Firm Description General Information E*TRADE Capital Management, LLC (“ETCM,” “we,” “us,” or “our”), is an investment adviser registered with the Securities and Exchange Commission (“SEC”). ETCM, under its predecessor name, was founded in 1996 and became a wholly owned indirect subsidiary of E*TRADE Financial Corporation on October 3, 2005. On October 2, 2020, Morgan Stanley acquired E*TRADE Financial Corporation. ETCM is an affiliated indirect subsidiary of Morgan Stanley and E*TRADE Financial Corporation was consolidated into Morgan Stanley and no longer exists. ETCM’s broker-dealer affiliate, E*TRADE Securities LLC (“ETS”) provides online brokerage, investment advisory services, and related products and services primarily to individual retail investors (“clients”) on etrade.com (“E*TRADE” or “E*TRADE from Morgan Stanley”).
Morgan Stanley is a publicly traded global firm engaging, through its various subsidiaries, in a wide range of financial services, including securities underwriting, distribution, and trading; merger, acquisition, restructuring, real estate, project finance, and other corporate finance advisory activities; merchant banking and other principal investment activities; brokerage and research services; asset management; trading and foreign exchange; commodities and structured financial products and global custody; and securities clearance services and securities lending. Morgan Stanley is one of the largest financial services firms in the United States with branch offices in all 50 states and the District of Columbia.
ETCM Is a Fiduciary to You In serving as an investment adviser to its clients, ETCM is a fiduciary to you. ETCM is registered under the Investment Advisers Act of 1940 (“Advisers Act”), which places a fiduciary obligation on ETCM in terms of the way ETCM provides services to you.
In addition, ETCM reasonably expects to provide services as a “fiduciary” (as that term is defined in Section 3(21)(A) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and/or Section 4975 of the Internal Revenue Code of 1986, as amended (the “Code”)), with respect to Retirement Accounts. For purposes of this Brochure, the term “Retirement Account” is used to cover certain retirement plans under Title I of ERISA, which include money purchase plans, profit-sharing and investment-only plans sponsored by private employers, and SEP and SIMPLE IRAs, and Individual Retirement Accounts (“IRAs”) (as described in Section 4975 of the Code).
As a fiduciary, ETCM’s responsibility is to make sure your best interests come first. ETCM endeavors to provide you with full disclosure of all material facts relating to its investment advisory relationship with you. The advisory programs are designed to avoid conflicts of interest. In situations where the appearance of, or potential for, such a conflict is unavoidable, ETCM will clearly disclose the details of this to you.
A key feature of ETCM’s advisory services is that ETCM will provide you with objective investment advice. Investment choices for your account are the subject of an intensive due diligence process by our experienced professionals. ETCM’s recommendations of such products are made only after we have thoroughly reviewed your investment goals and risk tolerance and concluded that the recommended investment products are appropriate for you. We will provide ongoing investment advice to you and monitor your investments to ensure that they remain consistent with your objectives and risk tolerance. ETCM Advisory Programs ETCM offers the following discretionary investment advisory programs, sometimes referred to as “Wrap Fee Programs” (“advisory programs” or “Wrap Fee Programs”): Blend Portfolios (“Blend”), Dedicated Portfolios (“Dedicated”), and Fixed Income Portfolios (“FIP”). ETCM offers a fourth Wrap Fee Program, Core Portfolios (“Core”). Core is a digital advice advisory program available to clients only on E*TRADE’s electronic platforms, including its website, etrade.com. Underlying investments in the Wrap Fee Programs are referred to as “Advisory Assets.” For more information about each Wrap Fee Program, please see the respective subsections under “Features of the Wrap Fee Programs” in this Brochure. As of January 3, 2023, all of the advisory programs except Core have been closed to new accounts. In addition, ETCM will close Core Portfolios to any client that does not hold an existing account at E*TRADE sometime in the latter half of the second quarter of 2023. New E*TRADE clients seeking a Core Portfolios account will be directed to Morgan Stanley Smith Barney LLC, an affiliated broker-dealer and investment adviser (“MSSB”). Throughout 2023, ETS and ETCM will be transitioning clients to MSSB. Clients will be given advanced notice of their transition date along with detailed information regarding the transition. Learn more about this transition at etrade.com/mssb.
A Wrap Fee Program offers clients investment advisory services, keeping in mind the importance of asset allocation, as well as related brokerage and custodial services for a single asset-based annual fee (“Annual Advisory Fee” or “Advisory Fee”). The Advisory Fee is sometimes referred to as a “wrap fee” or “bundled fee.” Clients benefit from total transparency about their investments, account activities, an investment strategies while staying fully informed on etrade.com. Clients can deposit mon to help stay on track with their investment goals or withdraw money from their accounts whe they need it. Clients are always in control of their overall investment strategy; when financi circumstances or goals change, they can change their investment strategy at any time. Th advisory programs and fees are described in greater detail in this Brochure. d ey n al e Advisory programs are subject to the general oversight of ETCM’s Investment Policy Committee (“IPC”). The IPC oversees the ETCM discretionary advisory programs, with responsibilities including, but not limited to, reviewing and approving: the composition of portfolios, asset allocations, and fee schedules of the Wrap Fee Programs. The Investment Strategy Team (“IST”) supports the IPC, constructs allocations for managed portfolios, establishes rebalancing methodologies for IPC review, and conducts ongoing due diligence on Model Managers, Portfolio Managers (as defined under “Relationships and Affiliates” below), investment portfolios, and the co-adviser. IST members report to Morgan Stanley’s Wealth Management Global Investment Office. The IST and IPC are informed by investment analysis from the Global Investment Management Analysis Committee of MSSB. The IPC includes employees of the Wealth Management business of MSSB. Some of these individuals are members of MSSB’s Investment Solutions Investment Committee (“ISIC”). The ISIC is an internal governance committee responsible for investment decisions and portfolio construction for MSSB discretionary advisory programs. Even though MSSB also offers investment advisory services, those services and offerings differ in several aspects including but not limited to portfolio management philosophies, portfolio allocations, portfolio holdings, and risk profiles.
The Wrap Fee Programs Brochure is designed to help you understand all the wrap fee advisory programs offered by ETCM as either a sponsor or a co-sponsor, whether the Wrap Fee Programs are in your best interest, and the conflicts and potential conflicts of interest associated with your participation in an ETCM Wrap Fee Program. Relationships and Affiliates E*TRADE Securities LLC Execution, clearing, settlement, custody, and other brokerage-related services for Core, Blend, and Dedicated are provided pursuant to an agreement between ETCM and its affiliate ETS. ETS is a broker-dealer registered with the SEC, a member firm of the Financial Industry Regulatory Authority (“FINRA”), and a subsidiary of Morgan Stanley.
For FIP, ETS provides clearing, settlement, custodial, and other brokerage-related services pursuant to the same agreement. Portfolio Managers (as defined below) typically effect transactions for the purchase and/or sale of fixed income securities mainly through unaffiliated broker-dealers selected and used by the Portfolio Managers. Portfolio Managers will not route FIP trades to Morgan Stanley.
Lockwood Advisors, Inc. ETCM has an agreement with Lockwood Advisors, Inc. (“Lockwood”), to provide ETCM with impersonal advisory and/or administrative services for two of ETCM’s Wrap Fee Programs (Core and Blend). Lockwood also acts as co-sponsor and co-adviser for two additional ETCM Wrap Fee Programs (Dedicated and FIP).
Lockwood is an investment adviser registered with the SEC and an affiliate of Pershing LLC. Lockwood and Pershing LLC are BNY Mellon companies, and none of these companies are affiliated with ETCM. The Portfolio Manager Universe (as defined below) is subject to the review and approval of the IPC. Portfolio Managers are responsible for the individual investment decisions in connection with FIP. Lockwood, at its discretion, reserves the right to remove the availability of a FIP investment style and replace it with another investment style from the same or a different Portfolio Manager if the particular investment style fails to meet Lockwood’s defined screening criteria.
Morgan Stanley Private Bank, National Association ETCM is affiliated with Morgan Stanley Private Bank, National Association (“Morgan Stanley Private Bank”). ETCM clients with Core Portfolios accounts are eligible to participate in the Line of Credit program offered by the affiliated bank. Portfolio Managers Lockwood and ETCM make available different FIP investment styles provided by various third- party professional Portfolio Managers (“Portfolio Managers”) with whom Lockwood has a contractual relationship. As part of the agreement between Lockwood and ETCM, Lockwood pays management fees directly to the Portfolio Managers. Portfolio Managers and investment styles are approved by Lockwood and ETCM for inclusion in this program (“Portfolio Manager Universe”). ETCM provides clients with advice in connection with clients’ initial selection of the Portfolio Managers and FIP investment styles made available by Lockwood. Portfolio Managers make all individual security investment decisions in connection with FIP. ETCM reserves the right to expand the universe of Portfolio Managers in the future to include Portfolio Managers affiliated with Morgan Stanley.
Model Managers Manager model portions of Dedicated accounts are provided by model managers (“Model Managers”) selected by Lockwood and approved by ETCM. Model Managers are third-party professional Portfolio Managers with whom Lockwood has a contractual relationship. Lockwood serves as an overlay manager and has investment discretion over the Manager Models (as defined below). As part of the agreement between Lockwood and ETCM, Lockwood pays management fees directly to the Model Managers. ETCM is responsible for selecting manager models (“Manager Models”) from a preapproved list to fill the asset allocation for the selected asset allocation strategy. Manager Models invest in individual equities. Neither ETCM nor any of its affiliates acts as the investment adviser or principal underwriter for the Advisory Assets in the Manager Model portions of the portfolio. ETCM reserves the right to expand the universe of Model Managers in the future to include Model Managers affiliated with Morgan Stanley.
Strategist Managers Certain Blend clients will receive recommendations for portfolios with a branded investment strategy created by affiliated investment advisers, Morgan Stanley Investment Management Inc. (“MSIM”), or Morgan Stanley Smith Barney through Morgan Stanley Wealth Management (“MSWM”), an affiliated firm, or unaffiliated third-party financial firms (collectively “Strategist Managers”) (“Strategist Portfolios”). Strategist Portfolios are investment portfolios constructed, branded, and licensed for use by the Strategist Managers. Strategist Managers act through their employees, contractors, and agents to provide the Strategist Portfolios to ETCM. ETCM does not select the investments in Strategist Portfolios, although ETCM does review and approve the Strategist Portfolios offered by Strategist Managers. Although ETCM does not pay a fee to unaffiliated third-party Strategist Managers, ETCM has agreed to pay MSIM a portion of the advisory fee charged by ETCM on non-proprietary assets invested in MSIM Strategist Portfolios. There are no fee sharing arrangements with MSSB. More information about the use of affiliated Strategist Managers is provided below.
Affiliated Funds Mutual funds or exchange-traded funds (“ETFs”) (together “Funds”) for which affiliates serve as the sponsor or provide investment management or other services may be used as investments in ETCM offerings. If ETCM uses an affiliated fund, assets invested in the affiliated fund are not included in the calculation of the Advisory Fee. More information about the use of affiliated funds is provided below.
Programs and Services Prior to enrolling a client in a Wrap Fee Program, ETCM determines the client’s financial needs and objectives, gathering and analyzing client profile and risk tolerance information (together “Investor Profile”). This review is completed through E*TRADE’s digital platforms for Core or through an interview by an ETCM Investment Adviser Representative (“IAR”) for the other advisory programs. Investor Profiles contain financial information such as investment goals, liquidity needs, time horizon, investment restrictions, risk tolerance, investment experience, tax sensitivity, and the source of funds to be invested. ETCM analyzes the relevant information and creates the Investor Profile. Prospective clients are provided with asset allocation and diversified investment portfolio information in an Investment Proposal. The Investment Proposal should be read carefully prior to enrolling in the managed account.
Account Type Advice For prospective Core clients, ETCM does not provide advice as to whether a prospect should open a Core account. ETCM provides an Investment Proposal based on the understanding that clients decided to open a Core discretionary investment advisory account and that an investment advisory account is appropriate for their investment needs.
For Blend, Dedicated, and FIP, IARs will gather information about the client to determine if an advisory account is in the client’s best interest.
Whether the IAR advises the client to open a Blend, Dedicated, or FIP account depends on a number of factors, such as the fees charged, the size of the Wrap Fee Program account, the amount of trading expected in the account as compared with accounts that charge commissions and do not charge single wrap fees, and the client’s Investor Profile. As of January 3, 2023, IARs no longer advise clients regarding whether or not to open an ETCM managed account, but will continue to advise clients regarding their existing ETCM Blend, Dedicated, and FIP accounts. Portfolio Strategy Advice ETCM uses an algorithm to determine a prospective Core, Blend, and Dedicated client’s initial portfolio strategy advice. The portfolio strategy advice is based on the answers to the client’s Investor Profile Questionnaire, which is sometimes referred to as a “Risk Tolerance Questionnaire,” “Investor Questionnaire,” or “Client Questionnaire” (collectively referred to herein as “questionnaire”). The suggested portfolio strategy considers several classes of assets based on the client’s responses to the questionnaire. Not all answers in the questionnaire are weighted equally. Answers related to time horizon (i.e., how long you plan to invest in the portfolio before cashing out) and risk tolerance (i.e., your ability and inclination to encounter volatility in your portfolio in exchange for the potential for greater returns) are weighted the most when scoring the questionnaire. The FIP questionnaire is used to understand and validate the client’s preferences for a fixed income portfolio, confirm the client’s knowledge of the risks associated with individual bonds, and ascertain whether the client is looking for a laddered portfolio or a managed bond portfolio with a specific duration. The portfolio strategy is referred to as the Investor Profile in the client’s Investment Proposal. The portfolio strategy is not a financial plan and does not consider outside assets, concentration of holdings in other accounts, client debt levels, and multiple investment goals. Dedicated, FIP, and Blend clients are able to reach out to an IAR or a team of IARs at 800- 760-9036 with questions about the initial portfolio strategy or general questions about the questionnaire. Core clients can consult the Core Portfolios Support Team at 866-484-3658. The questionnaire can be updated at any time when a client’s goal or financial situation changes. Depending on the results of the new answers to the questionnaire, such updates could result in advice for a new portfolio strategy.
Portfolio Managers effect transactions for the purchase and/or sale of fixed income securities mainly through unaffiliated third-party broker-dealers selected and used by the Portfolio Managers. These broker-dealers are unaffiliated with ETS, ETCM, and Morgan Stanley. This trading discretion is provided by clients through the terms of the Advisory Agreement (as defined under “Features of the Wrap Fee Programs” below). This type of trading is often referred to as “trading away” or “step-out trades” because the trades are executed by an unaffiliated broker-dealer. These bond transactions could incur additional fees and expenses in the form of commissions, markups, markdowns or “spreads,” and costs, such as, but not limited to, clearinghouse fees, SEC fees, odd-lot differentials, electronic fund and wire transfer fees, platform service and access fees, and ticket charges that are not covered by ETCM’s Annual Advisory Fee. ETCM’s affiliates and the Portfolio Managers, and their affiliates, do not add additional compensation or expenses (e.g., markups or markdowns, commissions, platform fees, ticket charges, and fees or costs noted above) to the bonds traded for accounts in a FIP; however, if broker-dealers not affiliated with the Portfolio Managers are involved with FIP portfolio transactions, in certain circumstances, depending on each individual broker-dealer used and the details of the specific transaction, can include some or all of the above into the overall bond cost. If applicable, those costs will be included in the net price of the security and will not be reflected as a separate charge on trade confirmations or account statements. In certain instances, ETS will execute a limited number of bond trades. For example, ETS will execute certain transactions for securities held at ETS that are liquidated to fund a FIP account and securities that are transferred into the account and must be liquidated. Prior to selecting a Portfolio Manager, you should carefully read all material related to the Portfolio Manager. For additional information about the Portfolio Managers, trade execution, and the potential costs incurred, please read the Portfolio Manager’s ADV Part 2, which is available on request, and “Selecting Brokerage Firms” under “Brokerage Practices” in Item 6 “Portfolio Manager Selection and Evaluation” of this Brochure. ETCM and Lockwood jointly develop a selection of Portfolio Managers and investment styles for inclusion in FIP. The Portfolio Manager Universe is subject to the review and approval of the IPC. Portfolio Managers are responsible for the individual investment decisions in connection with FIP. Lockwood, at its discretion, reserves the right to remove the availability of a FIP investment style and replace it with another investment style from the same or a different Portfolio Manager if the particular investment style fails to meet Lockwood’s defined screening criteria.
For Core, Blend, and Dedicated, ETCM applies its proprietary quantitative screening methodology (including historical performance and risk measures) to the universe of mutual funds and ETFs (Core only invests in ETFs other than a money market fund for the cash portion of the account) available to ETCM via the ETS investing and trading platform (“Fund Universe”). Lockwood makes available research and advisory services to ETCM with regard to the construction of the Model Portfolios (as defined under “Features of the Wrap Fee Programs” below) offered through the Wrap Fee Programs. Lockwood’s screening is conducted on an impersonal and ongoing basis. The IPC, with the support of the IST, prepares an investment analysis methodology that incorporates various quantitative criteria, including historical return, risk, expenses, manager tenure, performance and style consistency, asset size, and growth. Lockwood does not provide advice or research services to clients enrolled in Core and Blend. The IPC is responsible for the determination of the prudence of all investments on the list of Advisory Assets for Core and Blend.
ETCM engages affiliated or unaffiliated third parties to assist with research, analysis, implementation, rebalancing, billing, and other services. In all cases, ETCM retains ultimate responsibility for all aspects of the advisory services provided through the Core and Blend programs.
For Dedicated, ETCM and Lockwood work together to make changes to the portfolios. Lockwood serves as the overlay manager and discretionary money manager and is reasonably available to clients for consultation.
For further information about the role of Lockwood in the Dedicated and FIP advisory programs, please see “Dedicated Portfolios” and “Fixed Income Portfolios” under “Features of the Wrap Fee Programs” below. Features of the Wrap Fee Programs ETCM’s investment advisory programs offer clients access to broad-based portfolio strategies that seek attractive risk-adjusted returns over the long term (generally three years or more), portfolios that are concentrated in one or more asset classes, and portfolios designed for income needs. “Risk-adjusted returns” means returns are measured with regard to how much risk is involved in producing the return.
The portfolio strategies, sometimes referred to as “risk profiles” or “investment profiles,” for Core, Blend, and Dedicated range from conservative strategies that invest mostly in fixed income securities to aggressive growth strategies that invest mostly in equity securities. ETCM’s advisory programs have the flexibility to use similar or different asset allocations, risk profiles, and investor questionnaires. Certain Wrap Fee Programs offer one or more portfolios that correspond to one of the different risk profiles. In specific instances, an IAR will work with a client to create a Dedicated account that is concentrated in one or two asset classes, using a small number of manager model portfolios and/or other Advisory Assets. The asset class focused portfolios do not use an asset allocation investment model and are not fully diversified; therefore, these focused portfolios have their own specific risk and return characteristics. Clients interested in this type of concentrated strategy will need to provide additional investment information (“Client Information Supplement”) to their IARs. In these situations, ETCM will rely predominantly on information provided in the Client Information Supplement and conversations with the client to build a portfolio to meet the client’s investment needs.
Portfolios of ETFs, ETFs and mutual funds, or manager model portfolios matching predetermined portfolio strategies are created and maintained for each risk model to establish base portfolios. Such portfolios are referred to as “Model Portfolios.” There is no guarantee that these portfolios will exactly duplicate client account holdings. FIP offers laddered municipal bond portfolios with maturity ranges from one to five years, one to 10 years, or one to 15 years.
For Core, Blend, and Dedicated, ETCM and/or Lockwood selects the initial and subsequent portfolio investments and allocations, monitors the account, rebalances the account when it is out of tolerance with the portfolio’s asset allocation parameters, and adjusts portfolio holdings when necessary. Out-of-tolerance parameters and rebalancing methodologies are subject to change. For further information about the rebalancing methodology, please see “Review of Accounts and Ongoing Advice” in Item 9 “Additional Information” of this Brochure. Clients electing to invest in Core, Blend, or Dedicated containing mutual funds and/or ETFs have the option to invest in portfolios that are tax-sensitive. Tax-sensitive portfolios contain municipal bond mutual funds (including state-specific municipal bond mutual funds depending on client preferences) or ETFs to help reduce taxes incurred on income associated with such portfolios. Core clients with taxable accounts will automatically be invested in tax-sensitive portfolios, whereas Retirement Accounts will be invested in the standard portfolio strategy. FIP will differ based on which Portfolio Manager is selected and the strategy of the portfolio. Prior to being closed to new accounts, the FIP actively managed bond portfolios attempted to outperform a market benchmark and invest in bonds with different maturities. Clients selecting an actively managed bond portfolio have the ability to choose between a tax-sensitive portfolio that invests in municipal or other government bonds and a portfolio that is not tax-sensitive that invests in corporate bonds. The laddered bond portfolios invest in bonds with specified maturity dates and do not seek to outperform a market benchmark. Starting sometime in the latter half of the first quarter of 2023, eligible Core clients can enroll in tax-loss harvesting to “harvest” tax losses across all taxable Core accounts with ETCM. In effecting tax-loss harvesting, ETCM will not consider dividends in the account or any assets held in other accounts outside of Core. It also does not consider any Client-Selected Strategy held in your account. Upon confirmation of enrolling in tax-loss harvesting, ETCM will: (i) Monitor the client’s account(s) daily for eligible losses that can be sold to satisfy a tax- loss harvest.
(ii) Once an eligible loss exceeds approximately 10% of the account value and is over $100, sell ETF shares in order to realize the losses in the account.
(iii) Monitor all Core accounts to ensure that all transactions comply with Internal Revenue Service guidelines during the wash sale period (this is the 61-day period from 30 days before to 30 days after the date of sale during which an investor cannot purchase substantially identical stocks or securities).
(iv) Reinvest the proceeds of such sale in one or more broad-based ETFs or cash equivalents during any applicable restricted period.
(v) Hold the replacement ETF shares or cash equivalents or other securities in the client’s account for a minimum of 30 days. Thereafter, ETCM monitors the value of the replacement security and generally will not sell it if the sale will result in a substantial short-term capital gains tax. However, the replacement security may be sold in certain instances where the potential short-term capital gain is below a specified minimum threshold. In such case, the sale will result in ordinary income to the client.
(vi) Once the replacement security is sold, ETCM invests the proceeds in the account in accordance with the applicable investment strategy. If a new account is opened during this 30-day restricted period and the investment strategy selected for the client’s account calls for the account to be invested in a security that was harvested in another Core account, the account will instead be invested in a replacement ETF, with similar risk and asset class characteristics, during the restricted period. Once the restricted period ends, ETCM will seek to invest in the security originally mandated by the investment strategy in a tax-efficient manner. There is no guarantee that any harvesting request will achieve any particular tax result. ETCM does not provide clients with any tax advice in connection with tax-loss harvesting. Tax-loss harvesting may adversely affect the investment performance of a client’s account.
ETCM actively manages Core accounts that use certain client-selected strategies. ETCM allows clients to select secondary portfolio strategies, including either smart beta or socially responsible investment holdings (“Client-Selected Strategies”), within the portfolio strategy for Core. Clients acknowledge and agree that ETCM is not providing investment advice regarding a client’s decision to use a Client-Selected Strategy and related investments, nor is ETCM advising on the prudence of such selections. Clients should be cognizant when choosing a Client-Selected Strategy that that portion of the portfolio could perform differently from other strategies available through Core. Therefore, the Client-Selected Strategy could meet certain personal investment preferences, but clients need to consider whether these strategies are in their best interest (or that of the Retirement Account). Client-Selected Strategies are also available in other advisory programs.
ETCM Wrap Fee Programs do not hold securities issued by BNY Mellon or its affiliates. Manager Models may include Morgan Stanley equity stock. Lockwood does not manage mutual funds or ETFs. Investment advisers constructing Strategist Portfolios and/or their affiliates manage or provide services to mutual funds or ETFs in the Strategist Portfolios (see more information about Strategist Portfolios below). Certain Morgan Stanley affiliates advise or manage mutual funds and ETFs. ETCM offerings can include advisory solutions and/or investments that are affiliated with Morgan Stanley. For more information regarding the treatment of these affiliated products, please see below. Furthermore, Lockwood and/or its affiliates are service providers, such as a trustee or an administrator, for mutual funds or ETFs used in Wrap Fee Program models; and, depending on the fund, Lockwood and/or its affiliates will receive a fee from the mutual fund or ETF for performing such services. Although these relationships represent a potential conflict of interest, Lockwood has indicated in its Co-Sponsored Programs Wrap Fee Program Brochure that it does not receive a portion of mutual fund or ETF management fees and it does not consider trustee or administrative fees received by an affiliate in its selection or retention of investment vehicles. ETCM does not consider Lockwood’s other service provider relationships when selecting holdings for its managed account portfolios. For additional information regarding these potential conflicts of interest, please refer to Lockwood’s Co- Sponsored Programs Wrap Fee Program Brochure or an individual Portfolio Manager’s ADV Part 2A, which are available on request. ETCM’s managed accounts are not intended solely as cash management or income vehicles. The portfolios seek total return rather than to maximize portfolio yields. “Total return” is defined by ETCM as an effort to produce the most efficient return for a given level of risk.
Each of the advisory firms for the Wrap Fee Programs has discretionary authority over its respective clients’ assets, and each has the authority to determine, without obtaining specific- client consent, the securities (or amount of securities) to be bought or sold in a client’s Wrap Fee Program account. ETCM prohibits clients from purchasing and selling securities in their Wrap Fee Program accounts and has instituted a block on purchases and sales by clients in those accounts. All brokerage accounts enrolled in a Wrap Fee Program (“Advisory Account” or “Wrap Fee Programs Account”) are subject to the terms of the E*TRADE Customer Agreement. In addition, Wrap Fee Program accounts are subject to the Advisory Agreement for E*TRADE Capital Management, LLC (“Advisory Agreement”), between the client and ETCM and with ETCM and Lockwood as co-advisers for Dedicated and FIP accounts. By signing the Advisory Agreement, clients acknowledge that they have been presented with a choice of, and information regarding, ETCM advisory programs. ETS provides clients with an account statement at least quarterly. Clients authorize ETCM to instruct ETS to deliver any prospectuses for mutual funds and ETFs held in advisory accounts to ETCM as the investment adviser and agent for those client accounts. Clients are able to review a prospectus or summary prospectus by visiting etrade.com/mutualfunds or etrade.com/etf or on request.
Investments in securities and other instruments involve risk and will not always be profitable. ETCM does not guarantee the results of any investment advice. In addition, ETCM does not guarantee that the objectives of the client’s Wrap Fee Program account will be met. The advice provided to the client pertains only to the account enrolled in the Wrap Fee Program. The advice does not cover other assets outside the account unless expressly stated by ETCM or IARs.
ETCM (for Core and Blend), Lockwood (for Dedicated), and the Portfolio Managers (for FIP) reserve the right to add or delete any security types (e.g., debt securities) and to add to, delete from, or otherwise change the list of Advisory Assets at any time. Subsequent changes to the list of Advisory Assets does not mean a particular client portfolio will change.
Margin accounts are not permitted in the Wrap Fee Programs. The Wrap Fee Programs are not leveraged and do not engage in short selling. Certain cash management features that are available to other accounts held with ETCM’s broker-dealer affiliate are not available to ETCM accounts, such as Bill Pay, debit cards, and check writing, or require that the client submit a transaction request to ETCM.
It is important that clients remember that past performance is not a guarantee of future results and that market, interest rate, and other investment-related risks exist that have the ability to adversely affect the performance of securities held in the Wrap Fee Program account and cause losses in the account.
Core Portfolios Core is offered through etrade.com and is accessible on the internet on a variety of mobile platforms. Although clients determine on their own whether Core is right for their investment needs, they have the ability to call the Core Portfolios Support Team with questions prior to enrolling. For clients electing to enroll in Core, the investment process starts with clients’ first answering a questionnaire and then selecting an initial portfolio strategy and, when appropriate, a secondary portfolio strategy. Clients are provided with an Investment Proposal describing an asset allocation strategy and a diversified portfolio of ETFs appropriate to the client’s Investor Profile. Clients who enter a relatively short-term time horizon will receive an Investment Proposal for a relatively conservative portfolio strategy.
It is very important that clients update their Investor Profile online when there have been material changes to their attitude toward risk or their financial situation. Updating their Investor Profile promptly will help ensure that their portfolio strategy

is customized to their needs.
Core rebalancing parameters differ depending on total balance and other factors, including but not limited to deposits and withdrawals. Clients who open a Core account and partially fund the account below the minimum are invested in the cash sweep option until such time as the client deposits the account minimum. For accounts funded above the minimum, Core rebalances according to both a calendar based and relative drift rebalancing. With drift rebalancing, Core is rebalanced by comparing the client portfolio allocations with the target allocation drift parameters each trading day after the markets are closed and submitting trade orders the following trading day, when necessary, to bring the portfolio into alignment with target allocations. Core also has a calendar rebalancing feature whereby Core accounts enrolled for at least six months are automatically rebalanced on a semiannual basis. Core accounts are rebalanced when material deposits or withdrawals are made to the account. Out-of-tolerance parameters and/or rebalancing methodologies are subject to change.
Depending on the amount of money invested by clients, Core accounts hold whole shares and/or interest in fractional shares of ETFs (“fractional shares”). Fractional share trading is offered as an accommodation and an investment advisory service to Core accounts. The potential benefits of this feature include but are not limited to gaining access to professional management with low initial minimum investments, achieving greater portfolio diversification by allowing investors to hold more positions and asset classes within their portfolios, and lowering cash holdings. Clients holding fractional shares can see these portfolio positions reported in US dollars or shares. Fractional shares are typically not recognized outside the ETS trading platform, are illiquid, cannot be sold directly into the market, and cannot be transferred via an automated clearinghouse.
For Core clients, interaction with ETCM will generally be limited to the automated Core web-based interface. Certain exceptions apply, and clients are able to consult the Core Portfolios Support Team by calling 866-484-3658. Blend Portfolios (closed to new accounts) Prior to enrolling clients in Blend, IARs interview clients to determine their financial needs and objectives. The IARs gather and analyze client profile and risk tolerance information. This review includes but is not limited to the client’s financial situation, investment goals, liquidity needs, planned investment time horizon, investment restrictions, risk tolerance, consideration for tax sensitivity, investment experience, and the source of funds to be invested. The IAR analyzes the information, and if the IAR believes that Blend is in the client’s best interest, the prospective client is provided with an Investment Proposal describing an asset allocation strategy and a diversified investment portfolio of mutual funds and/or ETFs. Whether a Blend account is in the client’s best interest depends on a number of factors, including the size of the account, the amount of trading expected in the Blend account as compared with accounts that do not charge a wrap fee, the client’s risk tolerance, the client’s financial needs and circumstances, and the fees charged.
Portfolio holdings in Strategist Portfolios are selected by Strategist Managers. ETCM does, however, review and approve the Strategist Portfolios offered by Strategist Managers. Depending on its relationship with the Strategist Managers and the investments that are offered by ETCM and its affiliates, ETCM may not be required nor able to adhere to updates provided to Strategist Portfolios by Strategist Managers. Clients do not pay any additional advisory fee to ETCM or Strategist Managers for the use of a Strategist Portfolio even though ETCM does pay a portion of its advisory fee to MSIM for the MSIM Strategist Portfolios. Investments selected for a Strategist Portfolio may not perform as anticipated and may be subject to higher fees and expenses than other investment products that could have been selected for such Strategist Portfolio. Additional information on such Strategist Managers is available in each firm’s Form ADV Firm Brochure, which can be found on the SEC’s website (adviserinfo.sec.gov) and is available on request. Additional risks with respect to each underlying fund are set forth in the offering documents, which are generally publicly available on the internet.
Strategist Managers are not acting as investment advisers to ETCM clients, nor are they responsible for executing investments associated with the use of a Strategist Portfolio. In fact, Strategist Managers have no contractual relationship with ETCM clients and no obligation to supervise or monitor the investment advisory or other services provided by ETCM. Strategist Managers also do not provide any legal, tax, or accounting advice to ETCM clients by constructing the Strategist Portfolios, nor do they provide any determination as to whether a Strategist Portfolio is advisable for an ETCM client. Strategist Managers have no obligation to, and will not, take into account the tax status, investment goals, or other characteristics of any client when compiling the Strategist Portfolios.
If a client receives a recommendation for a Strategist Portfolio, ETCM will make investments consistent with the structure of the Strategist Portfolio, monitor the client’s account, and advise the client regarding the client’s portfolio strategy.
There is a strong likelihood that Strategist Portfolios will be composed at least partly, if not mostly or entirely, of mutual funds and/or ETFs managed and sponsored by Strategist Managers, and Strategist Managers will receive fees related to the management of any proprietary ETFs and mutual funds. In fact, a Strategist Manager can generally be expected to select investments sponsored by it or its affiliates without considering or canvassing the universe of potential investments sponsored by persons not affiliated with the Strategist Manager or its affiliates (“Third-Party Funds”), even though there may (or may not) be one or more Third-Party Funds that may be more appropriate for inclusion in the Model Portfolio. Certain Strategist Managers will use a Third-Party Fund only if an appropriate investment sponsored by it or its affiliates is not available. The MSIM Strategist Portfolios hold both affiliated funds and unaffiliated funds. As such, Strategist Managers will be incentivized to include affiliated funds in the Strategist Portfolio and disincentivized to remove an affiliated fund from a Strategist Portfolio. Assets invested in affiliated funds are not included in the assets under management calculation of the Advisory Fee. MSSB Strategist Portfolios do not hold affiliated funds and primarily invest in unaffiliated ETFs. MSSB Strategist Portfolios reserve the right to hold affiliated funds in the future. There may be timing differences in the receipt by ETCM of updates to a Strategist Portfolio and the receipt of updates by other persons. Because of the timing differences, a Strategist Manager may have taken action or advised other clients it may have, with respect to changes in a Strategist Portfolio, before communicating the information to ETCM. As a result, other clients may have already commenced trading for their own clients before ETCM has received or had the opportunity to make available on its platform updates to a Strategist Portfolio. In this circumstance, trade orders ultimately placed for or on behalf of ETCM clients by ETCM (or ETS) may be subject to price movements, particularly with respect to large orders or where the securities are thinly traded. As a result, the ETCM accounts using a Strategist Portfolio may not track the Strategist Portfolio and may receive prices that are less favorable than the prices obtained by Strategist Managers or their affiliates for their client accounts. Furthermore, any delay in the communication or receipt of updates to a Strategist Portfolio may in certain instances reduce or eliminate the Strategist Portfolio’s usefulness to ETCM and its clients.
Blend uses a rebalancing methodology based on ETCM’s portfolio allocation drift parameters. Blend is rebalanced by comparing the client portfolio allocations with the target allocation drift parameters each trading day after the markets are closed and submitting trade orders the following trading day, when necessary, to bring the portfolio into alignment with target allocations. Blend also has a calendar rebalancing feature whereby Blend accounts enrolled for at least six months are automatically rebalanced on a semiannual basis. Strategist Portfolios rely on asset allocation updates, changes to portfolio investment holdings, and/ or rebalancing instructions from the third-party Strategist Managers and do not follow drift and/or calendar rebalancing. Out-of-tolerance parameters and/or rebalancing methodologies are subject to change.
Advisory Assets in Blend are limited to ETFs, shares of no-load mutual funds, and load-waived A-shares or institutional class shares of mutual funds.
Blend Portfolios accounts are serviced by a dedicated IAR or team of IARs available at 800-760-9036.
Dedicated Portfolios (closed to new accounts; existing accounts to be terminated around August 2023) Dedicated accounts are limited to ETFs, no-load mutual funds, load-waived A-shares, institutional class shares of mutual funds, and Manager Models that invest in individual stocks.
Prior to enrolling clients in Dedicated, ETCM IARs interview clients to determine their financial needs and objectives and to gather Investor Profile information. The IAR’s client review includes, but is not limited to, the client’s financial situation, investment goals, liquidity needs, planned investment time horizon, investment restrictions, risk tolerance, consideration for tax sensitivity, investment experience, and the source of funds to be invested. The IAR analyzes the information, and if the IAR believes that Dedicated is in the client’s best interest, the prospective client is provided with an Investment Proposal that describes an asset allocation strategy and a diversified or focused investment portfolio.
In response to changing economic and market conditions or the investment performance of various sectors of the markets, but not in response to market-timing considerations, IARs, at their discretion, periodically advise changes to the allocation among mutual funds, ETFs, or Manager Models within the designated asset classes.
Dedicated uses a rebalancing methodology based on portfolio allocation drift parameters. Dedicated is rebalanced by comparing the client portfolio allocations with the target allocation drift parameters each trading day after the markets are closed and submitting trade orders the following trading day, when necessary, to bring the portfolio into alignment with target allocations. Dedicated also has a calendar rebalancing feature whereby Dedicated accounts enrolled for at least six months are rebalanced on a semiannual basis. Calendar rebalancing is currently not available for certain Dedicated accounts due to the concentrated nature of the account holdings. Out-of-tolerance parameters and/or rebalancing methodologies are subject to change. As ETCM is a co-adviser with Lockwood for Dedicated Portfolios, please review Lockwood’s Co-Sponsored Programs Wrap Fee Program Brochure for additional information concerning applicable topics discussed in this Brochure. Dedicated accounts are not leveraged, and they do not directly engage in short selling.
As co-advisers and co-sponsors, ETCM and Lockwood have different roles and responsibilities with respect to managing Dedicated accounts.
ETCM’s key responsibilities primarily relate to the following: initial and ongoing evaluation of client investment objectives and risk tolerance; discretion to invest a portfolio of the Dedicated accounts in ETFs, no-load mutual funds, load-waived A-shares, and institutional class shares of mutual funds; initial and ongoing determination of appropriate Manager Models to be used in the portion of the Advisory Account that invests in Manager Models of the Dedicated account and the asset allocations that meet client investment objectives and risk tolerances; performance of ongoing consultations regarding changes in client investment objectives and reasonable investment restrictions; and monitoring of accounts to determine whether rebalancing is required to maintain asset allocations within the range of target allocations. ETCM does not, however, have discretion to select individual equities in the Manager Model portion of the Dedicated account.
Lockwood’s key responsibilities primarily relate to the following: applying research, risk and quantitative analysis, and other screening methodologies to evaluate and select a universe of mutual funds and ETFs available for use in account construction; reviewing account rebalancing needed to maintain investment allocation within the range of target allocations; providing oversight of the construction of accounts that are designed to meet clients’ objectives and risk tolerances; serving as the overlay manager that evaluates the performance, investment process, and investment style consistency of Model Managers that have been assigned to manage a Manager Model; exercising investment discretion to implement the Manager Model portion of the Dedicated account; and managing the overall trading activity in the portfolios.
In addition, ETCM, as co-sponsor, is responsible for helping clients complete an Investor Profile and defining each client’s investment strategy. ETCM is also responsible for interacting directly with clients.
Dedicated accounts are serviced by a dedicated IAR or team of IARs available at 800-760-9036.
Lockwood, as co-sponsor, is also responsible for the systems and discretionary investment services required to implement a client’s investment strategy. Although Lockwood and ETCM each have discretionary trading authorization, Lockwood primarily sends trade instructions to the executing broker for Dedicated accounts.
In certain instances, and when appropriate, IARs will work with prospective clients to design Dedicated accounts that are concentrated in one or two asset classes, using a small number of Manager Models and/or other Advisory Assets, and are not fully diversified. Clients interested in this type of concentrated strategy will need to provide additional investment information to the IAR and be comfortable with the risks associated with a portfolio that is not diversified among several different asset classes. IARs, at their discretion, will periodically, and if necessary, advise changes to the allocation within designated asset classes that are part of Dedicated’s Advisory Assets. These potential changes to portfolio strategies could be in response to changing economic and market conditions or the investment performance of various sectors of the markets but not in response to market-timing considerations. Reasonable restrictions involving the securities selected for use in Dedicated are available on client request. The cash position in Dedicated could increase depending on the number and type of investment restrictions the client requests.
Fixed Income Portfolios (closed to new accounts) In connection with FIP, Lockwood and ETCM make available certain FIP investment styles provided by various Portfolio Managers. Portfolio Managers and investment styles are approved by Lockwood and ETCM for inclusion in this program. ETCM has closed the following investment styles within FIP to new client accounts: Active Municipal Bond Portfolios; Active Taxable Bond Portfolios; and Corporate Bond Ladder Portfolios. ETCM continues to offer Municipal Bond Ladder Portfolios. There are no changes to the ongoing portfolio management of existing FIP accounts. Prior to enrolling clients in FIP, ETCM IARs interview clients to determine their financial needs and objectives, compiling the Investor Profile. An IAR’s client review includes, but is not limited to, a client’s financial situation, investment goals, liquidity needs, time horizon, investment restrictions, risk tolerance, consideration for tax sensitivity, investment experience, and the source of funds to be invested. An IAR analyzes the information, and if the IAR believes that FIP is in the client’s best interest, a prospective client is provided with an Investment Proposal that describes the FIP portfolio strategy, as well as information about the Portfolio Manager.
ETCM provides clients with advice in connection with clients’ initial selection of the Portfolio Managers and FIP investment styles made available by Lockwood.
Lockwood has the authority to add and remove Portfolio Managers and FIP investment styles available in the program. Lockwood, at its discretion, reserves the right to remove an investment style and replace it with another investment style from the same or a different Portfolio Manager if the particular investment style fails to meet Lockwood’s defined screening criteria.
Portfolio Managers make all individual security investment decisions in connection with the FIP program. FIP accounts are rebalanced manually at the Portfolio Manager’s discretion. As the co-advisers and co-sponsors, ETCM and Lockwood have different roles and responsibilities with respect to managing FIP accounts.
ETCM’s key responsibilities primarily relate to the following: initial and ongoing evaluation of client investment objectives and risk tolerance; initial and ongoing determination of appropriate Portfolio Manager(s) to be used and the asset allocations that meet client investment objectives and risk tolerances; and performance of ongoing consultations regarding changes in client investment objectives and reasonable investment restrictions.
Lockwood’s key responsibilities primarily relate to the following: applying research, risk and quantitative analysis, and other screening methodologies to evaluate and select a universe of Portfolio Managers; providing oversight of Portfolio Managers, including providing ETCM with investment matrixes and research scorecards with respect to Portfolio Managers’ qualitative narrative and investment philosophy; and overseeing Portfolio Managers’ trading activity in the portfolios and providing ETCM with information regarding same.
In addition, ETCM, in its role as co-sponsor, is responsible for helping clients complete the Investor Profile and defining each client’s investment strategy. ETCM is also responsible for interacting with clients.
Lockwood, in its role as co-sponsor, is responsible for the systems and discretionary investment services required to implement a client’s investment strategy.
FIP accounts are serviced by a dedicated IAR or team of IARs available at 800-760-9036.
Fees ETCM’s Wrap Fee Programs are investment advisory programs whereby clients pay a single Advisory Fee for investment advice and for brokerage, custodial, administrative, and technological services. Clients should review and consider if they would pay more or less than when purchasing such services separately, depending on commission rates and portfolio trading activity. When assessing a Wrap Fee Program’s cost, clients should consider the amount of trading activity they anticipate, other Wrap Fee Programs offered by ETCM or its affiliates, and factors such as commission rates, their investment experience and knowledge, and their availability to monitor and rebalance investments. Mutual funds and ETFs charge underlying fees and expenses that are separate and apart from the Advisory Fee charged by ETCM. When feasible, ETCM selects mutual fund and ETF institutional share classes that typically charge lower underlying fees and expenses. ETS waives its revenue-sharing payments from mutual funds and ETFs in ETCM’s Wrap Fee Programs. FIP transactions executed by unaffiliated broker-dealers include additional fees and expenses, including but not limited to clearinghouse fees; SEC fees; odd-lot differentials; electronic fund and wire transfer fees; platform service and access fees; and ticket charges, commissions, markups, and markdowns or “spreads” paid to market makers. In assessing the overall cost of the program, FIP clients should review their Portfolio Managers’ brochures regarding trade execution practices and consider the amount of anticipated trading activity. Each Portfolio Manager is required to consider and take into account the execution costs that participating clients will incur in connection with proposed FIP trades.
In the Dedicated and FIP programs, Lockwood pays management fees directly to the Model Managers or Portfolio Managers as part of the agreement between Lockwood and ETCM.
Clients prepay the monthly Advisory Fee, as indicated in the following Wrap Fee Program fee schedules. The specific Advisory Fee for your Wrap Fee Program is listed in your Investment Proposal. Fees are subject to change on reasonable notice. Generally, the initial Advisory Fee is due in full on the date you sign the Agreement and fund the Advisory Account with the minimum investment amount. The Advisory Fee is based on the market value of assets, excluding any affiliated funds, in the account on or about that date. The initial Advisory Fee payment generally covers the period from the Advisory Account enrollment date through the last business day of the applicable billing period and is prorated accordingly. Thereafter, the Advisory Fee is paid monthly in advance based on the Advisory Account’s market value on the last business day of the previous billing month and is due promptly. Advisory Fees are deducted from Wrap Fee Program accounts, generally from a cash position maintained in the client’s Wrap Fee Program account. In some instances, for Blend, Dedicated, and FIP, ETCM has the ability to deduct the fee from an alternate billing account designated by the client and agreed to by ETCM. If a debit (negative) balance occurs in the client’s account due to insufficient funds, the Advisory Fee will be paid by ETCM’s liquidating sufficient securities in the Wrap Fee Program account to cover the debit balance. Clients will need to weigh the effect of such liquidations on account performance.
The amount of the Advisory Fee depends on the market value of all assets, including cash balances, but excluding affiliated funds, in the account. Advisory Fees do not cover ongoing fund management fees and expenses of any mutual fund or ETF purchased in or transferred into a client’s account. Assets in the account are not subject to ordinary transaction fees (e.g., commissions or markups/markdowns).
The Advisory Fee does not cover, and the client will be additionally responsible and charged for, applicable brokerage commissions, markups, markdowns, and other transaction charges for trades executed at the client’s request at broker-dealer firms other than ETS and its affiliates (although the client’s Wrap Fee Program account will be blocked from any purchases and sales by the client). Other transaction charges and fees typically include, but are not limited to, custody, transfer, and stamp taxes; exchange and conversion fees (including with respect to mutual fund exchanges, American Depository Receipt conversions, and conversions of convertible bonds); clearinghouse fees; SEC fees; odd-lot differentials; electronic fund and wire transfer fees; platform service and access fees; account transfer fees; auction fees; debit balances; margin interest; and charges that may be imposed by law.
Clients should review the Form ADV Part 2A Brochures of Lockwood and the Portfolio Managers for more information regarding such brokerage practices as “trading away” and “step-out trades” and conflicts of interest and consider any additional expenses. Advisory Fees do not cover costs associated with assets held outside the program accounts or charges associated with other accounts that the client has with ETCM or its affiliates, including, without limitation, transaction charges relating to a purchase of Advisory Assets that the client elects to make outside ETCM’s advisory accounts.
ETCM has the sole discretion to waive or rebate Advisory Fees, in whole or in part, including in connection with both promotional efforts and investment management services offered to employees, affiliates’ employees, and certain former employees.
Wrap Fee Program Fee Schedules Fees Are Negotiable Wrap Fee Program Advisory Fees are negotiable and depend on such considerations as the following: the aggregate assets contained in all of the client’s ETCM and ETS accounts, the amount of time the client has had the aforementioned accounts, the total amount of business the client conducts with ETCM and its affiliates, and other factors. Breakpoints Fee schedules for Wrap Fee Programs, except for Core, are expressed as a schedule of rates applying to different asset levels, or “breakpoints.” Wrap Fee Program fee schedules that contain breakpoints are assessed an Advisory Fee at a blended rate.
As the market value of the Advisory Account reaches a higher breakpoint, as shown below, the incremental assets above each breakpoint category are charged the applicable fee rate. The effective fee rate for the account is a weighted average of the scheduled fee rates, sometimes referred to as “blended rate.” The blended rate may change with fluctuations in the account asset level. Householding When two or more investment Advisory Accounts are grouped together for billing purposes, clients can benefit even more from existing breakpoints. When determining the account size for purposes of the Wrap Fee Program Advisory Fee schedule, ETCM offers a householding fee program, sometimes referred to as “accounts related for billing purposes,” whereby the firm aggregates assets in multiple related ETCM Wrap Fee Program accounts and applies the aggregated balance to the breakpoint tier in the applicable fee schedule. ETCM uses the client’s Social Security number and current mailing address available on its platform to identify accounts that are eligible for householding. ETCM uses a best-efforts basis to link related accounts for billing purposes. Clients should confirm with their IAR that householding is set up on their related accounts.
If you have two managed accounts, the applicable fee on account 1 is calculated by applying your total grouped managed account assets (account 1 assets plus account 2 assets) to the account 1 tiered fee schedule. Similarly, account 2 fees are calculated by applying the total grouped managed account assets to the account 2-tiered fee schedule. If the total assets are sufficient to reach the next fee breakpoint for each managed account fee schedule, the client will benefit from a lower overall Advisory Fee.
ETCM cannot guarantee that clients who enroll in an advisory program and terminate in the same quarter will be enrolled in householding.
Valuation of Account Assets ETCM relies on ETS to determine the value of the assets in the account to calculate the Advisory Fee. The values used by ETS are not always the same prices achieved in actual transactions and, in some cases, represent dealer bids or offers that would be achievable only for orders of a particular size. In valuing assets, ETS uses information provided by recognized independent quotation and valuation services. Additionally, in instances where trades were executed at the very end of a calendar month or quarter, but the trades did not settle in the same month or quarter, brokerage account statements will reflect the execution price and not the most recent market price on the last day of the month or quarter. If any information provided by these services is unavailable or is believed to be unreliable, we will value any securities and investments in the account in a manner we determine in good faith to reflect fair market value. Account assets invested in open-end mutual funds will be valued based on the mutual fund’s net asset value calculated as of the close of business on the valuation date, per the terms of the applicable mutual fund prospectus. ETS has the ability to use a variety of sources for valuing Wrap Fee Program account assets, including third-party vendors. Deposits and Withdrawals Clients can make deposits into their account at any time. ETCM reserves the right to require clients to provide up to six days’ prior verbal or written notice to a licensed representative or the Managed Account Team member for withdrawals of assets from their account, subject to the usual and customary securities settlement procedures. No fee adjustments are made during any billing period for deposits or withdrawals. No fee adjustments are made during any billing period for appreciation or depreciation in the value of account assets during that period. If the account is terminated by either party, clients are entitled to a prorated refund of any prepaid Advisory Fee. Other Fee Information ETCM retains some of the fees it receives for advisory and portfolio management services and distributes the remaining portion to ETS in payment for services rendered for brokerage, custodial, and clearing services. ETCM also pays a portion of the advisory fee charged on non- proprietary assets in MSIM Strategist Portfolios with MSIM. For Dedicated and FIP, a portion of ETCM’s fee is used to compensate Lockwood for its services as co-adviser and co-sponsor. For information about Lockwood’s payments to Portfolio Managers and Model Managers, please consult its Co-Sponsored Programs Wrap Fee Program Brochure.
ERISA fee disclosure for qualified Retirement Accounts. In accordance with Department of Labor regulations under Section 408(b)(2) of ERISA, ETCM is required to provide certain information regarding our services and compensation to help fiduciaries and plan sponsors of those Retirement Accounts that are subject to the requirements of ERISA in assessing the reasonableness of their plan’s contracts or arrangements with us, including the reasonableness of our compensation. This information (the services we provide as well as the fees) is provided to you at the outset of your relationship with us and is set forth in this Brochure and in your Advisory Agreement (including any fee table and other exhibits) and then at least annually to the extent that there are changes to any investment-related disclosures for services provided as a fiduciary under ERISA.
Affiliates of ETCM provide marketing, shareholder service, distribution, administration, bookkeeping, or Rule 12b-1 fees (“Revenue Share”) for such services. These fees are disclosed in each mutual fund’s prospectus. Depending on the relationship between ETS and the mutual fund company, the amount of these fees due to ETCM or its affiliates will be withheld by the mutual fund clearing company. ETCM does not take into consideration Revenue Share when choosing or determining selection criteria for mutual funds and ETFs. With regard to Title I ERISA accounts, ETCM relies on being a level-fee fiduciary for the ongoing management of the Wrap Fee Programs. If ETCM uses an affiliated fund, assets invested in the affiliated fund are not included in the calculation of the Advisory Fee.
In certain circumstances, due to an error by ETCM or a third-party vendor, if clients are owed by ETCM a monetary credit of less than $5, the proceeds of the credit will be donated to an investor education charity. A monetary credit of $5 or more will be credited to the advisory account. Regarding terminated accounts, ETCM will make commercially reasonable efforts to provide the credited amount to former clients.
Core Portfolios Fee Schedule The following reflects the standard Advisory Fee charged to Core clients.
Account Market ValueAnnual Advisory Fee $500 and over0.30% Blend Portfolios Fee Schedule The following reflects the standard blended Advisory Fee charged to Blend clients.
Account Market ValueAnnual Advisory Fee First $100,0000.90% Next $150,0000.80% Next $250,0000.75% Next $500,0000.70% Next $1,000,000 and over 0.65% Dedicated Portfolios Fee Schedule The following reflects the standard blended Advisory Fee charged to Dedicated clients.
Account Market ValueAnnual Advisory Fee First $1,000,0001.25% Next $1,000,0001.15% Next $3,000,0001.10% Next $5,000,000 and over 0.95% Fixed Income Portfolios Fee Schedule The following reflects the standard blended Advisory Fee charged to FIP clients.
Account Market Value Bond Ladder Annual Advisory Fee Actively Managed Annual Advisory Fee First $1,000,000 0.45%0.75% Next $2,000,0000.40%0.70% Next $3,000,000 and over0.35%0.65% Compensation IARs and Core Portfolios Support Team representatives supporting ETCM products are paid a base salary and discretionary bonus.
In addition, IARs supporting Dedicated, Blend, and FIP offerings are, under certain circumstances, incented to promote certain advisory programs or products over others and/or services from ETS, Morgan Stanley, and its affiliates, including referrals to MSSB. These incentives include compensation based on the amount of assets transferred to certain Morgan Stanley branded accounts. This compensation does not vary depending on whether services from Morgan Stanley are brokerage or investment advisory. All payments are administered in accordance with the provisions of a written compensation plan that is administered and supervised by the Human Resources Department and/or other independent units of Morgan Stanley. All written compensation plans are subject to change.
Uninvested Cash Generally, some portion of a client’s portfolio will be held in cash. Uninvested cash balances are invested daily in a money market mutual fund or other short-term cash vehicles (“Sweep Options”) that are available through ETS and its affiliates. The Sweep Option is subject to change at any time without notice, and such future changes could include the use of bank sweep deposit programs available through affiliates of Morgan Stanley or its proprietary money market mutual funds. Clients can call 800-387-2331 or a licensed representative at 866-484-3658 to change the Sweep Option or make inquiries regarding available Sweep Options. The yields for the different uninvested cash Sweep Options offered through ETS vary and can be higher or lower than the default Sweep Options for investment advisory programs.
If the Advisory Account is terminated and converted to a self-directed ETS brokerage account, the uninvested cash will be swept into the default Sweep Option offered for such accounts.
Clients could lose money by investing in a money market fund. Because the share price of a money market fund can fluctuate, when a client sells their shares, the price could be worth more or less than what the client originally paid for them. A money market fund has the ability to impose a fee on the sale of the shares or temporarily suspend the client’s ability to sell shares if the fund’s liquidity falls below the minimum requirement because of market conditions or other factors. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. A fund’s sponsor has no legal obligation to provide financial support to the fund, and clients should not expect that the sponsor will provide financial support to the fund at any time.
Performance-Based Fees and Side-by-Side Management ETCM does not charge performance-based fees or engage in side-by-side account management activities. Performance-based fees are based on a share of capital gains or capital appreciation of a client’s account. Side-by-side management is the practice of managing accounts that are charged a performance-based fee while at the same time managing accounts that are not charged.