John McGonagle • EPI Advisors, LLC - Understanding the relevance of risk-adjusted returns by Dave Walton - Strongest jobs gain since 2012 surprises markets - Building stronger visibility for an advisory firm (Rodger Sprouse, Titan Securities)

1. Jobs report
surprises Street
• pg. 7
Building stronger
firm visibility • pg. 3
Relevance of risk-adjusted
returns • pg. 4
December 11 | Volume 4 | Issue 11
First magazine focused on active investment management
John McGonagle’s
SOCRATICAPPROACHHow frank dialogue delivers client solutions

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. I am also a frequent speaker at in-
dustry events, have trained other fi-
nancial professionals, and contribute
to various publications, primarily as
an industry resource. Our firm belongs
to the Better Business Bureau and the
National Ethics Association, and I fea-
ture both of those prominently on our
website. On a more local basis, I take
part in several charitable events and
organizations.
I think all of these activities com-
bined fulfill a personal desire I have
to give back to the profession and the
community and to help in educating
people.”
hile I love to receive
new client referrals
from current clients, I also believe that
it is important to maintain a high level
of visibility in the community and in
the professional arena. I have done this
in a number of ways.
For several years I have been an
instructor at local college campuses,
offering two-day courses for those ap-
proaching retirement. I am sincerely
interested in educating people on the
issues of retirement, and it is a wonder-
ful way to meet new people. I am very
careful not to push the services of our
firm, but I do offer attendees the op-
portunity to have a personal two-hour
session at my office. I am happy just to
answer any specific personal questions
they may have and if a relationship
does develop, it is hopefully to both of
our benefit.
I have also hosted a local radio fi-
nancial program on Sunday mornings,
which I have had to cut back on recent-
ly due to family obligations, but hope
to resume on a regular basis once my
children are older. I have covered all
sorts of financial issues, including al-
ternative investment approaches and
active investment management. The re-
tirement landscape has changed forev-
er in America, and I have addressed the
unique retirement challenges that Baby
Boomers have to deal with.
Building stronger visibility
for an advisory firm
Rodger Sprouse
Overland Park, KS
Titan Securities
Sprouse Financial Group, Inc.
W“
Rodger Sprouse is a registered representative of and offers securities and investment advisory services through Titan Securities, member
FINRA/SIPC. Sprouse Financial Group is not affiliated with Titan Securities. All investments contain risk, including the loss of the entire
principle invested. There can be no assurance that any investment product will achieve its investment objective(s). Investments should be
considered based on personal investment objectives and suitability.
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
Dave Walton
David Wismer
Graphic Designer
Travis Bramble
Contributing Photographer
Tom McKenzie
December 11, 2014
Volume 4 | Issue 11
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.
December 11, 2014 | proactiveadvisormagazine.com 3
TIPS & TOOLS

4. Understanding
the relevance
of risk-adjusted
returns
By Dave Walton
Read text only
proactiveadvisormagazine.com | December 11, 20144

5. continue on pg. 11
here have been a number of popular
media articles lately proclaiming
that active management is less than ideal for
investors. The articles claim, on average, active
management strategies don’t outperform pas-
sive strategies—and there is some data to cor-
roborate such claims. For example, on average,
hedge funds have generated negative alpha on
a rolling five-year basis.
Similarly, only 23% of actively managed
large-cap core mutual funds have outperformed
the S&P 500 year-to-date. Unfortunately,
the media lump together the diverse set of
hedge funds, stock-picking mutual funds,
and multi-manager/asset/strategy portfolio
approaches designed for risk-adjusted returns,
even though the differences are striking.
Unsurprisingly, the critics of active manage-
ment suggest a passive, buy-and-hold portfolio
mixing traditional asset classes (e.g., stocks,
bonds) in proportions designed to meet the
needs of specific investors. And in the midst
of the bull market we have experienced for the
past five years, this type of passive strategy has
indeed worked well. But does that mean active
management should be abandoned?
For many investors, the answer is probably
“no,” particularly when considering holistic
portfolio approaches as mentioned above. To
fully appreciate why, we must look not only at
returns but also at the risk side of the equation.
The 2014 DALBAR Quantitative
Analysis of Investor Behavior Report paints
a vastly different picture of passive returns.
Despite the theoretical performance of
holding passive funds, over the last 20 years
returns realized by investors have fallen se-
verely short. The table below highlights the
problem.
Of course there have been many ups
and downs over the last 20 years, so what
about the more recent past?
Well, according to the
same report, results for the
past three years have been
getting worse—equity fund
investors have lagged the
S&P 500 return by at least
five percentage points, with
the gap expanding each of
the last three years.
Why does this happen to investors? The
DALBAR report mentions that “the major
cause of the shortfall has been withdrawing
from investments at low points and buying
at market highs.” What this behavior likely
comes down to is that investors simply can’t
follow the passive strategy. It sounds counter-
intuitive, but despite the seeming simplicity of
the passive strategy and its recent outperfor-
mance, passive is still a strategy. And just like
active strategies, the rules must be followed.
What does all of this have to do with
risk-adjusted return? A lot, actually. Let’s
first define the term “risk-adjusted return.”
Ultimately it is a measure of performance per
unit of risk. But how do we define risk? Modern
finance has provided many ways to measure it:
volatility, standard deviation, beta, drawdown,
value-at-risk, etc. All of these risk metrics are
attempts to reduce the risk equation to a single
number and all use some form of historical per-
formance or scenarios based
on historical performance.
And all of these measures are
by definition assumed to be
temporary—tolerating some
level of risk to ultimately
achieve some level of return.
The problem is that such
quantifications overlook a
more fundamental, intuitive definition of risk:
what Warren Buffett refers to as “the permanent
loss of capital.” Using this definition of risk,
any temporary volatility, drawdown, etc. in the
past isn’t a concern. Instead we are concerned
with the potential for permanent losses moving
forward. But since the future is unknown, how
can we estimate the risk of a trading strategy by
this definition?
The answer is that we can define strategy
risk as the amount of capital that would be lost
before a decision is made that the strategy is not
While clients might profess a willingness to endure large portfolio drawdowns, when losses become a
reality, their attitudes and behavior often change swiftly. Explaining the relevance of risk management
and risk-adjusted returns is one of the most important tasks facing all advisors.
T
Total annualized
return
Actual investor
realized return
Investor performance
versus Index
Index maximum
drawdown (DD)
Return to
Max DD
Ratio
Equity funds 9.48% 5.02% -4.46 ppts.
Fixed income funds 5.77% 0.71% -5.06 ppts.
-50.95%
-5.15%
0.18
1.12
Source: DALBAR, Inc. 2014/Morningstar: S&P 500 TR Index, Barclays US Agg. TR Index, 1994-2013.
Equity returns for
individual investors
consistently lag
the S&P 500.
December 11, 2014 | proactiveadvisormagazine.com 5

8. Proactive Advisor Magazine: John, tell
me a little about your background and
why you became an advisor.
John McGonagle: I came from a family of
pretty modest means, which has been a driver
for trying to achieve business success. I have
always been interested in finance and business,
owning my own retail business at age 21. Even
when I was working 70-hour weeks in retail,
I appreciated how important the financial side
of the business was in terms of managing cash
flow, inventory, capital financing, etc. I suc-
cessfully cashed out of the retail business and
began a career that encompassed many sides of
the financial services industry: insurance, bank-
ing, financial product sales management and
marketing, commercial real estate, and business
Read text only
John McGonagle’s
SOCRATIC
APPROACH
By David Wismer
Photography by Tom McKenzie
Frank dialogue can create tension, but John McGonagle believes that
it helps clients better recognize their needs.
development. All of these experiences have
proven invaluable in shaping my perspective as
an advisor and RIA.
What were the commonalities of those
experiences?
I think process and collaboration are criti-
cally important in any endeavor. Education is
8 proactiveadvisormagazine.com | December 11, 2014

9. continue on pg. 10
also a big part of selling oneself and one’s capa-
bilities. It is much better to have the individual
across the table come to their own conclusions
based on the facts you have laid out, rather than
trying to just sell a concept, strategy, or service
in a heavy-handed way.
An early mentor introduced me to what I
call the “Five Ts”: time, temperament, technol-
ogy, training, and trust. You basically need all of
these to be successful in whatever you do—and
if you need to grow or become more expert in
one of these areas, find the best resource to help
you meet that need. Falling under the heading
of training, there might even be a sixth “T.” As I
grow my business, it is apparent how important
it is to be able to transfer knowledge to others
in your organization, so they can implement a
repeatable, successful process.
What is your focus with clients today?
We have several business entities under our
overall structure, but my team’s primary focus
is on retirement income planning. I employ a
very Socratic approach to the planning process,
involving clients in understanding what they
have been doing, where they need to go, and
where the underlying
shortfalls might
exist. Only then can
we come up with
a plan where they
will have buy-in and
be involved in the
solutions.
I like to study
human behavior and
how it pertains to
personal finances.
The types of questions you ask a client and the
order they are asked becomes very important.
The idea is not only to have a client see the issues
for themselves, but also for them to internalize
the need for solutions. If there is no tension in
problem-recognition, there is usually no real
action. People will not make changes because
they want to feel better about doing it; they will
make changes because there is a real, perceived
need for them. The good news is, ironically,
in the long run they will feel much better for
having done it.
The reality is that we are not only in the
investment services business, we are in the
investment services marketing business. There
is the obvious importance of prospecting for
new clients in terms of growing the practice.
But there is also a strong marketing element
to making sure clients are properly presented
with the information they need for informed
decision-making.
How does this apply to clients’
investments?
Once we have thoroughly gone through the
discovery process, I present solutions in incre-
ments, which I have found works best. Most of
the people we work with facing retirement want
some level of a guaranteed source of income
and the right annuity product may fit that need
nicely. But people also need to grow their assets
over time to provide for adequate distributions
throughout their retirement. How can one take
the assets gathered over a lifetime and turn
them into a paycheck?
This is where we will usually turn to active
money management by third-party managers.
I will ask a client, “What has to happen for
you to make money in a traditional investment
portfolio?” And they
answer correctly,
“The market has to
go up.” I lay out a
chart of the S&P
500, breaking it
down from 1980-
2000 and then 2000
through today. It be-
comes pretty obvious
that the fundamental
nature of the stock
market has changed. It does not always go
up—in fact, more recently, close to half of the
time it does not go up. I ask then if a long-only
investment strategy, staying fully invested at all
times, makes a lot of sense. The answer is pretty
universally “No.”
So we have to find a better way that goes
beyond modern portfolio theory. That is active
money management—it has the ability to go
to cash when needed, rotate into different asset
classes and sectors, or go inverse when there
is a bear market. Active money management
represents a strategy that is going to respond to
the marketplace in a proactive fashion. It can
help to preserve client capital through risk man-
agement in difficult markets, and perhaps even
profit during bear markets. But in favorable
markets, it can find a trend and take advantage
of the bull market.
“If there is no tension
in problem-recognition,
there is usually no action.
People make changes because
there is a real, perceived
need for changes.”
December 11, 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
Advisory Services offered through EPI Advisors, LLC, a MI Registered Investment Advisor.
Great explanation, John. What are the
benefits of active money management for
your practice and your clients?
The first major benefit is the element of
risk management. Active management is a
sophisticated approach to the volatility we have
seen over the past fifteen years. By smoothing
out volatility for client portfolios, active man-
agement helps me plan better for a range of
high-probability return expectations over the
long term.
Second, active management can help with
the most troubling issues of investor behavior.
While clients have been told for decades about
buy-and-hold investing, when markets crash
they naturally tend to panic. This can result in
some very bad decision-making. Active man-
agement can circumvent that issue in the first
place.
Third, my use of third-party managers allows
me to take a very impartial view of strategies
for my clients. I am not trying to advocate for
or against a specific strategy or manager—my
only goal is selecting the highest-quality man-
agers who can perform against their stated
objectives. It is also important to point out to
continued from pg. 9
“Active management is a
sophisticated approach to
the volatility we have seen
over the past fifteen years.”
clients that these are dedicated professionals
who are employing the most sophisticated
technical strategies and constantly evaluating
market conditions—no advisor can do that as
effectively on their own.
The bottom line is that active management
has become a differentiator for my practice—
offering my clients a solution they have likely
not heard about before and one that can present
a better answer for their investment needs.
10 proactiveadvisormagazine.com | December 11, 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
working and to stop trading it. Every strategy,
active or passive, has an implied growth rate
based on history—the return side of the equa-
tion. In order to achieve a certain return, fol-
lowers of the strategy must be willing to toler-
ate (pay) a certain level of temporary risk. The
strategy risk can then be quantified in terms of
how large temporary losses become before the
strategy is abandoned because it’s assumed to
be no longer functioning as expected. In prac-
tice, this is done using sophisticated statistical
approaches, but a simple example will suffice
to illustrate the point.
Let’s take another look at a passive invest-
ment in equities through this lens. Looking
back 20 years, the total return of the S&P
500 has been 9.48% through the end of 2013.
Over the same time period, we can also note
that the maximum drawdown over this period
was 50.95%. So the strategy risk for a passive
investment in the S&P 500 must be at least
as large as 50%. We have to assume that the
strategy is still working if another drawdown of
that magnitude is seen in the future.
But is this reasonable? Many investors
may not be able to handle a 50%—hopefully
temporary—loss of capital, even if they may be
ultimately happy with the realized return. The
cost of potentially losing more than half of one’s
capital is a steep price to pay. Yet this is the size
of the loss that must be taken before an investor
can consider the passive strategy to be no longer
functioning as expected.
For a stylized example, let’s say an investor
can tolerate a 30% drawdown before pulling
the plug on the strategy. Well, if this is the case,
then the passive equities strategy is not a good
match. We already know the strategy risk is
larger than that. If the investor ignores this and
attempts to follow the passive equities strategy
hoping for the best, the results can be disastrous.
Pulling the plug after a 30% drawdown converts
temporary losses into permanent ones. In other
words, the risk is realized and the return is not.
So what can be done? Traditional, passive
approaches reduce the allocation to a market
portfolio and increase the allocation to risk-free
assets. The result may or may not fit the risk/
reward needs of investors. Another option is to
diversify all or part of the portfolio into actively
managed strategies.
The business press often is unaware of the
fact that many active management strategies
are designed to have lower levels of strategy
risk than passive strategies—as the media often
focuses exclusively on performance versus an
arbitrary benchmark. Adding active strategies
can lower the overall portfolio risk to a level
tolerable to the investor and, in doing so, also
give one a fighting chance to realize the return
side of the equation.
continued from pg. 5
Adding active
strategies can lower
portfolio risk to a
tolerable level.
11December 11, 2014 | proactiveadvisormagazine.com