies and worst-case scenarios. Active money
management is a disciplined approach to in-
vesting with advanced mathematical tools and
models, which is something that inherently
appeals to me.
How do you approach clients about
planning?
It is a very holistic process grounded in my
training. I want to develop the big picture of
where they are in their lives financially and
where they want to go. I focus on the major
items that can really have an impact: how have
they been deploying their assets, how are their
protection needs being handled, what is their
basic cash flow picture, and how have they been
planning for things like their estate, college
education, and health care needs. Once I have
that picture and a thorough understanding of
their goals, I work with the client to develop a
plan and recommendations that can move them
toward achieving those goals.
What about the investment piece?
It obviously depends on the client and their
objectives, but for most clients the goal is to
grow assets to meet their retirement needs. I
think that growth can best be achieved through
active money management and strategic diver-
sification. Equities are just one part of the pic-
ture. I like to take a look at a variety of things
such as high yield fixed income, real estate, oil
and gas partnerships … the whole gamut of
alternatives.
What client benefits do you look for from
third-party active managers?
It starts with the fact that I think every
professional has their role and area of expertise.
My proficiency is putting together a financial
plan with all of the elements working together.
While I love the financial markets and always
have, there is no conceivable way I can develop
the models or systems that the best money
continue on pg. 10
November 13, 2014 | proactiveadvisormagazine.com 9

10. Show your clients a
friendlier
bear market
800-347-3539 | flexibleplan.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
managers have or employ the staff to monitor
and analyze market developments the way our
managers do.
Second, the emphasis on risk management
is critical. As my clients approach retirement,
they really cannot afford to take a hit to their
assets the way the market crashes of the early
2000s or 2008 played out. It simply depletes
the working and productive assets too much at
a point when they may not have the luxury of
time to recover. A risk-first approach may not
produce the highest returns in all markets, but
it can produce more consistent and sustainable
returns.
Third, the active managers I use have the
ability to utilize strategies that can work with
any risk profile—from the most conservative
investor to aggressive. But no matter what
the risk profile, the strategies we use have an
emphasis on risk management, a defensive
capability, and typically have multiple strategies
within a client portfolio. Having a “strategy
of strategies,” if you will, allows for increased
diversification and the ability to emphasize or
deemphasize the sectors or asset classes that are
working or not working.
Finally, there is the concept of discipline. I
am trying to bring a disciplined approach to my
clients’ overall financial lives, and that needs to
apply to their investments as well. Active money
managers apply that discipline to their strategy
development and execution, driving emotion
and bias out of the process.
Once well-orchestrated strategies are in
place, we need to let them work for clients
as they are intended to do. This is consistent
with my overall client philosophy of creating
a plan and then faithfully executing the plan,
which is really what works best over the long
term.
continued from pg. 9
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.
10 proactiveadvisormagazine.com | November 13, 2014

11. 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
continued from pg. 5
The “bucket approach” and
active management
One of the key failures of static asset alloca-
tion approaches is that all of them fail to follow
trends in both returns and risk. As we have seen,
bear markets have been devastating to all forms
of static allocation—especially if they happen
at the wrong time. This is true regardless of
whether one employs a constantly rebalanced
approach (nearly impossible to implement) or
the bucket approach.
The key difference between these two
methods is that when buying and holding
traditional asset classes, the bucket approach
is most affected by bear markets that occur
toward the end of the investor’s time horizon,
while the constantly rebalanced approach (with
systematic withdrawal) is most impacted by
bear markets that occur at the beginning.
From a practical perspective, since both of
these methods were designed for retirement
planning, the bucket approach has more psy-
chological appeal. In theory, people that have
just retired are most sensitive to their nest egg
and may make rash decisions if they encounter
a bear market early on. It is harder for them to
be concerned about what may happen if they
run out of money at some point in the very
distant future. Human nature is to focus on the
shorter term.
However, the cost of running out of
money can be severe—this can mean having
no financial options at a point when the
client is unlikely to be able to return to work.
The bucket approach is more sensitive to this
outcome, especially when employing a tradi-
tional buy-and-hold approach. Yet bucketing
cannot bail you out of a sequence of poor
returns.
Active management, in contrast to tradi-
tional buy-and-hold investing which penalizes
the bucket approach for “bad luck” in the later
years, may provide an excellent solution. It
focuses on responding to trends in return and
volatility by shifting asset allocation throughout
the holding period. Most active management
approaches that are trend-following based will
outperform buy-and-hold in an extended bear
market. As a tradeoff, they may trail on the
upside in bull markets. However, in aggregate
they produce the smoother return profile that is
ideal for financial planning since it typically is
not as sensitive to “bad luck.”
By using active management with the
bucket approach, it is possible to produce a
nearly ideal scenario that is designed to keep
investors invested for the long term while pro-
tecting them from events in the future that may
devastate their portfolios.
(Editor’s Note: This article presents an excerpt from a Flexible Plan Investments, Ltd. white paper,
by authors David Varadi, Jerry Wagner, and Dr. George Yang. The white paper in its entirety can be
downloaded at http://goto.flexibleplan.com/download/whitepaper-bucket-investing.pdf)
11November 13, 2014 | proactiveadvisormagazine.com