[Howard Capital Management is a registered investment advisory firm that created a series of mathematically driven, risk management programs; 2 new mutual funds with strict, rules based methodologies; and is now launching a new marketing company for their financial advisor clients called the Optimized Advisor. At the core of this growing enterprise is a dedication and expertise with….. algorithms.]

Hortz: “Before you started your RIA in 1999, your bio mentions that you specialized in research, development, and implementation of various types of trading systems. What did your experiences there teach you that you are now employing in your current risk management systems?”

Howard: “What it taught us is that you want to try to be as mechanical and non-emotional to the investment process as you possibly can be. We saw that, by focusing on a purely mathematical approach, just looking at the numbers, you can root out emotional bias. That makes math your true guiding light. We are not in here guessing, allowing emotions to control how we invest, but to build and follow a specific system and methodology.

Hortz: “Your risk management systems are powered by algorithms. Can you explain what exactly is an algorithm?”

Howard: “Well, an algorithm is sort of a broad term for nothing more than math and a specific set of rules or formulas that you use. We use a lot of math and statistics in our analysis. Our methodology also includes relative strength, momentum, with proper money management techniques like stop losses, but we basically are rating odds. We ask: What are the odds of an outcome happening based upon a certain input taking place? Like with the HCM Buy-Line, our proprietary stop/loss tool, we know what the odds are of the market going substantially lower if the Buy Line goes negative. It’s just odds and matching up inputs with outcomes. It’s the same thing as if you go to the casinos in Vegas. If you stay long enough at the casinos, they are going to get your money. And the reason is that they have a statistical edge. They have the odds in their favor that they are going to win. And it’s just math and statistics. We are using the same basic knowledge of odds and statistics that Las Vegas casino owners use so successfully to put our money management clients on the same side of the table as “the house”, structurally putting the odds in our favor, so to speak. Algorithms allow us to do that for our clients.

Hortz: “Is there any room for innovation in algorithms? How do you keep improving them?”

Howard: “Algorithms can clearly be made better. We have made lots of changes throughout the course of time. Having an innovative mindset and constantly looking for new ideas and applications will always get you to improve. You always have to keep looking at what is working. Always be working to make your system better. Adapt to what is taking place. For instance, as computers get stronger, you can run larger data queries and you can find some stuff you didn’t see before….And you need to keep on top of innovation in the market. Fifteen years ago ETFs didn’t exist and they trade differently than mutual funds and stocks so you have to adjust your algorithm, your math, adjust your stop losses. So as the marketplace innovates, you have to innovate along with it.

Hortz: “Algorithms now seem to be at the core of so many new digital solutions and services. They are being applied in so many different ways. Why do you think that is the case?

Howard: “The reason is very simple. Human emotions, many times, in many situations, make bad calls. It plays too much off of greed or fear and in the interim, it fails. So the more human emotion you can take out of a situation, the better the outcome can be. Algorithms also can match up a very large number of inputs and variables to find correlations and desired outcomes very quickly and efficiently.

Hortz: “So what is your key differentiator or value proposition for your financial advisor clients with your programs?”

Howard: “The key differentiator for us is clearly our mathematical approach and loss protection methodology. In 2000 and 2002, we sat out the majority of that market based on the odds that the market was clearly going down. We sat out of all of 2008 and came back in 2009. If you are minimizing your losses in bad markets, your recovery time is nothing.

Hortz: I saw on your website that your HCM 401(k) Optimizer has been granted ‘Certified Computer Model’ status by DALBAR. Why is that significant and how does that help advisors in the retirement plans market?

Howard: “Being Dalbar certified as a ‘computer model’ means that the 401k Optimizer is totally computer generated and meets the detailed requirements of ERISA for fiduciary relief. In other words, it clearly verifies that there is no human emotion or conflicts of interest that are placed into what happens inside the Optimizer. Your investment selections and portfolio management are all done objectively by math. Per the DOL, this will reduce fiduciary liability for both plan sponsors and financial advisors as outlined under ERISA Section 408(g).

Hortz: Why does the Department of Labor support computer models, which inherently is supporting the use algorithms?

Howard: “The Department of Labor’s concern is to prevent conflicts of interest on investment advice, that there is no subjectivity to the advice given to plan participants. In a computer model, investment advice is all based upon math, upon the computer generating and managing the participant’s retirement portfolio. Even under the current DOL review process, I think it is safe to say that the computer model provision is already in there, in black and white, and they want to keep it as a key component for 401k participant safety.

Hortz: “You transitioned your business from an advisor with retail clients to where you started working exclusively with other advisors with your risk management programs. In helping advisors who want to evolve their business model or way of operating, what advice would you give them from your experience?”

Howard: “At our firm we never wanted to be a jack-of-all-trades. We wanted to be a master of one - manage money with down-side protection using disciplined methodologies that work. It’s hard to evolve and innovate in your business if you are spread out in so many different areas…. If I was to give advice to an advisor, I would say specialize in something. Specialize working with small business owners, doctors, a particular type of money management. That focus will drive you to discover new ideas and ways to work with your target clients in new and powerful ways.

The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisors and financial services firms. We position our members with the necessary ongoing innovation resources and best practices to drive and facilitate their growth, differentiation and unique community engagement strategies. The Institute was launched with the support and foresight of our founding sponsors--Pershing, Voya Financial, Ultimus Fund Solutions, Fidelity, MeridianIQ/AdviceIQ, Innovation Equity Partners and Charter Financial Publishing (publisher of Financial Advisor and Private Wealth magazines). For more information click here.