MMS Sample Proposal - Portfolio Strategies...

INVESTMENT PROPOSAL & POLICY

MMS Sample Proposal Prepared By: Sample Advisor

DATE: JULY 3, 2012

Sample Advisor Wealth Management, Inc.

123 Main St., Suite 100 Newport Beach, CA 92660

The Elements Financial Group LLC is a third-party service provider.

Table of Contents

I. INTRODUCTION

II. THE IMPACT OF MARKET MOVEMENT

III. THE LIMITS OF TRADITIONAL RISK MANAGEMENT TOOLS

IV. THE IMPACT OF VOLATILITY ON INVESTOR RETURNS

V. MANDATE OVERVIEW Market Movement Tactical Market Movement Market Movement Diversifiers

VI. DISCOVERING YOUR INVESTOR RISK PROFILE

VII. SOLUTIONS Mandate 1 Mandate 2 Mandate 3

VIII. SUMMARY

IX. GLOSSARY

I. INTRODUCTION

We believe that investors face significant challenges as they work towards investment success. Foremost in the minds of many investors is the discontent with how their investment portfolio performed over the last ten years. Many investment plans, developed in good faith and with the best information available at the time, have fallen short of investors’ expectations due to what we believe is a fundamental oversight in investment strategy. Simply stated, Market Movement, not asset allocation, is the single most important factor that dictates a client’s investment experience. Traditional asset allocation, when implemented through passive asset class diversification, has been less effective than expected during periods of high global market stress. The inability of traditional asset allocation to effectively control market movement has left investors dependent on market direction to meet their goals. This reliance on market direction has caused investors to experience emotional reactions and larger losses than expected during downturns. Investors often demonstrate counterproductive buying and selling behavior, leading them as a group to consistently underperform the markets. Looking forward, we believe a successful investment strategy must focus on three key

themes:

The recognition of the importance of market movement and its fundamental

impact on the variation of investment returns, as well as implementing

effective strategies to address market movement.

The limitations of traditional asset class diversification as an effective risk‐

management tool.

The impact of volatility on investor emotions and their historical investment

results.

In this proposal, we will explore these challenges and introduce our approach to investment management that is designed to reshape the client investment experience and address the impact of market movement.

II. THE IMPACT OF MARKET MOVEMENT

“It is time for folklore to be replaced with reality. Market Movement, not asset allocation or security selection, is the primary driver of returns.” - Roger Ibbotson, Professor of Finance at Yale School

of Management

Redefining academic research has shown that market movement, rather than asset allocation or

security selection, is clearly the most significant influence on investment returns. Market

movement can be thought of as the underlying cyclical (usually, 1‐3 year range) or secular

(usually, 15‐20 year range) market trends during an investment period. The recognition of

market movement, and the decision as to the level of participation, are key ingredients to

investment success.

To gain some historical context, we can look back over the past 100 years to see what market

movement has looked like. Equity markets have consistently alternated between long‐term

secular bear and bull markets, averaging 15‐20 years in duration. These longer‐term cycles are

typically driven by fundamental changes in the economy and business cycle, while the shorter‐

term, cyclical cycles tend to be driven by investor sentiment.

Source: Xiong, James, Ibbotson, Roger G., Idzorek, Thomas, and Chen, Peng,

2010. “The Equal Importance of Asset Allocation and Active Management”

Secular bull markets are often characterized by a general increase in stock prices, relatively short lived

declines, lower levels of volatility and a generally favorable investment environment. Secular bear

markets are often characterized by a generally challenging environment, and may include: significant

market moves (both up and down), and flat to negative returns over extended periods of time. We

believe that with proper preparation and recognition, investors can succeed in any environment.

III. THE LIMITS OF TRADITIONAL RISK MANAGEMENT TOOLS

“Many investors suffer from 'Diversification-Deficit Disorder.' The issue is not that diversification failed. It's that it was not implemented properly.”

- Dr. Andrew Lo, Professor of Finance, MIT School of Management

For over 30 years, risk management has focused primarily on asset allocation as the single most

reliable tool to control a portfolio’s variation of returns and, thus, to the overall risk that an

investor will assume for their desired return. Increased volatility and higher correlation of asset

classes (asset classes behaving in a similar fashion), however, have made traditional

diversification techniques less successful. Looking back over recent major market events, fewer

and fewer asset classes provided the expected protection during periods of high market

correlations.

Return calculations were made based on a fixed asset allocation of the traditional single‐mandate portfolio

shown above. The asset allocation is meant to reflect the traditional asset allocation structure of an

institutional portfolio. Institutional asset allocations may vary. The above exhibit is shown as an example for

illustrative purposes only and does not serve as a recommendation or actual institutional portfolio.** The gain

needed to recover represents the percentage return necessary for a portfolio to get back to the pre‐loss it’s

account value. There is no claim being made that such a return will occur.

Max

Max Drawdown and Gain Needed to Recover 12/31/07‐12/31/11

Gain Needed to Recover

(5/19/2008‐3/9/2009)

IV. THE IMPACT OF VOLATILITY ON INVESTOR RETURNS

“In investing, what is comfortable is rarely profitable.” -Robert Arnott, Chairman, Founder of Research Affiliates

Emotions drive investor decision‐making in both up and down markets. When chasing returns

at market peaks, investors tend to buy ‘high’ in anticipation that markets will continue higher.

Many felt this way about technology stocks in 1999, and real estate in 2006. Likewise, investors

tend to sell low when markets decline and future losses seem certain. When selling at market

bottoms, investors tend to wait for markets to demonstrably appreciate before re‐purchasing;

ultimately locking in their losses and selling low and buying high. We have to look no further

back than early 2003, and the spring of 2009, when markets had fallen over 40% and over 50%,

respectively, only to rebound strongly and have many investors miss the recovery.

Emotionally‐driven investment decisions tend to lead investors to practice the opposite of

sound investment discipline. Rather than buying low and selling high, many investors wind up

doing just the opposite.

Recovering from these critical mistakes is extremely difficult and explains why investors often

underperformed the very asset classes in which they are invested. Comparing actual investor

returns to returns available through market participation makes a case for investors acting on

pure emotions.

Source: Chart based J.P. Morgan Asset Management “Market Insights: Guide to the Markets, 1Q, 2012”.

www.jpmorganfunds.com, accessed 03/27/12. Indexes used are as follows: REITS: NAREIT Equity REIT Index,

EAFE: MSCI EAFE, Oil: WTI Index, Bonds: Barclays Capital U.S. Aggregate Index, Homes: median sale price of

existing single‐family homes, Gold: USD/troy oz, Inflation: CPI. Average asset allocation investor return is based

on an analysis by Dalbar Inc., which utilizes the net of aggregate mutual fund sales, redemptions and

exchanges each month as a measure of investor behavior. Returns are annualized (and total return where

applicable) and represent the 20‐year period ending 12/31/10 to match Dalbar’s most recent analysis.

Reshaping the Investor Experience by

Addressing the Impact of Market Movement

From an investment standpoint, we believe that portfolio construction should be centered on

diversifying across strategies, not just asset classes that have distinct risk and return drivers.

This stands in stark contrast to traditional asset class diversification, which tends to leave the

investor mostly dependent on varying levels of market driven risk and return factors. By

understanding the drivers of each strategy, and contribution to the overall risk/return profile of

the portfolio, we seek to understand the level of market movement exposure to each investor’s

unique goals and situation. This objective of understanding the impact of market movement

contributes to better managed volatility and a lower tendency for emotional investor behavior.

As we have discussed, many investor portfolios are built with too much reliance on the general

movements of securities markets. Rather than being reliant on that singular approach, we

believe an effectively diversified portfolio should be built around three distinct mandates. Each

mandate has its own unique objective, expectation, and contribution to the portfolio. By

understanding the role of each mandate in the portfolio, and working with your advisor to seek

the optimal investment structure for your situation, our goal is to reshape the investor

experience and address the impact of market movement.

We believe that to effectively address and manage the impact of market movement and reshape the investor experience, a truly diversified portfolio should be implemented across three distinct investment mandates:

Mandate 1: Market Movement ‐ Allocate to strategies designed to replicate risk/return of general market movements Mandate 2: Tactical Market Movement ‐ Allocate to strategies designed to actively adjust asset class weightings to increase/decrease risk as research dictates Mandate 3: Market Movement Diversifiers ‐ Allocate to strategies designed to delink from market direction and provide a source of return/risk that is expected to be independent of general market movements

V. MANDATE OVERVIEW

Mandate I

We believe Market Movement strategies should be designed to passively, accurately and cost‐efficiently expose an investor to the ups and downs of the broad capital markets. Though at times it may be emotionally difficult, consistent exposure to market movement has historically been necessary to manage longevity and inflation risks. The portfolio’s return attributed to Market Movement includes both rising and falling markets and requires discipline to participate in both.

*Market Movement (Historical Simulation) – the Global Equity Market Proxy Index represents a historical back‐tested composite of fixed weighted

allocations to the Vanguard Growth ETF (18%), Vanguard Value ETF (18%), Vanguard Small Cap Growth ETF (5%), Vanguard Small Cap Value ETF (5%),

Vanguard MSCI EAFE ETF (45%), and Vanguard MSCI Emerging Markets ETF (10%). The composite is shown to demonstrate the behavior of global

stock market movement. The performance of the composite is shown relative to the MSCI World Index, which is a capitalization weighted index that

monitors the performance of global stocks. This figure is for illustrative purposes only, and does not necessarily represent an investment portfolio or

an index for an investment portfolio. It is not possible to invest directly in an index. Results may vary based on time periods and allocations. Past

performance is not indicative of future results.

Data Source: Bloomberg

Mandate II

Tactical market movement strategies utilize their flexibility to actively adjust their portfolios to changing market conditions. They have the ability to increase or decrease their reliance on the markets based on a manager’s individual outlook. While still deriving returns from Market Movement, the best of these strategies have a tendency to mitigate downside capture. Adding value through tactical decisions is difficult and there is a small universe of strategies that have proven abilities to do so. Identifying strategies that not only have added value historically, but are likely to do so in the future, requires rigorous due diligence and monitoring. Understanding how these strategies might work together and their individual contribution to a Three Mandate Portfolio requires careful evaluation.

*Tactical Market Movement (Historical Simulation) – the Tactical Proxy Index represents a historical back‐tested composite of every mutual

fund in the Bloomberg Flexible Portfolio Category (A Shares Only) with inception dates of 12/31/2006 or earlier. The composite includes 58

equally weighted funds and assumes a fixed equally weighted allocation to each fund. The composite is shown to demonstrate the general

behavior of a universe of flexible or tactical asset allocation managers. The performance of the composite is shown relative to the MSCI World

Index, which is a capitalization weighted index that monitors the performance of global stocks. This figure is for illustrative purposes only, and

does not necessarily represent an investment portfolio or an index for an investment portfolio. It is not possible to invest directly in an index.

Results may vary based on time periods and allocations. Past performance is not indicative of future results.

Data Source: Bloomberg Tactical Proxy Index

Mandate III

Historically, diversification has centered around mixing various stock and bond asset classes. As demonstrated, diversifying in this manner may place too much reliance on Market Movement. Understanding this primary source of risk is a critical first step, which should be followed by finding ways to mitigate that risk. Regardless of one’s risk appetite, the concept of gaining access to different sources of risk in a single portfolio is a critical element to true portfolio diversification.

Market Movement Diversifiers utilize a different approach to investing relative to traditional strategies. These managers tend to have a wider spectrum of asset classes and investment vehicles at their disposal than traditional benchmark oriented funds. The goal is to improve the overall risk‐return characteristics of a portfolio. These strategies may be designed to “de‐link” from market direction and provide new sources of potential return and risk; sources that may have low correlation to other strategies in an investor’s portfolio and the two prior Mandates. These strategies are typically not driven by the traditional stock and bond markets and therefore are ideally suited as portfolio diversifiers.

Market Movement Diversifiers (Historical Simulation) – the Market Movement Diversifier Proxy Index represents a historical back‐tested

composite of fixed weighted allocations to the IQ Hedge Market Neutral Beta Index (45%), IQ Hedge Multi‐Strategy Index (20%), IQ Hedge Fixed

Income Arbitrage Beta Index (10%), IQ Hedge Event Driven Beta Index (10%), and Credit Suisse Managed Futures Liquid Index (15%). The

composite is shown to demonstrate the behavior of a diversified mix of alternative investment strategies. The performance of the composite is

shown relative to the MSCI World Index, which is a capitalization weighted index that monitors the performance of global stocks. This figure is

for illustrative purposes only, and does not necessarily represent an investment portfolio or an index for an investment portfolio. It is not

possible to invest directly in an index. Results may vary based on time periods and allocations. Past performance is not indicative of future

results.

Data Source: Bloomberg

The reliance of traditional diversification methods on market direction has exposed many investors to

greater losses and volatility over the past decade than they had expected. As a result, their portfolios

require substantially greater gains to recover from these losses. Greater volatility has also made many

investors more vulnerable to the ill‐timed emotional mistakes that can negatively impact their

portfolios.

Evolving portfolios beyond traditional diversification by including mandate‐specific strategies, which are designed to manage the impact of market movement, can provide more effective risk management and comprehensive diversification to improve the investor experience.

I. DISCOVERING YOUR INVESTOR RISK PROFILE

The Risk Profile Questionnaire helps identify your personal risk tolerance and define the appropriate

amount of risk exposure in your portfolio. This discovery, which is facilitated by your investment team, is

essential to the customization of your investment strategy and becomes the foundation from which all

asset allocation decisions are made. Your score on the questionnaire indicates that you are a Balanced

investor.

Investor Risk Profile: Balanced

A Balanced investor profile seeks moderate exposure to both capital appreciation and preservation. The

assets in the portfolio are typically distributed evenly between low risk investments, and equities or high

risk investments. A Balanced investor profile typically has moderate equity market risk with modest

downside protection.

Disclosure: Time Horizon and Market Risk A long‐term time horizon for investments is defined as being at least ten years. A period in excess of ten years takes into account a full market cycle. For shorter periods (1‐3 years), markets can be volatile. We believe that the volatility in the markets for shorter period investments, make Asset Allocation Models that target the preservation of principal the most appropriate.

VII. SOLUTIONS

PROPOSED PORTFOLIO RISK PROFILE: The resulting risk profile of the total proposed portfolio based on the blended solutions below is

Disclosure: If the Proposed Portfolio Risk Profile shown above is not consistent with the Investor Risk Profile shown on the previous page, we recommend reevaluating the Proposed Portfolio with your advisor to reconcile this inconsistency. Please note that your Investor Risk Profile is based on a Risk Profile Questionnaire that you completed, which helps identify your personal risk tolerance and define the appropriate amount of risk exposure in your portfolio. Therefore, the Proposed Portfolio Risk Profile should be equal to, or lower than your Investor Risk Profile.

MANDATE 1 (Market Movement): Based on our understanding of your knowledge of market movement

and its tendency towards cyclical and secular behavior, the portion of your portfolio designated to market

movement is . This mandate will be implemented via:

MANDATE 2 (Tactical Market): Based on your understanding of the role tactical allocation plays in your

portfolio, the portion of your portfolio designated to tactical market movement is . This mandate

will be implemented via:

MANDATE 3 (Market Diversifying): Based on your understanding of the potential need to have strategies

that seek to provide unique diversification, your allocation to market diversifying strategies is .

This mandate will be implemented via:

Proposed Account Allocation

Owner Account Registration Mandate Portfolio Amount % of

Assets

100%

VIII. SUMMARY

In summary, we believe a successful investment strategy should attempt to provide more recognition of the impact of market movement on returns and focus resources to discern the proper amount of participation an investor will tolerate. The strategy seeks to implement portfolio strategies that are more advanced than traditional asset class diversification, attempting to smooth the pattern of returns available from pure market movement. To be effective, an investment strategy should have clearly communicated commentary and provide the investor with access to information focused on helping him or her make decisions based on information not emotion.

Overall Portfolio Construction

Investor Asset Classes

Investor Portfolio Positions

Please see the glossary for general descriptions and risks of securities being recommended. Upon your request we will provide you with

additional information, including a fund summary prospectus and/or a prospectus that contains complete details on the investment

objectives, risks, fees, charges, and expenses, as well as the other information about the investment company, which should be carefully

considered. Please read the prospectus carefully prior to investing. The prospectuses contain this and other information about investment

companies. There are risks inherent in investing including the potential loss of principal. Past performance is not a guarantee of future

results. Diversification does not guarantee against loss of principal.

STRUCTURE

We believe that investment management must be founded on a Fiduciary Code of Conduct that

holds the client’s best interest above all. It is important, therefore, to take time to understand

the elements of a Fiduciary Code of Conduct, as well as several key investment themes, and to

recognize how the core structure and mission of our firm is guided by these principles.

A Commitment to a Fiduciary Code of Conduct

According to The Investment Adviser Association’s Standards of Practice, “As a fiduciary, an

investment advisor has an affirmative duty to care, loyalty, honesty, and good faith to act in the

best interest of its clients.” As a firm, we believe that it is our responsibility to disclose

important information about the relationship between all members of your investment team

and to provide timely and objective education, while seeking to eliminate conflicts of interest

that could impair a firm’s ability to offer objective advice and investment services.

Transparency through an Open Architecture Structure

Our Open Architecture Structure emphasizes a commitment to seek to provide an investment

atmosphere that is transparent and avoids conflicts of interest. The integrity of our investment

recommendations requires that we maintain an impartial approach to asset allocation,

mitigating outside influences or biases. This framework, as you will learn, is carefully designed

to promote objectivity and a positive alignment between you and your investment team.

Fiduciary: one who acts in utmost good faith, in a

manner he or she reasonably believes to be in the best

interest of the client.

A conflict of interest exists when an individual’s

business or personal interests may impair his or her

ability to offer objective advice, recommendations, or

services.

Advisory Fees

At the time in which a Client account is first opened and funded and any time an additional

deposit of $10,000 or more is received, the Adviser Fees shall be calculated based on the value of

the deposit, prorated for the number of days remaining in the quarter. This initial fee will be

charged at the end of the month in which the initial funding or additional deposit is made.

Thereafter, the Adviser Fee shall be charged quarterly in advance based on the quarter‐end

account value as of the end of the prior quarter.

Up to ‐

$250,000

$250,001 ‐

$500,000

$500,001 ‐

$1,000,000

$1,000,001 ‐

$2,000,000

$2,000,000

and above

In the event that a client account is terminated during a calendar quarter and any time a

withdrawal of $10,000 or more is taken from an account, Adviser will compute the unearned

Adviser fees, prorated for the number of days remaining in the quarter and cause such unearned

Adviser Fees to be refunded to the Client.

Based on the proposed investment amount, your blended advisory fees total

Liquidity

Since the investment vehicles within your portfolio are considered highly liquid investments, it

will not be necessary to maintain high cash balances among the asset mixes, except as may be

dictated for investment purposes. You may request withdrawals at any time by notifying your

Investment Advisor or custodian. When redeemed, the value of the investment(s) may be worth

more or less than their original cost and your custodian may charge a termination fee.

Custodial Fees

Your advisor has selected Pershing Advisor Solutions LLC to provide essential services for your brokerage account – including the custody of your assets and brokerage transactions. While you may be unfamiliar with the Pershing name, your advisor knows Pershing as one of the leading custody, clearing, and trade execution providers in the industry – and the solution behind many of the nation’s largest financial organizations. Working behind the scenes, Pershing delivers fast and accurate executions of your trades, prepares timely statements, and provides your advisor with leading-edge tools and technology.

1

SIPC®

Coverage Pershing is a member of the Securities Investor Protection Corporation (SIPC

®). As a result, securities in

client accounts are protected up to $500,000 (including a maximum of $250,000 for claims for uninvested cash awaiting reinvestment). For details, please see www.sipc.org. Neither SIPC nor excess of SIPC coverage protects against loss due to market fluctuation of investments

Mutual Fund Accounts The custodian will charge an annual account administration fee of $50 to be collected in arrears in quarterly installments. No additional custodial fee or annual account administration fee will be charged on assets invested in No Transaction Fee (NTF) mutual funds. The custodian will charge a quarterly fee in advance based on the value of the portfolio for the average of the previous 3-month ends on assets invested in Non-NTF mutual funds (see table below). Such accounts will also be subject to a termination fee of $75.

Exchange Traded Fund (ETF) Accounts The custodian will charge each ETF account a quarterly fee in advance based on the value of the portfolio for the average of the previous 3-month ends (see table below). The annual minimum fee will be $250 and the accounts will also be subject to a termination fee of $75.

Unified Managed Accounts (UMA) No custodial fee or annual account administration fee will be charged on assets invested in No Transaction Fee (NTF) mutual funds. The custodian will charge a quarterly fee in advance based on the value of the portfolio for the average of the previous 3-month ends on assets invested in ETFs and Non-NTF mutual funds (see table below). Such accounts will also be subject to a termination fee of $75.

Account Value Client Fees Per

Annum Client Fees Per

Quarter

First First $250,000 0.25% 0.0625%

Second Next $250,000 0.12% 0.0300%

Third Next $250,000 0.10% 0.0250%

Fourth Next $250,000 0.08% 0.0200%

Fifth Next $1,000,000 0.06% 0.0150%

Sixth Over $2,000,000 0.05% 0.0125%

The fees above are exclusive of mutual fund and/or exchange traded fund annual expenses. Upon your request, we will provide you with more information, including a fund summary prospectus and/or prospectus that contain complete details on the investment objectives, risks, fees, charges and expenses, as well as other information about the investment company, which should be carefully considered. Please read the prospectuses carefully prior to investing. The prospectuses contain this and other information about investment companies.

http://www.sipc.org/

Investment Policy Statement

(Client Copy)

The Investment Policy Statement is key to our investment process because it confirms that the

guidelines, responsibilities, and long‐term objectives set forth in the Proposal are consistent with your

financial goals. The Investment Policy Statement is the foundation upon which our work together will

be based.

Investor

The investor shall be responsible for:

Communicate personal objectives

Provide relevant financial information

Promptly communicate any/all changes in financial situation

Participate in ongoing client/advisor reviews

Investment Advisor

The Investment Advisor shall utilize the following criteria when selecting one or more investment

strategies for your account:

Your personal investment risk profile.

Our understanding of your knowledge of market movement and its tendency towards cyclical

and secular behavior; the role tactical allocation plays in your portfolio; and your potential need

to have alternative strategies that seek to provide unique diversification.

The current economic and market environment.

The investment strategies that are closely aligned with your personal investment goals and

objectives.

How the recommended investment strategies may complement one another within your overall

portfolio.

Review of fees and charges.

PROPOSED PORTFOLIO RISK PROFILE: The resulting risk profile of the total proposed portfolio based on the blended solutions above is

Disclosure: If the Proposed Portfolio Risk Profile shown above is not consistent with your Investor Risk Profile, we recommend reevaluating the Proposed Portfolio with your advisor to reconcile this inconsistency. Please note that your Investor Risk Profile is based on a Risk Profile Questionnaire that you completed, which helps identify your personal risk tolerance and define the appropriate amount of risk exposure in your portfolio. Therefore, the Proposed Portfolio Risk Profile should be equal to, or lower than your Investor Risk Profile.



Assets

100%

Investment Policy Review

The Investment Policy Statement is not a contract. It is a summary of our agreed upon investment strategy for your portfolio (see “Proposed Account Allocation” to follow) . By signing the document you acknowledge that the Proposal has been read, understood, and accepted as appropriate guidelines for your investment plan.

Investor Signature______________________________________ Date____________


Advisor Signature ______________________________________ Date____________

Investment Policy Statement

(Advisor Copy)

The Investment Policy Statement is key to our investment process because it confirms that the

guidelines, responsibilities, and long‐term objectives set forth in the Proposal are consistent with your

financial goals. The Investment Policy Statement is the foundation upon which our work together will

be based.

Investor

The investor shall be responsible for:

Communicate personal objectives

Provide relevant financial information

Promptly communicate any/all changes in financial situation

Participate in ongoing client/advisor reviews

Investment Advisor

The Investment Advisor shall utilize the following criteria when selecting one or more investment

strategies for your account:

Your personal investment risk profile.

Our understanding of your knowledge of market movement and its tendency towards cyclical

and secular behavior; the role tactical allocation plays in your portfolio; and your potential need

to have alternative strategies that seek to provide unique diversification.

The current economic and market environment.

The investment strategies that are closely aligned with your personal investment goals and

objectives.

How the recommended investment strategies may complement one another within your overall

portfolio.

Review of fees and charges.

PROPOSED PORTFOLIO RISK PROFILE: The resulting risk profile of the total proposed portfolio based on the blended solutions above is

Disclosure: If the Proposed Portfolio Risk Profile shown above is not consistent with your Investor Risk Profile, we recommend reevaluating the Proposed Portfolio with your advisor to reconcile this inconsistency. Please note that your Investor Risk Profile is based on a Risk Profile Questionnaire that you completed, which helps identify your personal risk tolerance and define the appropriate amount of risk exposure in your portfolio. Therefore, the Proposed Portfolio Risk Profile should be equal to, or lower than your Investor Risk Profile.



Assets

100%

Investment Policy Review

The Investment Policy Statement is not a contract. It is a summary of our agreed upon investment strategy for your portfolio (see “Proposed Account Allocation” to follow) . By signing the document you acknowledge that the Proposal has been read, understood, and accepted as appropriate guidelines for your investment plan.



Advisor Signature ______________________________________ Date____________

IX. Glossary of Terms and Risks

Alternative Investment Funds: An investment that is not one of the three traditional asset types (stocks, bonds and cash). Alternative investments include global macro, managed futures, real estate, and derivatives contracts. Alternative investments may provide additional diversification because their returns may have a low correlation with those of standard asset classes. Alternative investment strategies may have higher risks and fees associated with them.

Arbitrage: The practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices. In principle and in academic use, an arbitrage is expected to be risk‐free; in common use, as in statistical arbitrage, it may refer to expected profit, though losses may occur, and in practice, there are always risks in arbitrage, some minor (such as fluctuation of prices decreasing profit margins), some major (such as devaluation of a currency or derivative).

Asset Allocation: An investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset class in an investment portfolio according to the investors risk tolerance, goals and investment time frame. Diversification does not guarantee against loss of principal.

Beta: The measure of an asset’s risk in relation to the market (for example, the S&P 500 index) or to an alternative benchmark or factors. Roughly speaking, a security with a beta of 1.5 will move, on average, 1.5 times the market return.

Bond Fund: A fund that invests in fixed income instruments (bonds). In general, such funds are appropriate for investors with medium‐term investment horizons, for those seeking an investment that emphasizes income rather than growth, and for investors who have a low tolerance for the risk of short‐term price fluctuations. Investments in bonds and bond funds are subject to interest rate, credit, and inflation risk. Investments in foreign markets involve additional risks, including political and economic risks and the risk of currency fluctuations.

Chicago Board Options Exchange Volatility Index (CBOE VIX®): A weighted blend of prices for a range of options on the S&P 500 Index. Often referred to as the fear index or the fear gauge, it represents one measure of the Market’s expectation of stock market volatility over the next 30 days.

Correlation: A statistical measure of how two securities move in relation to each other. Positive correlation implies that as one security moves, either up or down, the other security will move in the same direction. Alternatively, negative correlation means that if one security moves in either direction the security that is negatively correlated will move in the opposite direction.

Custodian: A custodian bank, or simply custodian, is a specialized financial institution responsible for safeguarding a firm's or individual's financial assets, record keeping and reporting, and is not likely to engage in "traditional" commercial or consumer/retail banking.

Derivative Contract: A derivative instrument is a contract between two parties that specifies conditions (especially the dates, resulting values of the underlying variables, and notional amounts) under which payments, or payoffs are to be made between the parties. Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Derivatives instruments, which may be used to take both long and short positions, can be highly volatile, result in economic leverage (which can magnify losses), and involve risks in addition to the risks of the underlying instrument on which the derivative is based, such as counterparty, correlation and liquidity risk.

Dynamic Asset Allocation: A portfolio management strategy that involves small adjustments to a portfolio’s asset mix based on updated asset class returns and risk expectations. The general premise of dynamic asset allocation is that market dynamics and the relationship between asset classes are constantly changing and that it is critical to respond to these changes while still remaining true to the original portfolio risk/return objectives.

Emerging Market Fund: A fund that invests the majority of its assets in the financial markets of developing countries. Investments in foreign instruments or currencies can involve greater risk and volatility than U.S. investments because of

adverse market, economic, political, regulatory and geopolitical or other conditions. In developing or emerging countries, these risks may be more significant.

Exchange Traded Fund (ETF): A security that tracks an index, commodities, or a specific sector. Unlike a fund, with Net Asset Value calculated at the end of the day, an ETF trades like a stock on an exchange. The expense ratio for most ETFs is typically lower than the average mutual fund. ETFs carry a number of risks, including but not limited to equity market risk, liquidity, currency, interest rate, credit, and counterparty risk, and may result in the loss of principal.

Global Macro Fund: A strategy that bases its holdings ‐ such as long and short positions in various equity, fixed income, currency, and futures markets ‐ primarily on overall economic and political views of various countries (macroeconomic principles). Because the Fund investments may be concentrated in a particular geographic region or country, the Fund share value may fluctuate more than that of a less concentrated fund. Derivatives instruments, which may be used to take both long and short positions, can be highly volatile, result in economic leverage (which can magnify losses), and involve risks in addition to the risks of the underlying instrument on which the derivative is based, such as counterparty, correlation and liquidity risk.

Implied Volatility (IV): is the expected volatility of a security’s stock price. In general, implied volatility increases when the market is bearish (trending downward) and decreases when the market is bullish (trending upward). This is due to the common belief that bearish markets are more risky than bullish markets.

International Fund: A fund that can invest in companies located in any geographic area outside the U.S. Investments in foreign instruments or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geo‐political or other conditions.

Large Capitalization Stock (Large Cap): The definition can vary, however, the term generally applies to companies with a market capitalization value of more than $10 billion. Although prospects for long term growth may be more likely for large, more established companies than for either mid or small cap companies, large cap stocks can be sensitive to changing economic conditions.

Long or Long Position: A long position in a security, such as a stock or a bond, or equivalently to be long in a security, means the holder of the position owns the security and will profit if the price of the security goes up.

Long/Weak Volatility: Asset classes and/or investment strategies that have historically demonstrated positive or weak correlations to volatility indices. In other words, when volatility indices increased, the asset classes or investment strategies increased or were marginally impacted in value.

Managed Futures Fund: Managed futures funds can take both long and short positions in futures contracts and options on futures contracts in the global commodity, interest rate, equity, and currency markets, thus seeking to benefit both if the price of the underlying instrument rises or falls. The use of derivatives, forward and futures contracts, and commodities exposes the Fund to additional risks including increased volatility, lack of liquidity, counterparty risk, and possible losses greater than the initial investment as well as increased transaction costs.

Market Index: A pre‐selected group of investments created to provide a representation of the performance of the overall stock or bond market or a segment of the stock or bond market. Indexes are unmanaged and do not take transaction costs or fees into consideration. It is not possible to invest directly in an index.

Master limited partnership (MLP) Funds: A limited partnership that is publically traded and, to be legally classified as an MLP, generates most (~90%) of its cash flows from real estate, natural resources and commodities. An MLP combines the tax benefits of a limited partnership (the partnership does not pay taxes from the profit ‐ the money is only taxed when unit holders receive distributions) with the liquidity of a publicly traded company. In addition to risks commonly associated with the underlying investments of the MLP, legislative, judicial, or administrative changes and differing interpretations, possibly on a retroactive basis, could negatively impact the value of an investment in MLPs and therefore the value of your investment in the Fund.

Middle Capitalization Stock (Mid Cap): The definition of a mid‐cap stock can vary, but generally, it is a company with a market capitalization between $2 and $10 billion. Mid Cap stocks can be particularly sensitive to changing economic conditions, and their prospects for growth are less certain than those of larger, more established companies.

Money Market Funds: A fund that invests in short‐term debt instruments. Its objective is to earn interest for its investors while maintaining a constant price of $1.00. A money market mutual fund investment is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market mutual fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.

Mutual Funds: An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus. Mutual Funds carry a number of risks, including but not limited to equity market risk, liquidity, currency, interest rate, credit, and counterparty risk, and may result in the loss of principal.

Real Estate Investment Trust (REIT) Funds: A fund with an objective of investing in real estate. A REIT can invest in property directly or in the debt associated with real estate. These funds may experience greater than normal volatility.

Risk Tolerance: The degree of uncertainty that an investor can handle in regard to a negative change in the value of his or her portfolio. An investor's risk tolerance varies according to age, personality characteristics, income needs, and financial goals.

Short Selling (also known as shorting or going short): The practice of selling securities, that have been borrowed from a third party (usually a broker), with the intention of buying identical assets back at a later date to return to that third party. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as the seller will pay less to buy the assets than it received on selling them. The short seller will incur a loss if the price of the assets rises (as it will have to buy them at a higher price than it sold them), and there is no theoretical limit to the loss that can be incurred by a short seller.

Short Volatility: Asset classes or investment strategies that have historically demonstrated an inverse correlation to volatility indices. In other words, when volatility indices increased, the asset classes and/or investment strategies declined in value.

Small Capitalization Stock (Small Cap): Refers to stocks with a relatively small market capitalization. The definition of small cap can vary, but generally it is a company with a market capitalization of between $300 million and $2 billion. Small cap stocks have historically exhibited greater price volatility, than mid and large cap stocks, particularly over the short term.

Stock Fund or Equity Fund: A fund that invests principally in stocks that can be actively or passively (index fund) managed. In general, such funds are appropriate for investors who have a long‐term investment horizon (ten years or longer), who are seeking growth in capital as a primary objective, and who are prepared to endure the sharp and sometimes prolonged declines in share prices that occur from time to time in the stock market. This price volatility is the trade‐off for the potentially high returns that common stocks can provide.

Strategic Asset Allocation: At the inception of the portfolio, a "base policy mix" is established based on the risk tolerance and objectives of an investor along with the expected returns of the market. Because the value of assets can change given the market conditions, the portfolio constantly needs to be re‐adjusted to stay aligned with the formulated objectives.

Tactical Asset Allocation: An actively managed asset allocation strategy that makes large adjustments to the portfolio mix of assets based on current market conditions. The risk of a tactical asset allocation strategy may vary significantly over time from very conservative to very aggressive.

Time Horizon: The length of time over which an investment is made or held before it is liquidated. Given a short time frame, it would be prudent to invest more conservatively because there is little time to make up for any losses.

Volatility‐Based Asset Allocation: A strategy that goes beyond traditional asset allocation by using exposure to volatility as an additional consideration in a portfolio’s construction. Past performance and estimations of volatility exposure are not indicative of future results, and processes used may not achieve the desired results.

**Index Definitions:

Barcap Aggregate Bond Index. The U.S. Aggregate Bond Index is a broad‐based benchmark that measures the investment grade, U.S. dollar‐denominated, fixed‐rate taxable bond market, including Treasuries, government‐related and corporate securities, MBS (agency fixed‐rate and hybrid ARM passthroughs), ABS, and CMBS. Dow Jones Industrial Average Index (DJIA). The DJIA is a price‐weighted average of 30 actively traded blue chip stocks, primarily industrials. Markit Iboxx High Yield Index. The Markit iBoxx $ Liquid High Yield Index is designed to provide a balanced representation of the US dollar high yield corporate market by the means of the most liquid high yield corporate bonds available. The index consists of sub‐investment grade US dollar‐denominated bonds issued by corporate issuers and rated by at least one of three rating services: Moody’s Investors Service, Standard & Poor’s Rating Services, or Fitch Ratings. Dow Jones US Select REIT Index. The Dow Jones U.S. Real Estate Total Return Index ‐ a subset of the Dow Jones US Index which represents Real Estate Investment Trusts (REIT) and other companies that invest directly or indirectly in real estate through development, management, or ownership, including property agencies. The index is float‐adjusted and market cap weighted. MSCI EAFE Index. The MSCI EAFE Index ‐ a capitalization weighted index that monitors the performance of stocks from Europe, Australasia, and the Far East. MSCI Emerging Markets Index. The MSCI Emerging Markets Index ‐ a capitalization weighted index that monitors the performance of stocks in emerging markets. Russell 1000® Growth Index. The Russell 1000 Growth Index measures the performance of the large‐cap growth segment of the U.S. equity universe. It includes those Russell 1000 Index companies with higher price‐to‐book ratios and higher forecasted growth values. Russell 1000® Value Index. The Russell 1000 Value Index measures the performance of the large‐cap value segment of the U.S. equity universe. It includes those Russell 1000 Index companies with lower price‐to‐book ratios and lower expected growth values. Russell 2000® Growth Index. The Russell 2000 Growth Index measures the performance of the small-cap growth segment of the U.S. equity universe. It includes those Russell 2000 Index companies with higher price-to-value ratios and higher forecasted growth values. Russell 2000® Value Index. The Russell 2000 Value Index measures the performance of small-cap value segment of the U.S. equity universe. It includes those Russell 2000 Index companies with lower price-to-book ratios and lower forecasted growth values. S&P/Citi International Treasury Bond Ex‐US Index. The S&P/Citigroup International Treasury Bond Ex‐U.S. Index seeks to measure the performance of treasury bonds issued by non‐U.S. developed market countries.

Indexes are unmanaged and do not take transaction costs or fees into consideration. It is not possible to invest

directly in an index.

There are risks inherent in investing, including the potential loss of principal. Past performance is not a guarantee of future results. Diversification does not guarantee against loss of principal. Disclaimer: This material contains confidential and proprietary information of The Elements Financial Group, LLC and is intended for the exclusive use of the person to whom it is provided. It may not be modified, sold or otherwise provided, in whole or in part, to any other person or entity without prior written permission from The Elements Financial Group, LLC. The information contained herein has been obtained from sources believed to be reliable. The Elements Financial Group, LLC gives no representations or warranties as to the accuracy of such information, and accepts no responsibility or liability (including for indirect, consequential or incidental damages) for any error, omission or inaccuracy in such information and for results obtained from its use. Information and opinions are as of the date indicated, and are subject to change. Past performance does not guarantee future returns, and processes used may not achieve the desired results. Sample client portfolios are only provided to illustrate certain characteristics of various model portfolios. Actual portfolios and results may vary.

The Elements Financial Group, LLC, is a third-party service provider.

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