John Gutfranski and Debra White Stephens are working together in a succession plan over 10 years where they jointly manage clients through a "yours, mine and ours" model. Debra previously focused on life/health insurance and has decades of experience advising small businesses, while John has a banking/investments background from a large firm. Their philosophy emphasizes managing volatility through active management of third-party managers to generate steady returns over time. They educate clients on the risks of downturns and benefits of active management over buy-and-hold strategies.

1. YOURS, MINE,
OURS&
Budget deficit
shrinking pg. 6
3 approaches to
client acquisition
pg. 3
Is Modern Portfolio
Theory flawed? pg. 4
July 17, 2014 | Volume 3 | Issue 3 First magazine focused on active investment management
JOHN GUTFRANSKI
PG. 8
DEBRA WHITE STEPHENS

3. A third approach was facilitat-
ed by our broker/dealer, Geneos
Wealth Management. I attended
a year-long, high-level coaching
program by one of the leaders in
the field. This was pretty transfor-
mative, covering everything from
our internal processes to marketing
outreach. Those marketing ap-
proaches, via our website, commu-
nications, and marketing materials
around our wealth management
process, and systematic programs
for client acquisition, have helped
contribute to about 20% growth
over the past year.”
trong recommendations
from current clients are
always the best source for growing
our business and new client acqui-
sition. Exceeding client expecta-
tions and delivering a consistently
high-quality process helps generate
those referrals.
But I think you need to actively
find ways beyond referrals if you
really want to see double-digit
growth in your business. There are
several ways I approach this.
For eight years I have taught
the retirement planning class at
our local community college, for
example. While not everyone going
through that class will be a lead,
or even would be appropriate for
our services, it has quickly become
an excellent source of both direct
leads and referrals.
We have also ramped up our
focus on building stronger strate-
gic relationships with influencers,
primarily lawyers and accountants.
That has to be more than a casual
effort, and it needs to be a two-way
street. The number of relationships
is not our focus—it isn’t efficient to
spread ourselves too thin. Rather,
we focus on finding quality busi-
ness relationships that are a good
fit in terms of shared client profiles.
Three approaches to
client acquisition
Chuck Bigbie
Tulsa, OK
Geneos Wealth Management, Inc.
President, Woodland Wealth Management
S“
Securities offered through Geneos Wealth Management, Inc. Member FINRA/SIPC. Advisory services offered through
Geneos Wealth Management, Inc., a Registered Investment Advisor.
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TIPS & TOOLS

4. ccording to Modern Portfolio Theory (MPT),
investors are risk-averse: they are willing to accept
more risk only for potentially higher payoffs and
will accept lower returns for a less volatile investment. It’s an
extraordinarily elegant theory that has an outsized influence on
the investment management field. But, it is seriously flawed by
its method for determining risk.
Simply, MPT is a theory on how risk-averse investors can
construct portfolios to optimize or maximize expected return
IS MODERN PORTFOLIOTHEORY
SERIOUSLY FLAWED?
By Linda Ferentchak
Read text only
based on a given level of market risk, emphasizing that risk is an
inherent part of higher reward.
When Harry Markowitz developed MPT back in the
1950s, he needed a definition of risk and chose to use vol-
atility. The greater the volatility of the portfolio, measured
either in terms of standard deviation or beta, the greater the
assumed risk. Both standard deviation and beta have the fail-
ing of considering upward volatility to be as much a negative
as downward volatility.
A
proactiveadvisormagazine.com | July 17, 20144

5. that found “realized returns appear to be higher than expected
for low-risk securities and lower than expected for high-risk se-
curities ... or that the [risk-reward] relationship was far weaker
than expected.” The author continued on: “Other important
studies have concluded that there is not necessarily any stable re-
lationship between risk and return; that there often may be vir-
tually no relationship between return achieved and risk taken.”
continue on pg. 11
2.15% 2.15%
13.6% 13.6%
68.2%
99.7%
95.4%
34.1%34.1%
But there’s another dark side to standard deviation that is too
often overlooked: it is based upon a statistical tool known as the
bell curve. Assuming that investment returns follow a normal
distribution, you can identify the population average and, using
standard deviation, determine the likelihood of future returns
varying from that average.
With a normal bell curve distribution, the highest point in the
curve, or the top of the bell, represents the most probable event
with all possible occurrences equally distributed around the top.
68.2% of the returns will be within one standard deviation from
the mean; 95.4% of the returns are within two standard devia-
tions; and 99.7% will lie within three standard deviations.
Using standard deviation and historical stock price informa-
tion, many investment consultants develop portfolios for clients
based on the probability of achieving specific returns. But these
plans have a flaw that only becomes apparent when it’s too late:
they overlook “Fat Tails.”
Fat Tails are those extreme values that fall outside the normal
distribution of the bell curve: far to the left (huge losses) and
far to the right (huge gains) of the average. Statistically, they
have an extremely low probability of occurring, often less than
0.1%. But they do happen, and with far more frequency than
the normal bell curve predicts.
BELL CURVE
FatTail FatTail
In his book, The (mis)Behavior of Markets, Benoit Mandel-
brot studied the period from 1916 to 2003, comparing con-
ventional finance theory, based on the normal distribution of
the bell curve, to reality. Statistically speaking, between 1916
and 2003, there should have been only 58 days when the Dow
(DJIA) moved more than 3.4%. In fact, there were 1,001. There
should have been only six days with swings in excess of 4.5%;
there were actually 366. Swings of more than 7% should come
only once every 300,000 years based on a bell curve distribution,
but there were 48 such days in the 87 years.
In August of 1998 alone, the Dow recorded losses of 3.5%,
4.4%, and 6.8%. The statistical odds of getting three such de-
clines in one month: 1 in 500 billion.
Recognizing that Fat Tails do occur, there has been an at-
tempt to modify the standard bell curve to give greater probabil-
ity to market extremes. But this still leaves a perhaps even bigger
flaw to the use of volatility as a measure of risk. For volatility to
be a reasonable measure of risk, it needs to have some correlation
to return. And therein lies the problem.
The level of volatility in stock prices and index values ap-
pears to have little relationship to return. MPT’s measurement
of risk is flawed.
In 1977, the Journal of Portfolio Management published an
article by J. Michael Murphy, “Efficient Markets, Index Funds,
Illusion, and Reality.” In the paper, the author cited four studies
FAT TAILS
July 17, 2014 | proactiveadvisormagazine.com 5

6. 0
-200
-400
-600
-800
-1000
-1200
-1400
-1600
2008 2009 2010 2011 2012
projected
2013 2014
Budget deficit on track for six-year low
ccording to MSNBC, the
shrinking U.S. budget deficit
is one of the nation’s best-kept
secrets—and the government is
seeing the fastest reduction of the deficit
since the end of World War II. Recent
polls, says the network, indicate the vast
majority of Americans think the deficit is
still increasing.
The U.S. budget deficit so far this
fiscal year was the smallest since 2008,
said Bloomberg last Friday (7/11), as
a stronger economy bolstered tax pay-
ments by consumers and businesses.
The deficit in fiscal 2014, which ends
September 30, is projected to be 2.8
percent of gross domestic product,
according to the Congressional Budget
Office (CBO), compared with 4.1 per-
cent in 2013.
A
Source: MSNBC News
The $365.9 billion shortfall from
October 2013 through June 2014
compared to a $509.8 billion gap in the
same period a year earlier. Last month,
the government posted a $70.5 billion
surplus compared to a $116.5 billion
excess a year earlier.
Rising employment and corporate
profits will probably keep lifting tax re-
ceipts this year as the U.S. recovers from a
first-quarter slump, says Bloomberg. That
will help shrink this fiscal year’s deficit,
which is projected to be the smallest as a
share of the economy since 2007.
The CBO said the deficit will fall
to $378 billion by 2015 with no con-
gressional action—a sharp contrast to
the $1 trillion recession-driven deficits
in each of President Obama’s first four
years in office.
Improvement in labor statistics are
given some of the credit, as payroll con-
tinues to grow at an average monthly
gain of 231,000 jobs this year. Higher
receipts from the Federal Reserve,
resulting from stronger earnings on
the central bank’s securities holdings,
contributed to the narrower deficit,
the CBO said. Stronger contributions
to U.S. Treasury coffers from govern-
ment-run mortgage finance groups
Fannie Mae and Freddie Mac have also
been a factor.
“Because revenues, under current law,
are projected to rise more rapidly than
spending in the next two years, deficits in
the CBO’s baseline projections continue
to shrink, falling to 2.1 percent of GDP
by 2015,” the CBO said in a July 8 review
of June’s budget.
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U.S. BUDGET DEFICIT BY YEAR
6 proactiveadvisormagazine.com | July 17, 2014
TOPPING THE CHARTS

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8. READ TEXT ONLY
Debra White Stephens, CFP®
Former president, Houston Chapter of the
International Association for Financial Planning
Guest on several local financial television and
radio talk shows
John Gutfranski, CFP®
, AIF®
, CRPC®
Director, Fort Bend County MUD #35
Member, U.S. Green Building Council
Earned B.A. in Business Administration from
Cleveland State University
YOURS, MINE,
&OURS
JOHN GUTFRANSKI DEBRA WHITE STEPHENS

9. Proactive Advisor Magazine: It is great
to speak with both of you. Can you
describe your working relationship?
Debra: John and I are in the fourth year of a
long-range succession plan that will take about
10 years. It is going very well.
John: Right. We have a bit of a “yours, mine
and ours” practice right now and we are con-
tinually developing our joint relationship with
new and existing clients.
What were you both doing previously?
Debra: I have had a pretty steady and
consistent practice, with close to 40 years in the
business. While I say consistent, I have evolved
my focus over the years, starting strictly with
life and health insurance, acquiring my CFP
in 1985, and from there building a full-service
advisory and planning practice. I have worked
with small business owners for many years and
they remain a major focus.
John: My story is quite different. I have a
strong background in banking and investment
products and most recently worked for several
years at a large national firm. When the 2008
financial crisis hit, there was a fair amount of
disruption within that company and my spe-
cific team. I examined a few alternatives and
am very happy to have joined Cetera Advisor
Networks in 2009.
Debra and I mesh quite well in the small
business area. We find if Debra has an existing
business relationship, I will generally take the lead
on the 401(k) side and Debra will focus more on
the key executive financial planning, with both
of us involved in the asset management piece.
What is your philosophy on investments?
John: One of our guiding principles is in
managing the volatility and fluctuations of the
market through active management. It is nice to
hit a home run or triple every now and again but
we are more focused on singles and doubles, to
reducing the errors if you will, and in winning
by not losing. I guess if you had to put a picture
on our practice, it would be of the tortoise
coming in first in the race over the long haul.
Debra: If someone comes to meet with us
and is totally focused on “how we did” versus
the market last year or any year, it’s probably
not a good fit for us.
John: I think what we really share is the
viewpoint that we are going to give each and
every client a credible, research-based invest-
ment recommendation based on their specific
needs and risk tolerance. Third-party active
managers are a big part of that equation.
Do clients understand active
management principles?
Debra: Assuming it was appropriate for a
client, I take them through a little bit of market
history and explain the impact another year like
2008 might have on their portfolio. When you
put that into real dollars and not just percent-
ages, it makes an impression and helps them
better understand the risk that can be out there.
I show the math of what happens if one just
sits in a buy-and-hold situation and how diffi-
cult that can be to recover from. Then I explain
that is why we use active managers, who are
able to move to defensive mode in a portfolio
when necessary and are watching fundamentals
and trends every day of the week.
John: I explain that we are like their per-
sonal CFO and are not just going to put them
into investments and hope everything works
out fine. That is not acceptable. We will be
very rigorous in our evaluation of third-party
managers and make sure they are consistently
delivering on their strategies. If not, we are not
hesitant to make changes.
But what the client really needs to under-
stand is that we are putting together a risk-man-
aged strategy. We are not benchmarking against
the S&P 500, we are benchmarking with an eye
to risk-adjusted returns. It is all about winning
over the long term in a slow and steady fashion
by avoiding large losses. We do this by employ-
ing active managers who can understand the
current market environment and who can be
highly adaptive as conditions undergo change.
What kinds of strategies might this involve?
John: Let’s say for a client we might start
with a core equity and bond portfolio that
is actively managed either through a single
third-party manager or several different
managers. Regardless of that decision, it is
usually a well-diversified approach utilizing
multiple strategies to reduce risk and construct
continue on pg. 10
Four years ago, Debra White Stephens and John Gutfranski partnered in a
long-range succession plan. Each brings different strengths to the table, and
their clients—both old and new—have appreciated the smooth transition.
9July 17, 2014 | proactiveadvisormagazine.com

10. M U LT I - M A R K E T
+
MULTI-STRATEGY
+
MULTI-MANAGER
One p rtfolio
D Y N A M I C A L LY R I S K - M A N A G E D
L E A R N M O R E
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.
appropriate correlations. Then beyond that,
we might add a further layer of diversification
through things like non-traded REITs, cur-
rency baskets, structured notes, or closed-end
investment funds like BDCs. For many clients
who need both asset growth and a future guar-
anteed income stream, we will see if annuities
are appropriate, which can also have an active
management component.
Thank you both for your time.
Any concluding thoughts?
Debra: My practice has been very relation-
ship-oriented over the years. While I do exhaus-
tive fact-finding with clients on their financial
situations, I also think the more qualitative
side of the business is very important—really
getting to know your clients and their personal
and business aspirations. I have seen clients
who started with very little in the way of assets
now retiring with a very nice lifestyle, and I
have been with them every step of the way.
John: I agree with Debra that feelings are
equally as important as facts. But I am really
a numbers and research-oriented person by
nature and what motivates me is putting to-
gether a financial plan or investment portfolio
that maximizes returns while managing risk.
Maybe a combination of Warren Buffett and
Harry Potter could deliver unrealistic invest-
ment returns every single year, but that is not
our focus for clients. It is about seeing client
assets grow responsibly, always with an eye to
risk and asset protection. This makes for satis-
fied clients who are meeting their objectives,
which in turn leads to strong relationships and
ultimately referrals.
continued from pg. 9
Securities and investment advisory services offered through
Cetera Advisor Networks LLC, member FINRA, SIPC. Cetera
is under separate ownership from any other named entity.
Photography:ScottF.Kohn
10 proactiveadvisormagazine.com | July 17, 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
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In 1992, Eugene Fama, one of the original developers of the
Efficient Market Hypothesis, co-authored a paper titled “The
Cross-Section of Expected Stock Returns,” published in the
Journal of Finance Vol. 67. The paper examined 9,500 stocks
between 1963 and 1990, concluding that a stock’s risk, mea-
sured by beta (i.e. volatility), was not a reliable predictor of per-
formance. “What we are saying is that over the last 50 years,
knowing the volatility of an equity doesn’t tell you much about
the stock’s return.”
To be predictive, volatility needs to remain somewhat stable.
As any market analyst knows, volatility can change dramatically
in a relatively short period for reasons unrelated to return. Ben
Graham, hailed by many as “the father of value investing,” argued
against measures of risk based upon past prices (such as volatility)
in his 1934 book Security Analysis, noting that price declines can
be temporary and not reflective of a company’s true value.
So where does this leave today’s investment advisor? Number
one is to realize that MPT and its companion theory, the Cap-
ital Asset Pricing Model, are not risk management approaches.
While there is value to their focus on diversification, diversifica-
tion alone cannot protect against market declines.
Second is that volatility as a measure of risk is not a predictor
of return. Investing in high volatility stocks with the expectation
of high returns is based on faulty assumptions.
And investing in low volatility stocks is not a foolproof
method to avoid significant downward price moves during an
overall market meltdown.
Many current market strategists recognize the profound issues
surrounding Fat Tail or black swan events. According to Steven
Sears, a Barron’s senior editor, “The black swan always hovers
over the market’s horizon … Wall Street’s most accomplished
practitioners see a future filled with tail risk. If something hap-
pens that history has not anticipated, Modern Portfolio Theory
breaks down.”
It is clear that managing risk and return in today’s global in-
vestment environment requires active investment management.
There are no easy “invest and walk away” solutions.
continued from pg. 5
“If something happens that history
has not anticipated, Modern
Portfolio Theory breaks down.”
11July 17, 2014 | proactiveadvisormagazine.com

12. 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.
Editor
David Wismer
Marketing Coordinator
Elizabeth Whitley
Contributing Writers
Linda Ferentchak
David Wismer
Graphic Designer
Roger Ackerman
Contributing Photographer
Scott F. Kohn
July 17, 2014
Volume 3 | Issue 3
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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Publishing, Inc. All rights reserved.
Reproduction of printed form, whole or in
part, without permission is prohibited.
7 ways advisors use alternatives
Morningstar, Inc. just released the results of its eighth annual nationwide
survey of advisors and institutional investors in which the firm sought out
their views on alternative investing.
Finding a better way to index
While $115 billion flowed into index funds in 2013, the risk associated
with indexing is underestimated by most people. Is there a better way?
Main Street and Wall Street moving in
opposite directions?
Retail investors are piling into stocks as many pros say gains for
the year may be close to over.
The crisis in retirement planning
Harvard Business Review says defined contribution plans are
problematic—putting relatively complex investment decisions
in the hands of individuals with little or no financial expertise.
Is it time to rethink the price-earnings ratio?
Investment strategist: Common measure of long-term
stock performance could be due for a rethink.
How to bring in clients’ outside assets
Clients often feel they are spreading the risk by getting advice
from multiple advisors. Your challenge is convincing them you’re
the one to bring order to it all.
Stay connected
12
L NKS WEEK
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