Jim Mardock • Portland, OR
Transamerica Financial Advisors, Inc.

A year ago, Jim Mardock unwittingly put his third-party active managers to the test. When his wife passed away after a long illness, Jim depended on their quantitative, disciplined approach to manage the strategies and portfolios of his clients. The care of his practice and clients continued uninterrupted, in dependable hands.

Proactive Advisor Magazine: Jim, when did you first get involved with active management?

I went through the dot-com crash of 2000-2002 just like everyone else who was in traditional stock and bond allocations. I personally lost a fair amount of money on paper. And that’s OK. I understand money goes down and up, and I understand buy-and-hold investing. But it really bothered me to see my clients’ portfolio values drop.

The managers of their mutual funds could not really get out of the market to any large degree. They had to do as best they could within the confines of each mutual fund’s prospectus. We had client money in excellent, very well-managed funds, but our clients still took significant losses.

At that time I didn’t know much about active management. A few years later, our company decided to add active management to our potential client allocation mix. As I came to understand its guiding principle of managing risk first, the more interested I became.

Within six months I had moved many of my clients into actively managed strategies. It became clear to me that growth-oriented strategies could be pursued within an investment process that did not have to sit idly by and passively accept large portfolio drawdowns.

That seems like a big change. How did the process work?

Our parent company at the time did a thorough job in meetings and materials of explaining this new strategic option to advisors like me. They brought on board several third-party managers after looking at dozens. We have since joined Transamerica Financial Advisors (TFA). They perform the broad level of due diligence, and then we have the ability to find strategies that match well with our individual clients’ objectives.

The third-party managers themselves played a critical role for us. We held seminars with representatives of several money managers and the client attendance was remarkable. Everyone was hungry to learn about a new way to approach portfolio management that could mitigate some of the risk. It also had a very positive impact on my business and obtaining referrals.

Can you explain a typical client conversation about active management?

A lot of what I emphasize in explaining third-party active management is that there is an entire team working on behalf of the client. Highly skilled professionals are there on a daily basis using analytics, research, and algorithms to watch your money and determine whether it should be in or out of the markets, what the risk levels are, and where money should be allocated.

I am not hesitant to tell clients that my specific job is not money management per se; it is to provide the highest level of service and overall planning that I can. A big part of that job is to find asset managers that are really proficient at what they do.

What criteria do you use in selecting an active manager?

As I said, I am not the final decision-maker on the active managers that are available. But I was on an advisory board for some time, so I am very familiar with the process.

We are looking for managers with a clear and differentiated strategic approach. We examine their track records on performance, of course. How do they stack up versus their competition for their approach? And perhaps most importantly, are they disciplined in following their stated objectives and rule sets?

We are looking for repeatable and sustained performance. We realize every manager will have years that are better than others—but we want to make sure they stay true to their philosophy. Personally, I am also very interested in their position on account minimums. I have a lot of smaller and mid-sized accounts and feel these clients should have access to sophisticated active strategies as well.

How do you explain performance of strategies to clients?

I use materials that focus on the process or approach of the strategy—then evaluate the performance based on the rules set defined by that particular strategy. For example, a trend-following strategy based on specific signals works best when there is a well-defined trend of some duration. In 2011, the broad market changed direction a very high number of times and ended up almost flat for the year.

A trend-following strategy can get caught in some of the whipsaw action and underperform the market. The strategy did exactly what it was supposed to do, yet it lost money on the year. That illustrates a couple of important concepts about using active management.

First, it is important to set the proper expectations with clients. Every strategy will not have optimal performance every year. Second, it is why we want to be well-diversified with a number of complementary strategies in our arsenal. And, third, active management should not be measured against one year’s performance. It is designed to work over full market cycles. That trend-following strategy works very well in both bull and bear markets; it just happens to struggle a bit in sideways markets.

Jim, thanks for discussing your view of active management.

I do want to share a personal note. My wife passed away a year ago after a long illness. I want to thank all of my clients and colleagues for their support. When one is distracted and hurting, as I was, it was very reassuring to know I had many dedicated professionals working diligently on behalf of my clients.

This situation also further reinforced my belief in using third-party active managers. I knew that with their disciplined and quantitative approach, our strategies and portfolios were in good hands. With everyone’s help, my practice and my clients did not miss a beat.