Rodger Sprouse • Overland Park, KS
Sprouse Financial Group, Inc. • Titan Securities

The impact of severe bear markets spurred on Rodger Sprouse to find client investment solutions beyond “buy and hold.” Active money management has come out on top.

Proactive Advisor Magazine: Rodger, what influenced you to become a financial advisor?

Rodger Sprouse: There were several different factors. I was raised in a family that was all about teaching and helping others—my father was a pastor and my mother was a math teacher. I think I picked up an affinity for counseling and education and a strong inclination toward math and problem solving. My grandfather was passionate about investing and introduced his grandkids to the basics, which helped us buy our first stock—and I mean stock as in one or two shares. I invested on a regular basis in college and I knew that financial services was the area I was going to pursue after graduation.

Did your investing philosophy change over time?

Certainly. When I began as an advisor in the 1990s, it was all about mutual funds and specific asset-allocation styles—I also had a strong grounding in insurance products and annuities. Everything was basically long-only and advisors and clients were conditioned to accept the ups and downs of the markets.

The tech bubble of the early 2000s was a real eye-opener for me—even my grandfather remarked how fundamental analysis and realistic pricing had gone out the window. Though my clients were not fully exposed to equities at the time, it was hard to accept the kinds of losses that occurred. I did not feel it was justifiable to tell clients that those were only paper losses—that they had to wait for the market to come back.

Since then I have been engaged in finding solutions outside of buy-and-hold investing, which led me to active money management for many of my clients.

How do you explain concerns about buy-and-hold investing?

There are a lot of misconceptions about buy-and-hold investing and indexing out there. Clients are influenced by the latest thing they read, and people have very short memories. I explain four problems with buy-and-hold investing in a systematic fashion that I feel is pretty persuasive.

First, people can be seduced by the arguments about average annual returns for the S&P 500. Over time, market returns on an average annual basis are clearly positive, and markets have historically trended higher. But looking at average returns only is not a sound basis for an investment strategy. For example, if the market is up 20%, down 50%, and then up 30% in three years, the average percentage gain or loss is basically flat. In reality, $100,000 invested under that scenario is down to about $80,000 at the end of the three years. People just do not understand that math until it is explained to them.

Second, buy-and-hold investing really only works effectively over very long time frames and when dollars are not being withdrawn to fund retirement income or other needs. The sequence-of-returns dilemma is something people facing retirement or already in retirement need to be aware of.

Third, the emotional pain of going through steep drawdowns in bear markets is not something most people are willing to endure. And it can make for some very poor decision-making under fire, even for those with the best of intentions.

Fourth, why shouldn’t investors look for a way that may deliver a good portion of the gains of buy-and-hold investing in bull markets while avoiding big losses in bear markets? It makes perfect sense to me to use a different investment approach, and my clients tend to agree once it is fully explained.

“Since [the early 2000s], I have been engaged in finding solutions outside of buy-and-hold investing, which led me to active money management.”

Can you expand on that?

I want to be clear that I am not advocating for or against any specific asset class or investment vehicle. Everything has to be predicated on an individual’s or couple’s financial-planning needs, time horizon, and a proper risk assessment for their situation. I am an advocate of a bucket investment approach to plan for the use of retirement assets—short-, medium-, and long-term assets.

Within that framework, there can usually be a place for just about any kind of investment. But I tell clients that not all investments are created equal, and each may have a specific role depending on the proper planning objectives. That said, I am placing more and more client money into the hands of third-party active managers, especially for longer-term growth assets.

I feel fortunate to have affiliated with Titan Securities as my broker-dealer. They allow me the flexibility to use a wide variety of investment products and strategies, and they have access to many third-party active managers. While they conduct their own thorough due diligence, I also conduct my own, particularly to fully understand a manager’s strategic approach and philosophy.

There are many alternatives out there, and I tend to use multiple active strategies within a portfolio. The overriding message I give to clients is that we attempt to find the right strategies to navigate volatile markets and manage risk, while hopefully achieving the returns they want. We recognize that there will always be bumpy roads in the markets, so we use managers that can make adjustments to portfolios according to market conditions.

Another major point about the active managers I use is their ability to construct active strategies across the risk spectrum. Although I primarily work with clients focused on retirement needs, I do have many younger clients as well. Recently I was working with a client in his 40s, who had a long time horizon and fairly strong appetite for risk. We were able to construct an actively managed portfolio for him that was oriented to more aggressive growth, but also managed for risk with defensive mechanisms if markets really go south.

How do you distill this down to a core message for prospective clients?

Many people are still terrified of the stock market, especially as they approach retirement. They naturally feel they have to gravitate toward what they think are the safe havens of bonds, CDs, or even cash. I tell them that they do not have to accept pitiful returns and can grow their assets with a higher level of risk management than they might think exists.

This can be through a combination of asset-management approaches and products, including insurance products, annuities, alternative investments, and actively managed portfolios. It is very reassuring for people to learn that they can continue to grow their nest egg at attractive rates of return without all of the risks of the stock market or the changing prices of bond portfolios—they do not have to settle for excessively low rates of return.