Richard D'Ambola • Questar Capital Corporation (QCC) - When history rhymes: Identifying realistic estimates of future investment strategy performance by Dave Walton - Buybacks slowing while CEO confidence remains high - Outsourcing to increase productivity (Steve Miller, Transamerica Financial Advisors)

1. Buybacks slowing
CEO confidence remains high
pg. 7
Outsourcing for
productivity pg. 3
Identifying realistic estimates
of strategy performance pg. 4
4 bases to cover in
retirement planning
Richard D’Ambola
pg. 8
July 31, 2014 | Volume 3 | Issue 5First magazine focused on active investment management

3. advisor webinars that are helpful in
fully understanding the nuances of
a particular strategy.
The biggest benefit is more
psychological and less tangible.
I know that the active managers
I choose for client portfolios are
working 24/7 to monitor the per-
formance of their strategies and
the market environment.
Knowing that my clients’ assets
are actively managed every single
day—going short, going long or
even going into cash—frees up my
time to focus on prospecting and on
client retention needs.”
side from my own
client base covering
several states, I am ultimately re-
sponsible as a branch manager for
the work of multiple financial advi-
sors across a wide geography—my
schedule can get very hectic.
We gain a lot of efficiencies in
our practice through our use of
third-party managers.
Our broker/dealer, Transamerica
Financial Advisors, Inc., does a ter-
rific job of due diligence regarding
third-party investment managers
and provides a range of different
options. While I obviously need
to select managers appropriate to
client needs and objectives, that
basic legwork is done for us and
done well.
Since 2005, I have been increas-
ing the use of third-party managers
in my practice. They have well-con-
structed risk profile assessments
that are user-friendly and facili-
tate matching client money with
the appropriate strategies. Their
reporting formats are an excellent
tool with clients, as are materials
helping to explain the role of active
management. They also conduct
Outsourcing to
increase productivity
Steve Miller
Alpharetta, GA
Transamerica Financial Advisors, Inc.
CEO, Steven A. Miller, Inc.
A“
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Last week’s results
What is most important to
you in selecting investment
strategies/products?
-Vote to see results
This week’s poll
Approximately how much
of your time is spent on
administrative/regulatory
compliance tasks?
Global Results
Viewer Results
81%
43% 29% 29%
79% 82%
M
anaging
risk
M
anaging
volatilityProducing
incom
e
POLLS
VOTE
10%
20%
30%
40% or more
Steve Miller is a Registered Representative and an Investment Advisor Representative with Transamerica Financial Advisors, Inc.
Securities and Investment Advisory Services offered through Transamerica Financial Advisors, Inc. (TFA), Transamerica
Financial Group Division—Member FINRA, SIPC, and Registered Investment Advisor. Non-securities products and services
are not offered through TFA.
July 31, 2014 | proactiveadvisormagazine.com 3
TIPS & TOOLS

4. “Past performance is no guarantee
of future results.”
We see this statement everywhere finan-
cial performance is advertised. No one ex-
pects the future to be exactly like the past,
but isn’t it reasonable to expect them to be
similar? After all, history may not repeat itself
exactly, but to paraphrase Mark Twain, it
often “rhymes.” Wouldn’t it be nice to know
if the past performance of a specific strategy
has a good chance of continuing?
Answering this question effectively is
one of the key reasons my partners and I
formed our company. In brief, we work
with third-party asset managers to estimate
the chances an active investment strategy
will continue to perform as it has in the
past. Using statistically sound methods, we
perform a high level of due diligence on
active strategies.
So why should a financial advisor care?
Because clients count on advisors to provide
realistic estimates of future performance
despite the ubiquitous “past performance”
warning. But how can we do that? Since the
past is not completely reliable, how can we
generate realistic expectations for the future?
Before discussing the answer to that
question, we need to understand why, in
By Dave Walton
When
history
rhymes
“... history may not repeat
itself exactly, but to paraphrase
Mark Twain, it often ‘rhymes.’”
Identifying realistic estimates of future investment strat
proactiveadvisormagazine.com | July 31, 20144
Read text only

5. some cases, future investment strategy per-
formance can be radically different from the
past, even when the market conditions seem
historically similar. One major culprit is the
Data Mining Bias (DMB).
Haven’t heard of the Data Mining
Bias? You’re not alone. Despite the impact
it can have on future investment strat-
egy performance, DMB remains rela-
tively unknown, misunderstood, and in
some cases, outright ignored. DMB is
sometimes referred to by other names,
including curve-fitting, over-fitting,
data-snooping, or over-optimization.
Regardless of what we call it, the presence
of DMB can fool an asset manager into be-
lieving a worthless investment strategy has
the ability to produce excellent returns.
We can understand how DMB happens
using a popular metaphor. Imagine we give a
billion monkeys computer keyboards, provide
them rewards for typing, and let them bang
away for days, weeks, months, even years.
Given enough time, eventually one of them
will produce a line or two of Shakespearean
prose. Does that mean the monkey who
quoted Shakespeare is a true thespian and is
likely to continue creating literary master-
pieces in the future? Of course not.
The Shakespearian monkey example
shows that given enough time and resourc-
es, it is not only possible, but highly likely
that luck will impersonate mastery. Yet, the
exact same “luck” effect is present in many
human-created investment strategies, but is
less easily recognized. Why? Because there
are thousands of people creating investment
strategies using resources (computing power
that was unimaginable 25 years ago) who
in aggregate try millions—even billions—
of strategy combinations and pick only the
best ones to trade through a process called
optimization. Using this type of selection
process to build investment strategies is ex-
actly the same kind of process that allowed
our monkey friends to create prose from
random key banging.
All historical investment strategy results
are a combination of both a market edge and
luck, although the balance between the two
varies considerably from strategy to strat-
egy. But how can we tell the difference? In
a moment, we’ll discuss a method, called
System Parameter Permutation (SPP), de-
signed to help identify the real “edge” in a
given investment strategy.
But first, let’s discuss another issue
with how investment strategy results are
typically described. Performance results are
usuallypresentedlikethis:14%annualreturn
with a maximum drawdown of 20% over the
last ten years. So what’s the problem? These
single numbers for return and drawdown—
also known as “point” estimates—mask the
variability we are likely to see while running
the strategy. So, if the strategy returns only
2% one year, is the strategy broken? These
so-called point estimates don’t provide much
help in answering that question.
Wouldn’t it be much more useful to un-
derstand the range of likely outcomes? How
about the probability of achieving a certain
annual return? Armed with this additional
information, advisors can make more in-
formed decisions about the suitability of a
given strategy for a client and maybe avoid a
few panicked phone calls.
Is there a better way? In my opinion, there
is. To arm asset managers with a simple, yet
powerful, way to address these issues, I de-
veloped a technique called System Parameter
Permutation (SPP). SPP has been well re-
ceived, and in May 2014, I was presented the
National Association of Active Investment
Managers’ prestigious Wagner Award for a
paper describing the method.
SPP offers a practical way of measuring
the range of expected system performance,
rather than providing a potentially mislead-
ing “point” estimate. And remember the op-
timization processes those investment asset
managers used to create a huge number of
strategy combinations? The beauty of SPP is
that it leverages that optimization data to cut
through the DMB and help identify the real
investment strategy “edge.”
continue on pg. 11
Data Mining Bias can fool an
asset manager into believing a
worthless investment strategy
has the ability to produce
excellent returns.
Wouldn’t it be much more
useful to understand the range
of likely outcomes? How about
the probability of achieving a
certain annual return?
tegy performance
July 31, 2014 | proactiveadvisormagazine.com 5

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7. Buybacks slowing while
CEO confidence remains high
ith another generally positive
earnings season in the
process of winding down, the
lackluster broad economic
picture in the U.S. does not appear to be
significantly affecting those results or the
optimism of major company CEOs. Over
50% of U.S. companies have reported
for Q2, with 64% surpassing estimates
on earnings and 62% exceeding revenue
estimates (as of 7/25).
Despite the Conference Board’s measure
of CEO Confidence ticking slightly
downward during Q2, a positive outlook
remains. CEOs were upbeat regarding
continued profitability—primarily as a
result of higher market demand for goods
and services. Such confidence in the
business community bodes well for capital
spending and employment prospects, says
InvesTech Research.
Although earnings and the CEO
confidence measure are positive indicators
going forward, a recent MarketWatch
analysis points to the less encouraging
downturn in corporate stock buybacks.
Strong levels of corporate stock buybacks
through 2013 and early 2014—fueled by
W
Source: InvesTech Research
the low interest rate environment—have
helped drive equities to new all-time highs.
New stock buybacks fell to $23.2 billion
in June, the lowest level in a year and a
half, according to fund tracker TrimTabs
Investment Research. In May, the total
was just $24.8 billion (versus a monthly
average of $56 billion in 2013). That’s
worrisome, says TrimTabs CEO David
Santschi, because “buyback volume has
a high positive correlation with stock
prices.” While the buyback data can be
volatile, MarketWatch concludes that it is
a trend worth watching.
TOPPING THE CHARTS
Read text only
CEO CONFIDENCE
DRAMATIC SLOWDOWN IN BUYBACKS
Monthly total of new buyback announcements (in $ billions)
RECESSIONS
POSITIVE
OUTLOOK
FEAR OF
FISCAL CLIFF
FEAR OF
DEBT CEILING
SHOWDOWN
July 31, 2014 | proactiveadvisormagazine.com 7

8. 4 bases to cover in
retirement planning
Read text only
Richard D’Ambola
By David Wismer
8 proactiveadvisormagazine.com | July 31, 2014

9. Proactive Advisor Magazine: What
concerns are you seeing from clients
and prospects, Rich?
Rich D’Ambola: While there is a lot of
hype, marketing, and seminars by our industry
regarding the retirement crisis, unfortunately a
lot of it is very real.
Our practice tends to center around pre-re-
tirees or those already in retirement and there
is a terrific need for client education on several
issues. There are four core areas people may not
really understand that we talk about: longevity,
taxes, healthcare, and inflation.
In terms of longevity, it is a matter of those
in retirement not outliving their assets and other
related income streams. Medical technology is
amazing and it is estimated that well over 50%
of the population will outlive government-es-
timated life expectancies. Watch Willard Scott
in the morning and you will be amazed by the
number of people celebrating their 100th birth-
day. A good financial plan has to take longevity
into account for both husband and wife.
Taxes are a big unknown and also require
contingency planning. We are at one of the
lowest points in history in terms of tax brackets.
Is that going to continue? How might increases
affect retirees? And related to that is all of the un-
certainty hovering around Social Security fund-
ing for the long term—will that in some way
impact people retiring over the next 10-20 years?
Healthcare costs are also a matter of great
concern for retirees. There are all of the changes
moving through the system and each individu-
al’s health is so unpredictable.
Adding to all of these matters is the outlook
for inflation. What will the interest rate and in-
flation environment over the next twenty years
be like? Simple mean reversion says both have
to go up.
So, yes, there are plenty of anxieties out
there and they are very real.
What types of solutions do you provide?
We strive to bring real value into people’s
lives as far as developing financial plans and in-
vestment strategies that can make a difference.
We want to take a macro view of their needs and
find solutions to grow their assets and income
in retirement. This includes, for many people,
introducing them to risk management princi-
ples and active investment management, which
they likely have not been exposed to before.
How do you introduce the topic of
risk management?
We have come to the belief that sequential
return risk has to be a top priority for anyone
planning for retirement. It is the hard trade-off be-
tween needing asset growth over time to fund your
retirement and the unwillingness to expose portfo-
lios to the large risks that can decimate a portfolio.
We have seen with new clients that come
through the door how bad an impact the credit
crisis had on their retirement portfolios. They
are facing difficulties in even getting back to
where they were. Sure, the markets may have
recovered, but that does not help someone
who may have had to draw down their already
underwater assets during the past five years.
So that is what we mean by sequential return
risk—it can all be in the timing of how markets
are performing at any particular point in time
relative to your personal situation.
How do you overcome that?
First, we explain to clients about market
cycles. Most everyone is aware of market crash-
es and the big bull market periods, but few
really understand market cycles. Sixty percent
of the time markets are heading higher, 20% of
the time they are in bear markets, and 20% of
the time they are going sideways.
So if you really look at that, history tells us
that 40% of the time markets are in unfavorable
conditions. How are you going to manage that?
Does it make sense to take a passive approach?
We think not.
That is why we employ third-party active man-
agers who have sophisticated models and methods
of portfolio allocation. They are not bound to sit
idly by and watch a severe market downturn.
I tell clients it is like having a highly ad-
vanced Doppler radar early-warning system.
These managers have the technology to know
a Category 5 hurricane might be coming. And
just like with a hurricane forecast, they may not
always be right in predicting the actual occur-
rence or the severity of it if it does hit. But their
systems have been designed to make the funda-
mentally correct call on the markets. Wouldn’t
you rather have that knowledge working on
your side and have the chance to make prepara-
tions for a storm?
continue on pg. 10
For many investors, planning for retirement can feel like
a swing and a miss. Rich D’Ambola approaches four challenges
to retirement planning—helping his clients hit home runs.
Photography:JenniferPottheiser
July 31, 2014 | proactiveadvisormagazine.com 9

10. M U LT I - M A R K E T
+
MULTI-STRATEGY
+
MULTI-MANAGER
One p rtfolio
D Y N A M I C A L LY R I S K - M A N A G E D
L E A R N M O R E
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.
are able to incorporate alternative investments
to build in more portfolio diversification,
taking advantage of less correlated asset classes.
This is all part of the risk management element
of what they do and there is a role for every tool
that they use at one time or another.
One of the active strategies we like in par-
ticular has the ability to incorporate lever-
age during strong bull markets and to short
the market during downtrends. Going back
to my weather analogy, it is akin to changing
your clothes to fit the season, whether that is
employing short-term tactical tools or placing
greater or lesser emphasis on a particular asset
class or strategy as conditions dictate. Doesn’t
that make pretty good common sense?
Great explanation, Rich.
I am there to serve clients with what we
think are the very best fiscal solutions. My job is
to look at things at all levels and uncover, identi-
fy and solve problems. Risk management is a big
piece of my job description—as is making sure
clients have an understanding of the importance
of its role within their investment portfolios.
Do clients understand active management?
A very helpful piece in explaining the active
management story is showing them the math
on market losses. Few people realize that if they
take a 40% loss in their portfolio, it takes far
more than a 40% gain to make it back.
There is another aspect that is terribly im-
portant to clients: after the dot-com bust and
2008, many are fearful of the stock market. By
explaining the risk management and asset protec-
tion elements of active management, we can help
many of those people be more comfortable with
utilizing equity investing. That’s where history
can work in our favor, as compounding market
returns over time is critical to building wealth.
Is this the case only for equity investments?
No, that is another benefit of using our
third-party active managers. It is not plain va-
nilla equity or bond mutual fund portfolio con-
struction. Active management can be used with
both types of investments. And these managers
continued from pg. 9
Securities offered through Questar Capital
Corporation (QCC), Member FINRA, SIPC. Advisory
Services offered through Questar Asset Management
(QAM), a Registered Investment Advisor. Dunn’s Financial
Review is independent of QCC and QAM.
10 proactiveadvisormagazine.com | July, 31, 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
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As shown in the figure, SPP takes all of
the optimization data used to build an in-
vestment strategy and shows where the
“point” estimate (which is what most invest-
ment asset managers provide) falls within
the range of likely performance. Relatively
easy-to-apply statistical techniques can be
used to evaluate the likelihood of achieving
a specific performance target, and the chance
performance will fall within a given range
(e.g., a 90% chance of an annual return be-
tween -1% and 11%).
In brief, the SPP process involves the
following steps:
• A range of investment strategy parameters
and an evaluation time period are selected.
• All combinations of the selected parame-
ters are simulated individually (as would
be done in exhaustive optimization) using
a realistic, portfolio-based backtest engine.
• The results of each simulation are com-
bined to create a range of values for each
performance metric of interest.
In the figure, we used Compound Annual
Return (CAR) as the metric of interest, but
SPP allows us to estimate similar ranges of
performance for other metrics including the
maximum drawdown, Sharpe Ratio, etc.
In summary, clients rely on advisors to select
the most suitable active strategies, but suitabil-
ity requires an understanding of strategy reli-
ability and realistic ranges for future system per-
formance. SPP provides a simple method asset
managers can use to determine both. In turn,
this helps advisors utilizing third-party strate-
gies to have greater confidence in the strategies
used to achieve their clients’ objectives.
continued from pg. 5
View entire white paper
System Parameter Permutation (SPP)
Determining the range of likely performance
11July, 31, 2014 | proactiveadvisormagazine.com

12. 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.
Editor
David Wismer
Marketing Coordinator
Elizabeth Whitley
Contributing Writers
Dave Walton
David Wismer
Graphic Designer
Roger Ackerman
Contributing Photographer
Jennifer Pottheiser
July 31, 2014
Volume 3 | Issue 5
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.
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