C. Michael Carty, President of the NYC Chapter of QWAFAFEW, completes evaluation of DTC’s decision assistance technology.
“Of all the available choices, which one is best for my client?”
AN INDEPENDENT “QUANT” REVIEW OF DTC’S PATENTED DECISION-ASSISTANCE TECHNOLOGY AS APPLIED TO INVESTMENT ADVISORY SERVICES
DTC’s patented decision-assistance technology is an evolutionary step beyond the tools currently used in institutional investment consulting and retail investment advisory services, today – most certainly beyond the bar charts and scatter charts (30-40 year old “technology”) still found in institutional investment reports. In fact, some of the most sophisticated metrics currently in use (e.g., Sharpe Ratios, Sortino Ratios, Information Ratios, etc.) are also quite old, and were developed before the tremendous computing power now available. Importantly, component parts of these metrics cannot be varied . . . i.e., factors cannot be added or deleted, nor can the degree of influence any of the factors be increased or decreased.
In contrast, DTC’s technology enables advisors to select any number of client-specific performance factors (8, 12, 16), hierarchically arrange and weight them in any manner needed describe the optimal “investment effect” the advisor and/or client is seeking. And, with that, they can score and rank thousands of mutual funds, ETFs, and manager choices to identify those that best match the needs, goals, and preferences of individual clients. This enables them to both optimize and objectify investment selection in a manner never-before available and, by identifying those that have been the best at producing the desired composite “investment effect” over time, ensure that what is being shown to the client is provably in the client’s “best interests.”1
In 2017, an independent evaluation of the investment advisory application of DTC’s technology was performed by C. Michael Carty. Mr. Carty is one of the top “Quants” on Wall Street and President of the New York City Chapter of QWAFAFEW (www.qwafafew.org). Here are his conclusions, from pages 23-25 of his Report:
IX. Summary and conclusions
The patented process offered by Decision Technologies Corporation has been analyzed with a critical view towards evaluating the efficacy of its applications in this new regulatory environment. It filters out irrelevant information, focuses on relevant information, and identifies investment choices that are most likely in an investor’s best interest and most closely satisfy their risk/return preferences.
In addition, DTC’s process promises to mitigate increasing compliance costs by providing solutions that reduce conflicts of interest between fiduciaries and their customers. New regulations and judicial rulings have increased compliance costs, the possibility of punitive actions, and/or financial liabilities. By helping responsible advisors and clients make informed and objective decisions for the exclusive benefit of the client, it ensures that applicable standards of “fiduciary duty” can be met.
New regulations and judicial rulings have expanded the definition of a fiduciary to include anyone who offers advice and receives direct or indirect compensation. Those defined as fiduciaries must now be proactive in providing advice that is prudent and suitable without significant conflicts of interest. This requires using a decision-oriented process which is objective, inclusive, analytically sound, relevant, and cost-effective.
DTC’s decision-assistance process is evaluated to determine its efficacy in providing actionable decisions. Part of that evaluation consists of going step-by-step through the process and evaluating its claimed features: objectivity, relevance, flexibility, scalar sorts and ranks, discrimination, and decision orientation.
The process is determined to be objective; based on the set of parameters and weights selected. It is also relevant to the extent the selected parameters are relevant. The process is flexible in permitting the use of different parameters and filters, although their selection implies some subjectivity. It provides three output forms; scalar scores, ranks and distribution graphs which differentiate high from low scored investments relative to appropriate benchmarks. The output therefore distinguishes between superior and inferior performing investments and clearly delineates the need, or lack thereof, for appropriate action.
In conclusion, this decision-assistance technology provides fiduciaries with six benefits:
1. It offers a justifiable defense against charges of imprudence.
2. It offers a complete view and therefore control over the investment process from the prudent selection of top ranked investments based on relevant criteria, to monitoring performance, and facilitating the liquidation of imprudent ones.
3. It indicates when an investment is increasing or decreasing in attractiveness from one period to the next.
4. It permits creating customized templates containing proprietary performance criteria, weightings, defined investment data sets, and process instructions.
5. It can further refine the scores and ranks of other ranking and rating systems, e.g., Morningstar’s 5-star ratings, Standard & Poor’s, and Value Line’s.
6. It is a significant and productive departure from conventional performance measurement services which typically report the total returns of a portfolio’s holdings relative to a benchmark index and within quartiles of their asset classes.
The Goal of the technology has always been to enable advisers to definitively answer the following question:
“Of all the available choices, which one is best for my client?”
And, in doing so, it can help ensure compliance with virtually any version of “best interests” / “fiduciary rules” being newly promulgated by the SEC, DOL, and various states (now including NY, NJ, MD, and NV). How better could one demonstrate that what is being offered or recommended is in the client’s “best interests” than to score and rank all available choices using the blended performance parameters most important to the client?
It could also provide advisers with a potentially compelling competitive advantage, by enabling them to rapidly compare a prospective client’s mutual funds against all other similar funds and, in minutes, reveal performance gaps of frequently 5, 6, 8% or more per year for 5 years, often with little to no “risk premium.” He or she might then ask: “Even though past performance is no guarantee of future results, do you want to remain where you are and possibly continue to leave so much money on the table, or would you like to come over to us, where we will use this technology to keep your investment selections optimized in a way not possible where you are now?”
THE WAGNER LAW GROUP REVIEW AND OPINION
USE OF DTC’S PATENTED DECISION-ASSISTANCE TECHNOLOGY IS A “FIDUCIARY BEST PRACTICE”
We are expecting the Wagner Law Group (www.wagnerlawgroup.com), in Boston, to soon issue a legal Opinion that the use of our technology in investment selection and performance monitoring is a fiduciary “best practice,” and that the application of it in the sale and recommendation of investment products will operate to help ensure compliance with virtually any version of new “best interests” and “fiduciary” rules now being adopted. The team doing this is being led by Marcia Wagner and includes Livia Abner and Roberta Watson, all highly credentialed. This, together, with Michael Carty’s evaluation and conclusion that our technology represents an evolutionary step beyond anything in use in investment advisory services today, are strong arguments for adoption and licensed use.
1 The process can also filter out all conflicts of interest, both known and unknowable, that can too often degrade investment results, an effect the new “best interests” and “fiduciary rules” have been adopted in the hope of producing.
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