A. INVESTMENT ADVISORY SERVICES
Generally
J. Derek Lewis & Associates, Inc. (“JDLA” or “ADVISER”) provides investment advisory
services in the form of discretionary investment management and non-discretionary
investment advice. Accounts are managed on either a discretionary or a non-
discretionary, advisory fee basis for the benefit of the beneficial owner or
representative/fiduciary for the benefit owner (
jointly, for purposes of this Agreement, shall
be referred to as the “Client”, unless the context warrants another more limited/specific
definition).
JDLA offers asset allocation, primarily using mutual funds and exchange traded funds
(“ETF”). JDLA generally utilizes American Funds. While JDLA’s discretionary and non-
discretionary advisory services primarily relate to mutual fund and ETF portfolios, JDLA
provides investment advisory services for Section 529 College Savings Plans. Third
Party Asset managers may invest in a broader array of securities, including in portfolios
of stocks and other securities. See their ADV’s and refer to their Client contract for such
parameters. Moreover, JDLA retains the authority to use other products as referenced
above, which would be particularly more likely to be used upon the request of the Client
to oversee an existing portfolio. Nevertheless, JDLA concentrates its services in the area
of mutual fund selection, allocation of assets and periodic reallocation. The suggested
minimum account size is $100,000, although it is not an absolute requirement.
Description – Overview JDLA generally offers advice on investment
company securities (“mutual funds”). Based on the
individual needs of the Client, JDLA will evaluate
the appropriate solutions and offer advice on a
variety of mutual fund allocations designed to
achieve Clients’ investment objectives. While
JDLA reserves the authority to utilize securities
other than mutual funds, as a practical matter,
JDLA’s investment advisory program is currently
focused on mutual fund investments. JDLA tries to
use Adviser Share classes (when available), but
otherwise A Shares may also be used in the
absence of a more fee-efficient, Adviser-class
share.
Specialization Separately Managed Accounts involving Mutual
Fund and ETF Allocation
Assets Under Advisement /
Management (“AUM”)
As of September 30, 2023, JDLA’s Regulatory
Asset Under Management (“RAUM” or Regulatory
AUM”) were as follows:
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Discretionary Assets - $1,291,478,131
(7,349 Accounts)
Non-Discretionary Assets - $173,019,268
(164 Accounts)
Total AUM - $1,464,497,400
(7,513 Total RIA Accounts)
Each Client’s financial situation is assessed independently. JDLA schedules a meeting
with Clients to review their “financial picture” or make recommendations in consideration
of the Client’s specific situation.
If the consultation will result in the review the status of a specific portfolio, JDLA requires
the Client to provide specific financial information so JDLA can prepare an analysis prior
to the scheduled appointment. JDLA provides long-term track records during the
consultation; discusses volatile market climates, risks and opportunities, among other
factors. Thereafter, JDLA reviews market alternatives that appear to be both suitable and
in the best interest of its Clients in light of Client-specific objectives and risk tolerance.
This process is designed to help the Client(s) determine their investment objectives and
risk tolerance, which are required to identify the appropriate products and investment
strategies for the Client. Investment Adviser Representatives (“IAR”) of JDLA will also
provide multiple investment alternatives. During this process, JDLA discloses fees and
expenses of any recommended investment(s) and asset allocation.
For non-discretionary accounts, Clients of JDLA will share with the Client its opinion on
which investment(s) meet their risk tolerance and objectives, but the implementation of
any such recommendation is at the volition of the Client. For discretionary accounts,
JDLA determines the investments that meet the risk tolerance and objectives and makes
such investments/allocations without obtain Client consent in advance.
JDLA will not advise on legal proceedings, including class actions or bankruptcies
involving securities purchased or held in Clients’ accounts.
JDLA Investment Advisory Services Custody Arrangements
JDLA Mutual Fund Direct
➢
Discretionary
➢
Non-Discretionary
JDLA and/or 3rd Party Managers (held with
Schwab and/or in Schwab Marketplace)
Schwab
➢ Discretionary
➢ Non-Discretionary
3rd Party Asset Managers (“TPAMs”)
➢ Discretionary
Schwab
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JDLA consults with industry professionals, mutual fund managers and has access to
current research through Schwab. Furthermore, JDLA maintains ongoing subscriptions
to assist with analyzing specific investments, their risks, fees and expenses and the
longevity of each investment’s management team.
Non-Discretionary Investment Advisory Services
JDLA offers its advice to Clients for a fee. These services are asset-based pricing
services where an IAR of JDLA offers advice about the respective Client’s portfolio, based
upon suitability and also Client’s best interest with respect to transactions, pattern of
transaction and the resulting allocation of investments and funds Although JDLA generally
pre-clears investment choices with the Client prior to their purchase in accounts
designated as discretionary accounts, it does retain discretion to select the particular
securities purchased for certain clients. Client retains discretion to reject any mutual fund
allocations made, thereby compelling JDLA to reallocate the portfolio according to the
Client’s instruction. Even in discretionary accounts, JDLA will make changes in the
Client’s portfolio upon any specific instruction that the Client may provide.
While JDLA generally provides ongoing monitoring, since the nature of the products used
by JDLA are primarily mutual funds and ETFs, the time horizon is longer terms. As such,
ongoing monitoring does not occur as often as it would with other product types such as
stocks and options. The value of investments may rise or fall dramatically at any point in
time throughout the year, and it is the Client’s obligation, and not JDLA’s obligation, to
monitor those investments throughout the year, unless Client and JDLA agree to other,
specific arrangements for ongoing monitoring. Unless agreed otherwise, JDLA expects
to conduct an ongoing monitoring in the form of an annual review of Client’s portfolio, and,
depending upon the agreement with the client, may conduct more frequent reviews (
not
more frequently than quarterly).
JDLA provides customized investment advisory services on a “fee-only” basis. As an
investment adviser, JDLA’s goals include assisting the Client in making informed
investment decisions to maximize total investment returns over a generally specified time
horizon, subject to their tolerance to risk. Such accounts will be (i) carried with Schwab
Advisor Services, a division of Charles Schwab & Co., Inc. (individually or jointly,
“Schwab”) and/or (ii) held directly with the respective mutual fund companies or their
transfer agents. If the securities are held at Schwab (which is a “Qualified Custodian”),
depending upon the way the particular Client account is established, Schwab executes
purchase and sales orders and reflects the securities positions on their account
Statements. Otherwise, if the investments are submitted directly to the mutual funds,
then the mutual funds or their transfer agents will assume the responsibility for processing
purchase, sale and redemption requests, and such investments will be reflected on the
account Statements (
the official record of the account and its contents) issued by the
mutual funds. The Qualified Custodians, including the respective mutual fund company
or transfer agent, will prepare and mail transaction confirmations and summary periodic
account Statements to Clients.
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For purposes of this Agreement, Qualified Custodians, as well as the mutual fund or its
transfer agent that reflects the ownership of the investor directly on its books and records
(
due to the application-way nature of certain investments), shall be referred to as
Custodians.
General Terms and Conditions
1. Where accounts are advised for related entities or related Clients, values of
the related accounts may be grouped for fee computation
purposes. Requested “grouped status” is subject to approval of JDLA, at
JDLA’s sole discretion, and accordingly such requests may be declined.
2. Fees are paid on a quarterly basis.
3. Fees will be paid by the Client for the present fiscal quarter prior to the 15th
business day of the first month in the present fiscal quarte
r.1
4. Fees are generally charged directly to the Client’s Account, which shall be
paid by the cash or money market portion of the Client’s Account, but may
also be paid from other funds as directed by the Client. If there is an
inadequate balance in Client’s money market or cash account, then Client
hereby authorizes JDLA to reallocate assets sufficient to pay the fee
.2
Any Clients who wish to terminate this Agreement must provide written
notification of their request. Fees will be prorated to the date of termination
and refunded promptly.
Written disclosures of the Client shall take precedence over oral disclosures, and written
disclosures occurring later in time shall take precedence over any earlier disclosures, to
the extent that any conflicts exist. In the event of a conflict between a more recent oral
disclosure and an earlier written disclosure, the particular written disclosure shall, if not
current, be updated to reflect the current information. In all cases, such advice shall be
rendered based upon the Client’s current objectives and risk tolerance.
Discretionary Investment Management Services
Unless the context otherwise requires or limits the applicability of any particular provision,
the information otherwise contained above in the section entitled “non-discretionary
investment advisory services” applies here. In addition to non-discretionary investment
advisory services, JDLA may manage accounts with discretion. In order to do so, the
Client will indicate that desire by completing and signing an Investment Management
Agreement and a 3rd party trading authorization instrument/document. Ordinarily, such
discretion is reserved for mutual fund and/or ETF portfolios where the Client has not
wanted to be involved in pre-authorizing every trade and mutual fund/ETF allocation.
1 An exception to the foregoing is, in the case of American Funds, when they charge the fee other than
immediately after the fiscal quarter. For example, they charge in arrears on their quarter system: December
-February is paid on March 7th; March - May is paid on June 7th; June – August is paid on September 7th;
and September – November is paid on December 7th.
2 The foregoing notwithstanding, fees charged by American Funds are typically paid on a pro-rata basis
from each underlying fund (unless directed to be paid by 1 fund).
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JDLA will utilize its Client profile data gathered as part of the investor profiling process,
resulting in an investor profile.
Other areas of discretion include (i) determining what to sell to cover any systematic
withdrawals from the account, (ii) determining what to sell when the Client needs an
unusual withdrawal from the Account and (iii) determining what to buy when the Client
adds money to the account in the form of IRA contributions or otherwise.
Investment Advisory/Management Process
In general, the investment advisory/management process will consider any or all of the
following areas of concern:
• PERSONAL: Family records, budgeting, personal liability, estate information
and financial goals.
• TAX & CASH FLOW: Income tax and spending analysis and planning for past
current and future years. We will illustrate the impact of various investments on
a Client’s current income tax and future tax liability.
• DEATH & DISABILITY: Cash needs at death, income needs of surviving
dependents, estate planning and disability income analysis.
• RETIREMENT: Analysis of current strategies and investment plans to help the
Client achieve his or her retirement goals.
• INVESTMENTS: Analysis of investment alternatives and their effect on the
Client’s portfolio. JDLA generally offers advice on investment company
securities. Based on the individual needs of the Client, JDLA may evaluate and
offer advice on a variety of mutual fund allocations designed to achieve Clients’
investment objectives.
JDLA does not review casualty insurance (e.g., homeowners, auto, liability,
etc.). Clients are responsible for having such matters reviewed by an outside
casualty firm.
JDLA gathers the required information through in-depth personal interviews and a data
gathering process. With respect to its investment management process, JDLA
approaches its investment management process as follows:
Step 1: Analyze Client Goals and Objectives
This part of the process is considered the most important part of JDLA's investment
management process due to the fact it is the basis upon which JDLA builds the clients'
portfolios. This foundation is based upon how clients answer the following questions:
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1. At what stage of asset growth do you consider yourself: wealth accumulation or
distribution?
2. How much risk of loss and volatility are you willing to assume for a given rate of
return?
3. What is your time frame for reaching your various financial goals?
4. What are your current cash needs and liabilities?
5. What is your current tax situation?
As part of the information gathering process, JDLA may utilize a more detailed document
to develop an investor policy guideline referenced in Step 2 below.
Step 2: Formalize Investment Policy
Once JDLA has gained a significant understanding of your goals and objectives, JDLA
will use this information to assign an investment policy guideline for you. This statement
reflects the portfolio management strategy, guides future investment decisions and
establishes a record for information regarding your investment time frames, objectives,
tax-sensitivities, risk tolerance, etc.
Step 3: Design Optimal Portfolio
JDLA will use your investment policy guideline as a baseline for the design of your long-
term investment portfolio. From the policy, JDLA will build an asset allocation model that
will determine your portfolio performance sought.
JDLA will select one of its proprietary risk models and produce asset allocation scenarios
defining a number of different asset blends that is capable of meeting the expected rate
of return while maintaining your acceptable level of portfolio risk. JDLA will then work
through these scenarios to determine which one best fits your needs in light of existing
resources and investment objectives. You may need a combination of these models in an
effort to meet both your short-term and long-term goals.
Step 4: Portfolio Implementation
Once your asset allocation is selected, JDLA will begin to implement your portfolio design
if the Client has also elected to receive either ongoing non-discretionary investment
advisory services or investment management services. JDLA will carefully choose and
evaluate the investment options available via JDLA and Schwab. JDLA has done its due
diligence on the mutual fund and ETF options and independent money managers,
analyzing characteristics such as management, past performance, future goals and
strategies, qualifications (including their investment philosophies), sector allocations, and
other factors. Portfolio rebalancing and other implementation activities may require that
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you sign a Limited Power of Attorney for Purchases and Sales of Securities, allowing
JDLA limited trading discretion of your accounts.
Step 5: Performance Reporting and Measurement
JDLA provides customized reports at least annually and more frequently upon request.
Your report allows you to monitor the performance of your investment portfolio compared
to appropriate benchmarks. In addition, you will automatically receive quarterly
statements from the respective custodians and you may have online access to view
activity should you choose to take advantage of the service.
Step 6: Portfolio Monitoring and Rebalancing
Our asset allocation, mutual fund and money manager selection processes are carefully
tailored to the Clients’ needs. Although our asset allocation models tend to remain
consistent, we review them periodically and will occasionally modify them to reflect
fundamental market conditions, or changes in your objectives or circumstances. In
addition, we periodically monitor the performance of our selected investments and fund
managers, making recommendations as deemed appropriate. Although you may grant us
investment discretion, you may also revoke that discretion. Moreover, it is very important
that you communicate with our firm regarding any life or financial changes which may
affect your investment policy guideline and long-term financial goals.
Throughout our relationship, JDLA will endeavor to maintain a high level of personal
contact with you to help achieve your financial goals and recommends that you to take
advantage of regular portfolio reviews.
3rd Party Investment Management
Some of JDLA’s larger accounts prefer to own individual stocks in separately managed
accounts and will use the services of a professional portfolio manager who can
personalize the management of their account for tax purposes or other specific
management styles. Typically, the portfolio managers manage only a portion of the
overall household portfolio of the Client.
For such 3rd party portfolio management services, the portfolio manager will be given
discretion over the trading of the account; in those cases, JDLA will not have discretion,
but will act in an advisory capacity. The Client receives official confirmations and
monthly/quarterly statements from Schwab (as the official custodian, and receives
quarterly portfolio summaries from the respective portfolio manager. The Client will also
receive a portfolio valuation disclosure/statement from JDLA reflecting the whole portfolio
(all household accounts, including the outside-managed assets) typically on a quarterly
basis, but at least annually (depending on the account size and activity). JDLA directly
oversees and reviews these managed accounts on a quarterly basis and will discuss and
review the whole portfolio with the Client at least annually or as needed/requested by the
Client for rebalancing. JDLA will consult with the Client and the portfolio manager and
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will make arrangements for the Client to meet or speak directly with the portfolio manager
as requested.
Stewardship Partners charges an annual management fee of 60 basis points and bills the
Clients’ accounts
pro rata on a quarterly basis. Lederer and Associates charges an
annual management fee of between 75 and 100 basis points and bills the Clients’
accounts on a quarterly basis.
JDLA charges an annual fee of 75 basis points for advisory services and bills the Clients’
accounts
pro rata on a quarterly basis. Considering both the portfolio management fees
and the JDLA investment advisory fee, these Clients are not billed more than 1.50% per
annum for the combined services on these accounts.
In these cases, the Client will sign a management agreement with both JDLA and the
outside professional money manager (Stewardship Partners and Lederer and
Associates).
Stewardship Partners
Stewardship Partners provides investment advisory services, on a discretionary and non-
discretionary basis, for high-net-worth individuals and institutional clients. Each account
is managed in accordance with the investment objectives and any restrictions set by the
client. We interview the client or have the client complete a written Questionnaire,
assessing the client's financial situation/needs and decides as to whether the investment
styles and services offered by Stewardship Partners would be appropriate for the client
before Stewardship Partners is retained to manage the client's account. We are also
responsible for determining and notifying Stewardship Partners of any changes in the
client's investment objectives or personal or financial circumstances that should be
considered in managing the account.
The Web Site and important disclosures regarding Stewardship Partners can be found at
https://stewardshippartners.com/, including its its ADV and Form CRS located on that Site
page under the “About” tab.
Lederer and Associates
Lederer & Associates manages equity, fixed-income, and balanced portfolios. All
portfolios are managed separately. Based on your goals and objectives, we establish
asset allocation targets, the type of equity strategy, and the appropriateness of taxable
and/or tax-exempt bonds for each portfolio. You may impose restrictions on investing in
certain securities or types of securities.
We interview the client or have the client complete
a written questionnaire, assessing the client's financial situation/needs and decides as to
whether the investment styles and services offered by Lederer & Associates would be
appropriate for the client before Lederer & Associates is retained to manage the client's
account. We are also responsible for determining and notifying Stewardship Partners of
any changes in the client's investment objectives or personal or financial circumstances
that should be considered in managing the account.
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The Web Site and important disclosures regarding Lederer and Associates can be found
a
t https://lederer-associates.com/, with its ADV and Form CRS located on that Site page.
Schwab Program
Schwab provides various benefits for investment managers and their clients. Such
benefits include products, product & account services, administrative services, and
information and resource services. JDLA maintains primary responsibility to
communicate with its Clients, except for Clients that Schwab may refer to JDLA through
Schwab Advisor Network®. Schwab, however, has a responsibility to communicate with
JDLA Clients via the issuance of account Statements and trade confirmations.
Schwab will execute orders that JDLA or its Clients place, provided it receives securities
or property in good deliverable form prior to settlement. Unless JDLA or the Client
specifies that the order be executed in a specific exchange or market, and Schwab has
agreed to such execution, Schwab will, at its sole discretion, execute any order to
purchase or sell securities in any location or on any market or exchange where such
security is traded. Schwab will assume that all orders, unless specified otherwise, are
“long.” All transactions are subject to Schwab’s house trading rules and policies and
applicable rules, regulations, customs and uses of any exchange, market, clearing house
or self-regulatory organizations.
Schwab will make available to JDLA price and other market data information upon
reasonable request. Schwab obtains market data from industry sources that it deems to
be reliable, but the accuracy, completeness, timeliness or correct sequencing of the
market data cannot be guaranteed.
As with the fee debiting procedures for JDLA clients in general, Schwab will directly debit
the Clients’ accounts, subject to certain control procedures, including, but not limited to,
receipt of Client’s written authorization to debit the account. JDLA will submit invoices to
Schwab for the amount of fees to be charged.
As with securities custodians generally, Schwab retains a security interest, lien on and
right to set-off investment management fees payable by Clients to Schwab for the benefit
of JDLA, and such rights pertain to all securities, money or other assets held in the
Account, including proceeds from such assets.
Schwab Managed Account Services
Schwab’s Managed Account Services consist of the Managed Account Select® (“Select
Program”) and the Managed Account Access® Program (“Access Program”). Both of
these programs are jointly referred to as the “Sponsor Programs.” The other managed
account services are referred to as the Managed Account Marketplace® (“Marketplace”).
The Managed Account Services include brokerage, custody, and related services that
that allow participating clients to engage money managers to provide discretionary
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investment portfolio advisory services to designated accounts opened and maintained at
Schwab. In the Sponsored Programs, Schwab acts as a program sponsor. In the Select
Program, Schwab provides research on a select group of managers. In the Access
Program, by contrast, Schwab does not undertake to perform any screening or due
diligence in the acceptance of managers participating in that Program, and managers
participating in the Access Program may or may not be affiliated with Schwab. The fee
for Schwab’s brokerage, custody, research and other services in the Sponsor Programs
is bundled with the managers’ fees for their portfolio management services.
Marketplace contains a relatively more extensive list of managers whose portfolio
management services are available through Schwab. Schwab does not act as a sponsor
in relation to the Marketplace, and its compensation for Marketplace services is separate
from the manager’s fee. Marketplace includes managers providing separate account
management, overlay managers (including for multi-strategy portfolios and unified
managed accounts), Turnkey Asset Management Providers (“TAMP”) and sub-advisors
to any of the foregoing that have trading authority over Client accounts. The TAMP may
include separately managed accounts, multi-strategy portfolios and unified managed
accounts. For purposes of this section, managers include overlay managers, sub-
advisors with trading authority and TAMP (
as well as any managers that are part of the
TAMP’s Program).
If JDLA’s Clients are interested in participating in the aforementioned programs, JDLA
would be responsible for assisting interested Clients in selecting the appropriate
manager. If so, the respective Clients would be obligated to sign a Client Account
Agreement with Schwab, pursuant to which the respective Client would authorize
managers to manage the Client’s account(s) and Schwab would render its brokerage,
custody and related services to the respective Client’s account(s) and be authorized by
the respective Clients to allow JDLA and the managers to share your Client account
information and take such actions upon instructions of managers and JDLA. JDLA would
assist Clients in completing and submitting Client Account Agreements to Schwab,
including advising Clients about whether managers designated on Client Accounts will be
sent certain issuer-related information (
such as proxies, tender offers, proposed mergers,
rights offerings, exchange offers, warrants, certain prospectuses and annual reports) that
require managers to make voting decisions or take other actions regarding investments
held in Clients’ Accounts managed by the managers.
For Marketplace Accounts, JDLA will not submit to Schwab the Client Account
Agreements until the appropriate manager has accepted its appointment. By contrast,
JDLA will forward the Client Account Agreements for Sponsor Accounts promptly after
being signed by the Client.
The fee that Client Accounts in the Sponsor Programs (“Sponsor Accounts”) pay for
Schwab’s and managers’ services is separate from the fee that the Sponsor Account will
pay for JDLA’s services. Client Accounts in the Marketplace will pay a separate fee for
Schwab’s services, JDLA’s services and the manager’s services. Marketplace Accounts
may be designated either as transaction-based pricing or asset-based pricing.
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Advice to Clients, Generally
JDLA, and not Schwab, will be responsible in providing advice to Clients regarding,
among other things, the following:
i. The appropriateness for a Client of managed accounts, asset-based pricing
or bundled fees and other aspects of Schwab’s Managed Account Services;
ii. The appropriateness for a Client of the fee structure of any Sponsor Program
or TAMP’s service, and the fee applicable to any Marketplace Account;
iii. The selection of any manager to manage a Client Account, including reviewing
the manager’s strategy, performance or disciplinary record or other due
diligence information;
iv. Any investment style, strategy or technique, including those of any manager
and the allocation of the Client’s assets;
v. Any transaction in a Client Account effected upon JDLA’s instruction; and
vi. The ongoing performance and suitability of any manager and its investment
strategy(ies) or program.
The appropriateness of working with the Client, upon paying either asset-based fee or
transaction fees, may depend upon a number of factors, including, among others, the
Client’s investment objectives and financial situation, JDLA’s and the respective
manager’s investment strategies and trading patterns, as well as the frequency of trading
and the number and size of the transactions. If the number of transactions in the account
is low enough in any given billing period, Schwab’s portion of the bundled fees may
exceed the commissions or other transaction charges that would otherwise have been
charged for transactions effected in the respective billing period.
Document Delivery
Sponsor Accounts. JDLA shall deliver to each Client, no later than the time
the Client completes a Client Account Agreement:
i. A copy of Schwab’s Managed Account Services Disclosure Brochure
ii. The disclosure brochure, including any supplements, (“Manager
brochure”) and
iii. Any privacy notice for manager.
Schwab is responsible for delivering updates to its Managed Account
Services Disclosure Brochure, and each manager is responsible for
delivering or offering to deliver updates to its Manager brochure, privacy
notice and other required documents.
Marketplace Accounts. Each manager will be responsible for any required
initial delivery of its brochure and privacy notice, and also will be responsible
for any subsequent offer or delivery to Clients of required updates to these
documents.
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Schwab’s Role and Limitations Thereof
i. Schwab is not serving as an investment adviser in its Managed
Account Services with respect to any transaction in Client Accounts.
Furthermore, Schwab does not recommend or endorse any manager
to JDLA or its Clients.
ii. Schwab will not be responsible for determining any Client’s financial
situation or investment objectives or determining the suitability for
any Client or Client Account of separately managed accounts, any
manager, asset-based pricing, bundled fees or any other aspect of
Schwab’s Managed Account Services, investment style or strategy
or that of any manager.
iii. Schwab will carry out transactions only as directed by a manager, a
Client or JDLA. Schwab will send Client’s confirmations and Account
Statements. The name of the manager may appear on Schwab’s
Statements of the Client Account.
iv. Schwab is not obligated to monitor the trading of any manager, JDLA
or Client’s trading in Client’s Account.
v. Schwab cannot verify or guarantee the accuracy, adequacy or
completeness of the historical performance or other information
made available to JDLA.
vi. The manager may have other business relationships with Schwab,
separate from Schwab’s Managed Account Services, in connection
with which the manager compensates Schwab for services (e.g.,
Schwab Advisor Network® and Mutual Fund OneSource®).
vii. The investment strategy, techniques, portfolio securities and
historical performance of a manager’s separately managed accounts
may differ materially from that of mutual funds or other accounts
managed with a similar strategy by the same manager.
Authorizations
JDLA’s will complete agreements prescribed by Schwab to authorize
Schwab to:
i. Provide JDLA and each manager with access to Client Account
information;
ii. Act upon JDLA’s instructions for Client Accounts with respect to
payment of fees and, to the extent the Client elects, with respect to
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trading and disbursing assets;
iii. Act upon JDLA’s instructions, to the extent authorized by the Client,
with respect to the Client’s Additional, Funding or Optional Brokerage
Accounts (
as defined in Schwab’s Account Agreements);
iv. Act upon the trading instructions of managers that have been
designated to have trading authority;
v. Furnish transaction information to each manager and send certain
issuer information to any combination of the Client, JDLA and/or the
manager, as the Client may specify; and
vi. With respect to Marketplace Accounts, act on each designated
manager’s instructions for payment of the manager’s fees.
Termination of Manager Authorizations
Schwab shall not be required to follow any instructions of any manager
i. With respect to all Client Accounts managed by the respective
manager, after the termination of the Manager Service Agreement
between manager and Schwab;
ii. With respect to a particular Client Account managed by the manager,
after
A. The Client notifies Schwab in writing that it has revoked Client’s
selection of the manager,
B. The Client notifies Schwab in writing that it has terminated its
agreement with JDLA,
C. The Client terminates the Client Account Agreement, or
D. Either Schwab or JDLA terminates the governing contractual
arrangements between them.
If a manager is no longer available to manage the Sponsor Program Client
Accounts, Schwab will notify JDLA and JDLA will discuss with any Client
impacted by such change. JDLA and Client will discuss whether to select
a new manager that is eligible to manage the Client’s Account, switch the
Client’s Account to a different Sponsor Program or one of the Marketplace
services for management by the manager, or take some other action.
Schwab and the manager may agree to move a particular investment
strategy from the Select Program to the Access Program, in which event
JDLA may elect to continue to have the Client’s Select Program managed
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as an Access Program account subject to the same fees, but Schwab will
not provide research or other information regarding a manager whose
services are no longer being offered under the Select Program. It is also
possible that Schwab and the Manager may move one or more of the
managers in the Access program to the Select Program.
This is the end of the description of the investment advisory/management programs
specific to JDLA’s use of the Schwab program. The information below relates to JDLA’s
investment advisory/management program in general.
______________________________________________
Mutual Fund and ETF Allocation Implementation;
Discretionary and Non-Discretionary Investment Advisory Services
Brokerage recommendations of JDLA personnel are provided by registered
representatives (“RRs”) associated with JDLS. If Clients choose to implement the
recommended mutual fund and ETF allocations through JDLA personnel, then JDLA
would place such orders through Schwab or place brokerage orders through its affiliated
broker/dealer, JDLS. The decision about which avenue to use for the purchase of mutual
funds is based upon the products available and best interest considerations such as
Share Class, internal expenses of the mutual fund, product availability, etc.
JDLA performs due diligence on mutual funds and ETFs, and utilizes due diligence if
provided by Schwab and 3rd party managers. The purpose of the due diligence process
is to evaluate the quality of the mutual funds and ETFs. The role of JDLA is to determine
which mutual funds and ETFs complement the Client-specific objectives.
JDLA will not assist Clients with placing trades that it did not recommend. However, its
personnel who are JDLS RRs may place those trades for non-discretionary investment
advisory accounts as brokers in unsolicited transactions with JDLS. For assets
purchased by Clients that were not recommended JDLA, JDLA will exclude those
securities assets for investment advisory billing purposes, unless JDLA and the
respective Client agree that JDLA will initiate advisory services on those securities going
forward.
JDLA reserves the right to execute agreements with other registered investment advisers
in order to have them manage or sub-advise the Accounts of JDLA Clients. If it does so,
JDLA will conduct due diligence on them as contemplated in JDLA’s Compliance
Procedures. In such instances, JDLA may receive a portion of the account fee and JDLA
would make available to the Client the disclosure brochure of the other registered
investment adviser(s).
Mutual Fund Fees
JDLA’s investment advisory program primarily consists of providing investment advisory
services relative to mutual funds and ETFs and their allocations. JDLA receives a fee for
its advice. Also, several representatives of JDLA serve as RRs/brokers of JDLS, the
registered broker/dealer that receives brokerage commissions from the mutual funds
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recommended by JDLA. In such capacities, JDLA will either charge a fee, JDLS will
charge a commission but not both, unless in the case of 12b-1 distribution
fees/commissions for mutual funds, the investment advisory fee is reduced by the amount
of the 12b-1 commission received. Regarding commission-based products, JDLS retains
a portion of those commissions and pays the majority of the commission amount to the
RRs who sold those securities products. Having said that, JDLA strives to identify
appropriate mutual funds with adviser-class shares, where there are no
loads/commissions.
In addition to the foregoing, all investment advisory fees paid to JDLA for investment
advisory services are separate and distinct from the fees and expenses charged by
mutual funds to their shareholders. These fees and expenses are described in the
respective mutual fund’s prospectus. These fees will generally include a management fee
and other fund expenses. The distribution fee, referenced in the prospectus, is part of the
commission referenced above, which is paid to the broker/dealer by the mutual fund
companies.
Certain mutual fund share classes (A shares), which is a share class that are, in limited
case, used by JDLA (
particularly in cases where adviser share classes are not available
or adviser shares are not cheaper for a particular time horizon or investment amount) pay
commissions directly to JDLS from the initial amount of money invested by the Client,
whereas other mutual fund share classes that have back-end loads or no loads (in other
words, no direct sales charge or sales charges taken from portfolio after crediting the
account for the investment, but at prescribed periods of time/”deferred sales charge”)
absorb and/or pay for distribution fees/commissions in different ways than A shares,
which are in any case paid by the Client directly or indirectly. Such other share classes
typically have higher fees or expenses over the intended life of the investment than A
Shares (or adviser shares, if available), which typically reduces net returns over a long-
term horizon. In other words, if the mutual fund imposes a commission (sales charge or
“load”), a Client may pay an initial or deferred sales charge. Initial sales charges are
generally deducted from the investor’s initial investment funds. Such sales charges would
be paid to the broker/dealer and thereafter to the respective RR of the broker/dealer. On
the other hand, deferred sales charges are initially absorbed by the mutual fund itself, but
passed on to the investor in the form of higher annual fees and/or traditionally lower
annual returns. Notwithstanding the foregoing, JDLA and JDLS do not sell back-end load
share classes, and JDLA avoids selling A shares since it strives to place clients in adviser
share classes. However, JDLA may sell A shares through JDLS if JDLA determines they
are cheaper than adviser share classes. If it does sell an A share, it will not charge an
investment advisory fee for at least the period of time where the commission equals the
hypothetical advisory fee over the number of years. In other words, commission-based
positions are not eligible to be assessed an investment advisory fee until the commission
equals that total advisory fee had the position been subject to an investment advisory fee
since it was purchased. That being said, such account transitions are subject to a
determination that it would be in your best interest.
A Client could invest in a mutual fund directly, without the services provided by JDLA.
However, in that case, the Client would have to determine its investments without any
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advice of JDLA, which includes assessing which mutual fund or funds are most
appropriate for the Client’s financial condition, goals, objectives, risk tolerance and
investment time horizon. As with investment advisers generally, JDLA’s service is
investment advice, and so such services are typically priced as a fee- based upon the
value of the assets in the clients’ accounts.
The Client should review both the fees charged by the mutual funds and the fees charged
by JDLA to fully understand the total amount of fees. Thereafter, the Client is in a better
position to evaluate the product being recommended and the advisory services being
provided.
Investing in certain securities, including mutual funds, has been the subject of significant
regulatory consideration with respect to determining suitability in light of the fees,
redemption rights and other factors.
B. MUTUAL FUND RISKS, FEES & SUITABILITY DISCLOSURES, GENERALLY
Regulators (
regulators and self-regulatory organizations governing the brokerage
industry) have developed documents that serve as advisory or educational pieces for the
industry. An area of regulatory focus over the years has been mutual funds. In the
ordinary course of business, JDLS will provide disclosures to JDLA Clients that open
accounts with JDLS regarding mutual funds risks, expenses, breakpoints, rights of
accumulation, etc.