SAMPLE. CUSTOMIZED FOR: Sample Client. PRESENTED BY: CLS House Account (402) /05/2014

Transcription

1 CUSTOMIZED FOR: PRESENTED BY: CLS House Account (402) /05/2014 The holdings listed in this proposal are sample allocations for illustration purposes only and may not be representative of current or future investments. The holdings listed below should not be considered investment advice.

2 Dear Thank you for choosing CLS Investments, LLC ( CLS ) and me to manage your financial portfolio. Together, we ve created this customized investment proposal that outlines our recommendations for investment strategies and management of your account in accordance with your specific, individual financial goals. Those objectives, which are outlined in this document, have been established in accordance with the profile information you provided. Specifically, this investment proposal: Establishes reasonable expectations, objectives, and guidelines for the investment of your portfolio. Sets forth an investment structure detailing the expected initial allocation among asset classes. Creates the framework for a well-diversified asset mix that can be expected to generate acceptable long-term returns at a suitable level of risk. You, CLS, and I each have distinct and important roles in the investment process: Your role is to communicate your objectives, goals, and desired risk level by updating your investment profile when life changes occur. CLS will monitor the funds within your portfolio on a daily basis. If market conditions warrant, CLS will follow a disciplined money management approach to reallocate your portfolio to seek to meet your investment objectives. I will provide oversight to the entire process, meet with you regularly, and work closely with CLS. I have conducted diligent research to choose a professional money manager whose investment philosophy and methodology best support your goals. CLS and I work collaboratively to help you achieve your long-term investment objectives. Thank you for reviewing this proposal. Please contact me if you have any questions about these recommendations, CLS, or your financial portfolio in general. Sincerely, CLS House Account (402)

3 ACCOUNT INFORMATION Client Name: RegistrationType: Individual Primary Investment Objective: Wealth Accumulation. Emphasis on continued capital appreciation in accordance with your overall risk tolerance. Investment Amount: $250, Risk Budget: 75 STRATEGY INFORMATION Strategy Name: Core Plus ETF Strategy Custodian: TD Ameritrade

4 Risk Budget: 75 Registration Type: Individual Portfolio Allocation: Asset Categories Portfolio Allocation: Asset Class Segments

5 Risk Budget: 75 Registration Type: Individual Core Plus ETF TD Ameritrade Investment Portfolio Ticker Shares Price Per Share Market Value Allocation % ishares S&P 100 Index OEF $86.32 $32, % ishares Russell 1000 Growth IWF $89.61 $27, % PowerShares Senior Loan Port BKLN $24.56 $25, % Vanguard Dividend Appreciation VIG $75.87 $25, % Vanguard European Stock VGK $57.22 $20, % ishares Russell 1000 Value IWD $99.39 $15, % Vanguard Emerging Market VWO $44.48 $15, % Vanguard Information Technology VGT $97.54 $12, % ishares Russell Midcap Growth Index IWP $87.12 $10, % ishares S&P MidCap 400 Index IJH $ $10, % PowerShares Global Emerging Mkts Sovereign Debt PCY $28.88 $10, % WisdomTree Bloomberg US Dollar Bullish USDU $24.95 $7, % ishares 1-3 Year Credit Bond CSJ $ $7, % Proshares Short S&P 500 SH $23.55 $7, % Vanguard Small Cap VB $ $7, % WisdomTree Japan Hedged Equity DXJ $49.91 $7, % TD Ameritrade Cash Fund** TMCASH $1.00 $5, % ishares MSCI EAFE Growth Index EFG $70.13 $5, % Total: $250, %

6 CLIENT EXPECTATIONS CLS believes that assets, due to their varying levels of risk and return, tend to behave differently in different market conditions, and that investments in a properly allocated portfolio should not all move in the same direction. Therefore, CLS utilizes active asset allocation to manage client portfolios. Asset allocation is a portfolio management approach that attempts to balance risk and reward by apportioning a portfolio s assets among asset classes with varying levels of correlation. Portfolios are allocated according to individual goals, investing time horizon, and risk tolerance. Over the long term, asset allocation aims to maximize returns while minimizing risk. The chart on the following page illustrates the benefits of using CLS s asset allocation approach. You can see that there are variations in performance between asset classes in the same year and, at times, dramatic swings in performance in one asset class from one year to the next. This volatility underscores the value of allocating investments among many different asset classes, which seeks to help your portfolio achieve positive returns even if a portion may be invested in an asset class that is performing poorly at that time. The three columns on the right show returns for sample portfolios at three different risk levels. Although these portfolios endured volatility from year-to-year, annualized returns were favorable over the entire time period shown, which emphasizes the importance of long-term investing and asset allocation. A client s risk budget is derived from the client s specific answers to CLS s Confidential Client Profile questionnaire, which establishes the client s financial goals, ability to handle risk, and overall investment time horizon. The individual client risk budget is expressed as a percentage of the risk of a well-diversified equity portfolio. Investment Methodology

7 This chart illustrates how a conservative, moderate, and aggressive account has performed over time. It is not representative of the proposed CLS allocation in this investment proposal. Year U.S. Stocks U.S. Bonds International Sample Conservative Portfolio Sample Moderate Portfolio Sample Aggressive Portfolio % -2.9% 4.8% -1.7% -0.5% 0.7% % 18.5% 7.8% 22.2% 26.0% 29.8% % 3.6% 4.7% 8.1% 12.5% 16.9% % 9.7% 0.2% 14.4% 19.1% 23.9% % 8.7% 12.4% 12.6% 16.5% 20.5% % -0.8% 30.6% 6.3% 13.4% 20.5% % 11.6% -15.3% 5.4% -0.8% -7.0% % 8.4% -19.7% 2.0% -4.5% -11.0% % 10.3% -15.0% 1.1% -8.0% -17.2% % 4.1% 40.8% 12.8% 21.4% 30.1% % 4.3% 20.9% 7.2% 10.0% 12.8% % 2.4% 16.6% 4.2% 5.9% 7.6% % 4.3% 26.7% 8.4% 12.5% 16.5% % 7.0% 16.7% 7.1% 7.3% 7.4% % 5.2% -45.5% -8.0% -21.3% -34.5% % 5.9% 41.5% 13.4% 20.9% 28.5% % 6.5% 11.2% 9.3% 12.1% 14.9% % 7.8% -13.7% 4.9% 2.0% -0.9% % 4.2% 16.8% 7.9% 11.6% 15.3% % -2.0% 15.3% 7.6% 17.1% 26.7% Annualized Return 9.32% 5.74% 5.53% 7.07% 8.04% 8.60% Standard Deviation Growth of $100,000 $594,281 $305,371 $293,641 $392,250 $469,719 $520,859 The sample Conservative Portfolio is made up of 24% US Stocks, 6% International Stocks, 70% US Bonds. The sample Moderate Portfolio is made up of 48% US Stocks, 12% International Stocks, 40% US Bonds. The sample Aggressive Portfolio is made up of 72% US Stocks, 18% International Stocks, 10% US Bonds. Returns include reinvestment of all capital gains and dividends. As it is not possible to invest in these indices, returns are for illustrative purposes only and do not reflect actual trading, or the features of an actual investment through our services such as; objectives, risks, cost and expenses, liquidity, safety, management fees, fluctuation of principal or return, or taxes. U.S. Stocks are represented by the Russell 3000 Index which covers the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. U.S. Bonds are represented by the Barclays U.S. Aggregate Bond Index which represents the total US dollar denominated taxable bond market of SEC-registered securities. International securities are represented by the MSCI ACWI ex U.S. Index and represents the combined equity market performance of developed and emerging market countries excluding the U.S. You cannot invest directly in an index. Investment Methodology

8 CLS S RISK BUDGETING METHODOLOGY The core of the CLS methodology and the concept that guides the design of every level of the portfolio process is risk budgeting. The Risk Budget CLS s investment methodology revolves around establishing a risk budget for each client, which takes into account your individual financial goals, ability to handle risk, and overall investment time horizon. Once assigned, CLS seeks to not overspend or under use your risk budget. CLS portfolio managers then allocate your account by overweighting what we believe to be strong asset classes while pursuing to keep the risk level consistent. CLS understands that risk characteristics and volatility of investments vary, even in the same asset class. More broadly, while stocks (equities) have historically been considered more risky than bonds, some bonds may have higher risk than more conservative equity investments, as shown in the diagram below. By viewing equities and bonds on the same risk continuum instead of relying on a stock-tobond ratio, we have the ability to overweight favorable asset classes while keeping portfolio risk relatively constant even as the portfolio changes. This process results in portfolios designed to take advantage of more attractive opportunities for investment while seeking to maintain risk levels established by your risk budget. A risk budget is essentially a percentage of the risk of a diversified equity portfolio. CLS ties the risk budget to the Equity Baseline Portfolio (EBP). The EBP is a performance benchmark that is used to evaluate performance of your portfolio with that of the market. CLS s EBP is a blended index comprised of 80 percent domestic equity (represented by the Russell 3000 Index) and 20 percent international equity (represented by the MSCI ACWI U.S. Index). If your risk budget is 80, CLS s goal for your portfolio is to achieve approximately 80 percent of the EBP. Risk Budgeting Investment Methodology

9 CLS s methodology is unique in that it pairs a flexible approach to asset allocation with a disciplined risk management system, thus enabling the CLS portfolio management team to create active portfolios targeting a particular level of risk. Discipline & Flexibility Active Asset Allocation compared to a Stock-to-Bond Ratio These examples are an illustration of how the strategy is designed to function and are not meant to show the expected behavior of your entire portfolio during the example periods shown. Emerging Markets Large Cap Value High Yield Bond International Large Cap Growth Intermediate/ Long-term Bond Small/Mid Cap Growth Small/Mid Cap Core Small/Mid Cap Value Short-term Bonds/Cash Many investment managers use a stock-to-bond ratio approach to control risk with a portfolio, but CLS does not believe this method is a precise enough measure of actual portfolio risk. For example, a portfolio s risk using a stock-to-bond ratio approach is greatly affected by whether the risk comes from a small allocation to emerging markets, a sizable allocation to high-yield bonds, or a moderate overweight of the equity allocation. However, because risk budgeting takes into account other risk measures, such as standard deviation, beta, and downside capture, CLS can measure these options and determine to what degree a client s risk tolerance can handle each. With CLS s active money management approach, the allocation of assets within the client s portfolio changes from year-to-year to adjust for changing market conditions. As a result, it is intended that relative risk in the client s portfolio will remain fairly constant each year, regardless of what is happening in the market. Changing Allocations / Constant Risk Normal Market Higher Risk Market Lower Risk Market Risk budget 80 Risk budget 80 Risk budget 80 With the static stock-to-bond allocation approach utilized by many investment managers, the portfolio s allocation is kept constant over time by rebalancing back to the same asset classes, even though the risk in the market is changing. As a result, the portfolio s level of risk may also change each year even though the investor s long-term objectives have not. Therefore, the risk in the portfolio may not be in line with the investor s tolerance for risk. Static Allocations / Changing Risk Normal Market Higher Risk Market Lower Risk Market Approximate equivalent risk budget: 80 Approximate equivalent risk budget: 100 Approximate equivalent risk budget: 60 Discipline Investment Methodology

10 CLS s focus on managing risk instead of allocating portfolios according to a stock-to-bond ratio gives us increased flexibility over other asset managers. By examining the actual risk of investment choices, we can discover relationships that others may miss. There are two general reasons CLS makes changes within an investment portfolio: Risk of underlying assets changes. CLS believes that successful portfolio management needs to be anchored in a methodology that has a strong, quantitative discipline. We also understand that the market environment changes with time and that a methodology lacking flexibility will be rigid and slow. CLS s investment methodology is designed to allow your investment portfolio to adjust to the market environment while staying true to your individual risk budget. For example, if stocks are riskier than normal, CLS can reallocate a percentage of your portfolio to more conservative assets in an attempt to offset that increased risk and keep the portfolio in balance. If a particular asset class is showing less risk than it has historically, CLS adjusts the risk level of this asset and analyzes whether its return potential is sufficient to warrant increased investment. Attractiveness of underlying assets changes. Markets change; they go up and down. As an active money manager focused on asset allocation, CLS can adjust your portfolio holdings to reflect these changes while still seeking to keep you in your risk tolerance band. At CLS, we are actively watching your portfolio. Since we know risk varies between asset classes, whenever necessary, we can adjust your account towards classes we see as having lower risk or superior return. For example, when equities with risk lower than the benchmark are outperforming, CLS can create a higher equity allocation in an attempt to take advantage of the opportunity. The stockto-bond ratio would then be overweight equities, but the overall portfolio will still be in line with the risk budget. Flexibility Investment Methodology

11 Asset Classes Commonly-tracked Asset Classes: Sample Asset Classes CLS Tracks: The first step CLS takes within its methodology is to organize the investment world into asset classes, which are groups of securities with comparable characteristics that tend to react similarly to market events over time. Asset allocation is a critically important part of any investment portfolio, even those taking on low amounts of risk. While many investment managers track only a limited amount of asset classes, CLS currently tracks more than 80 asset class segments and strategies. Equities International Large Cap Mid Cap Small Cap Bonds Government Corporate High Yield Domestic International Fixed Commodities Alternatives Currencies Equities Equities Income Mega Cap Developed Investment Agriculture Volatility U.S. Dollar Grade Large Cap Emerging High Yield Base Metals Inflation Euro Mid Cap Small Cap Inflation Linked Precious Metals Merger Arbitrage Japanese Yen Small Cap Regions International (Developed) Energy Market Neutral Swiss Franc Micro Cap Value Emerging Market Gold Buy/Write Chinese Renminbi Growth Frontier Cash Value Global Mortgages Infrastructure Sectors Municipals Each asset CLS tracks is assigned a risk score, which allows different types of assets to be compared, regardless of whether they are stocks, bonds, or even commodities. Risk budgeting allows asset classes to be analyzed together to see which is the most attractive, which is not possible when the only consideration is whether an asset is an equity or a bond. By tracking a multitude of asset classes, CLS is able to better focus on an individual asset s actual risk. Asset Classes Investment Methodology

12 Risk Changes CLS uses a combination of three risk measures with quantitative inputs in conjuction with quantitative and qualitative investment analysis of asset classes to estimate risk and overall return potential. Calculating Asset Class Risk Measure the risk of each asset class CLS uses a combination of three risk measures designed to best analyze each security, since each risk measure will detect a different kind of change in an asset s risk level. RISK MEASURES Beta Downside Capture Relative Standard Deviation A measure of correlated volatility relative to the equity baseline portfolio. Time period: measured weekly over the last year and 10- year periods. How a security reacts when the market goes down in value. Time period: measured weekly over the last year. A measure of portfolio risk relative to the market s total risk. Time period: measured weekly over the last year. Investment Methodology

13 Investment Analysis Measure the overall return potential The goal of investment analysis is to analyze the attractiveness of an asset not only based on its risk, but also on the return potential the asset may bring to the portfolio. Consistent with our overall approach, CLS relies on a set of quantitative inputs and qualitative evaluations of asset classes to estimate overall return potential. CLS portfolio managers focus on five characteristics when analyzing the attractiveness of a security: economic, fundamental, statistical, technical, and valuation. INVESTMENT ANALYSIS Economic Fundamental Statistical Technical Valuation How an asset will be affected by macro variables such as economic growth, inflation, and interest rates. Asset-specific information such as business risk, earnings, and expected earnings growth. A measure of how assets move in relation to each other as well as during market declines Information about market sentiment from pricing patterns of an asset over different time periods. The price paid for earnings, cash flow, sales and book value in different market segments. Investment Analysis Investment Methodology

14 The CLS Investment Committee The 10-member CLS Investment Committee is responsible for the prudent management of all CLS assets. Rusty Vanneman* Chief Investment Officer & Committee Chairman Scott Kubie* * Chartered Financial Analyst Charterholder More information Executive Members Todd Clarke Chief Executive Officer Marc Pfeffer Kylee Pohl, J.D. General Counsel CLS Portfolio Managers J.J. Schenkelberg* Brian Beaulieu Economic Expert Outside Experts Paula Wieck For a full bio of each CLS Investment Committee member, please visit CLSinvest.com and click on Investment Committee under the About Us tab. Craig Israelsen Asset Allocation Expert Grant Engelbart Investment Committee

15 Quarterly Performance Evaluations Market Discussions & Updates Website CLS Mobile App CLS will make available to you an individual Quarterly Performance Evaluation at the end of each quarter, which you can review with this investment proposal to determine whether you are meeting your goals. The proposal will help you keep in mind your investment objectives, time horizon, and expected rate of return. Your Quarterly Performance Evaluations are available on the web at Communication with both you and your financial representative is important. Each quarter, CLS will make available to you our Directions newsletter, which contains information about the latest market and economic conditions. Directions is available online at Additionally, you can view our quarterly market review video and supplemental materials directly from our portfolio management team by visiting Finally, we will also send periodic market reviews and commentary to your financial advisor to help him/her stay informed. Log on to for secure access to your quarterly performance evaluations, daily positions and values, and other portfolio information. In addition, our web site provides a direct line of communication between you and our Service Team through the Site Help and Contact Us links on our home page. The CLS mobile app is now available for Apple iphone, ipad, and ipod Touch, as well as mobile devices using the Android operating system. The app provides on-the-go account access to: Account holdings Shares, values, prices, and performance Statements and reports You can also call or your financial representative directly from the app. To download the CLS mobile app, visit the Apple app store or Android marketplace and search for CLS mobile. Client Tools & Resources

16 This material does not constitute any representation as to the suitability or appropriateness of any security, financial product or instrument. There is no guarantee that investment in any program or strategy discussed herein will be profitable or will not incur loss. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that security values may fluctuate and that each security s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not a guide to future performance. Individual client accounts may vary. Investing in any security involves certain risks called non-diversifiable risk. These risks include market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any specific, or diversifiable, risks associated with particular investment styles or strategies. The benchmark for CLS Risk Budgeted strategies is a blended index composed of a set portion of the Equity Baseline Portfolio (EBP) and the Barclay s Capital 1-3 Month U.S. Treasury Index (Barclay s). The precise allocation of each benchmark to each index is based solely upon the risk budget of the model. For example, a Core ETF Strategy model with a risk budget of 100 will utilize a benchmark of 95% EBP, 5% Barclay s, whilst a Core ETF Strategy model with a risk budget of 60 will utilize a benchmark of 60% EBP, 40% Barclay s. The Equity Baseline Portfolio (EBP) is a blended index comprised of 80% domestic equity (represented by the Russell 3000 Index) and 20% international equity (represented by the MSCI ACWI ex US Index), rebalanced daily. The Russell 3000 Index is an unmanaged index considered representative of the U.S. stock market. The index is composed of the 3,000 largest U.S. stocks. The MSCI All-Countries World Index, excluding U.S. (ACWI ex US) is an index considered representative of stock markets of developed and emerging markets, excluding those of the US. The Barclay s Capital 1-3 Month U.S. Treasury Bill Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. Certain CLS Risk Budgeted strategies, including Core Plus ETF, ETF Managed Income, Master Manager, Master Manager Tax-Managed, Master Manager Managed Income, and ETF Protection, are considered wrap fee programs which means trading costs are not billed separately. Please refer to our Wrap Fee Program Brochure for additional details regarding these strategies. CLS Risk Budgeted strategies are considered diversified portfolios which may invest in Exchange Traded Funds, or ETFs, individual stocks, or bonds. The strategies will target specific sectors or investment methodologies which, depending on the strategy, may include domestic large, mid, and small cap equities, international equities, value investing, commodities, natural resource companies, real estate investment trusts, master limited partnerships, convertible bonds, senior bank loans, high yield bonds, government debt, preferred stock, managed futures, derivatives, high quality, and low volatility. There are additional risks associated with investment in these sectors or utilizing these methodologies. An ETF is a type of investment company whose investment objective is to achieve the same return as a particular index, sector, or basket. To achieve this, an ETF will primarily invest in all of the securities, or a representative sample of the securities, that are included in the selected index, sector, or basket. ETFs are subject to the same risks as an individual stock, as well as additional risks based on the sector the ETF invests in. Small or mid-cap companies are less predictable than large or mega-cap companies. Earnings are less predictable, shares are more volatile, and such companies generally fluctuate in value much more than large cap companies. Developed international securities and American Depository Receipts may be subject to fluctuations in the exchange rate, varying degrees of market regulations within the foreign country, lower liquidity and increased volatility as compared to US securities, additional tax implications, and political, economic, or social instability. Emerging markets may experience risks similar to developed nations but to a far greater degree. The stage of economic development of the country will be directly related to the amount of risk within that country s market. Value investing refers to investment in undervalued securities in an effort to achieve greater overall returns. A security which is considered undervalued might never achieve the level of return projected by an investor. As such, value investing is subject to liquidity risks in addition to the general business risk. Commodity instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargo, tariffs, and international economic, political, and regulatory developments. Real Estate Investment Trusts are subject to decreases in value, adverse economic conditions, overbuilding, competition, fluctuations in rental income, and fluctuations in property taxes and operating expenses. A Master Limited Partnership (MLP) is a partnership which is publicly traded with at least 90% of capital coming from real estate, natural resources, and commodities. As such, MLPs are subject to all of the underlying risks of these investments. Convertible securities will generally involve lower credit risk than a common stock as convertible securities are senior to common stock. Convertible securities generally pay lower dividends and interest than non-convertible securities. Senior Bank Loans are loans generally secured by a lien against a specific asset and are the first to be repaid in the event of a bankruptcy. While the business risk is lower than that of an unsecured loan, the risk is still present. High Yield Bonds, also known as junk bonds are bonds with low credit ratings. Investors generally invest in high yield bonds due to the prospect of greater than average interest payments. High yield bonds are subject to a greater degree of the business risk, credit risk, and the liquidity risk as opposed to a medium-grade or investment-grade corporate debt security. A derivative is a contract which may include futures contracts, forward contracts, options, and swaps, which are based on an underlying asset such as a stock, bond, commodity, currency, etc. The risk of the derivative for the writer will be closely related to that of the underlying asset CLS-8/5/2014 Disclosures