Item 1 – Cover Page
RiverFront Investment Group, LLC
1214 E. Cary Street
Richmond, VA 23219
August 25, 2020
Form ADV, Part 2A; our “Disclosure Brochure” or “Brochure” as required by the Investment Advisers Act of 1940 is a very important document between Clients (“you”, “your”) and RiverFront Investment Group, LLC (“RiverFront”, “us”, “we”, “our”).
This brochure provides information about the qualifications and business practices of RiverFront Investment Group, LLC. If you have any questions about the contents of this brochure, please contact us at 804-549-4800 and/or firstname.lastname@example.org. The information in this brochure has not been approved or verified by the United States Securities and Exchange Commission (SEC) or by any state securities authority.
Additional information about RiverFront is available at the SEC’s website www.adviserinfo.sec.gov (click on the link, select “Investment Adviser Firm” and type in our firm name). Results will provide you both Part 1 and 2 of our Form ADV.
We are a registered investment adviser with the Securities and Exchange Commission. Our registration as an investment adviser does not imply any level of skill or training. The communications we provide to you, including this Brochure, contain information you can use to evaluate us (and other advisers), which should help you with your decision to hire us or to continue to maintain a mutually beneficial relationship.
Item 2 – Material Changes
1. Material Changes:
The last annual update to the Form ADV Part 2A was filed on March 30, 2020. Since the last annual filing, RiverFront has made the following changes to the Form ADV Part 2A:
• Item 4: RiverFront has entered into a Model Provider agreement with Chautauqua Capital Management (“CCM”), a division of Robert W. Baird & Co., Inc. (“Baird”) whereby CCM provides an investment model that is used to make the investment selections for the RiverFront Chautauqua International ADR (“RCIADR”) portfolio. Baird Financial Corporation (“BFC”) is the parent company of Baird, a registered broker/dealer and investment adviser. CCM and Baird are affiliates of RiverFront via their common ownership under BFC. CCM and Baird are operationally independent from RiverFront.
• Item 5: With regard to the RCIADR portfolio, RiverFront will pay CCM 50% of the advisory fees received from accounts invested in RCIADR portfolio. Furthermore, prior to remitting this portion of advisory fees to CCM, RiverFront will deduct certain agreed upon expenses that are shared between RiverFront and CCM pursuant to the model delivery agreement.
• Item 8: The RiverFront Chautauqua International ADR (“RCIADR”) portfolio solution uses an investment model provided by CCM to determine the investment selections for the RCIADR portfolio. The RCIADR model invests in 25-35 securities in companies that CCM believes possess sustainable competitive advantages and are positioned to benefit from long-term thematic growth opportunities. The strategy will hold positions in several, but not necessarily all, economic sectors. Individual issuers will be headquartered in various regions around the world, primarily excluding the United States.
• Item 10 and Item 14: As part of the model provider agreement between CCM and RiverFront, CCM, from time to time, will provide marketing support in the form of sharing expenses for conferences, meetings, and other events designed to educate clients and potential clients about the RCIADR portfolio. Additionally, CCM is responsible for 50% of the fees charged to RiverFront by SEI Global Services, Inc., its affiliate, or similar third party for performing account reconciliation of accounts managed pursuant to the Model Portfolios. These expenses will be netted out of the model portfolio fees that RiverFront pays CCM. CCM associates will also make themselves available from time to time to assist in the marketing of the RCIADR portfolio. We may, at any time, update this Brochure and either send you a copy or offer to send you a copy (either by electronic means [email] or in hard copy).
2. If you would like another copy of this Brochure, you can either download it from the SEC website as indicated above or contact our Chief Compliance Officer, Julie Gibbs at 804-549-4808 or email@example.com.
Item 3 – Table of Contents
Item 1 – Cover Page ...................................................................................................................................... 1
Item 2 – Material Changes ............................................................................................................................ 2
Item 3 – Table of Contents ............................................................................................................................ 3
Item 4 – Advisory Business .......................................................................................................................... 4
Item 5 – Fees and Compensation .................................................................................................................. 8
Item 6 – Performance-Based Fees and Side-By-Side Management ........................................................... 11
Item 7 – Types of Clients ............................................................................................................................ 11
Item 8 – Methods of Analysis, Investment Strategies, and Risk of Loss .................................................... 11
Item 9 – Disciplinary Information .............................................................................................................. 20
Item 10 – Other Financial Industry Activities and Affiliations .................................................................. 20
Item 11 – Code of Ethics, Participation or Interest in Client Transactions and Personal Trading .............. 21
Item 12 – Brokerage Practices .................................................................................................................... 23
Item 13 – Review of Accounts .................................................................................................................... 27
Item 14 –Client Referrals and Other Compensation ................................................................................... 28
Item 15 – Custody ....................................................................................................................................... 28
Item 16 – Investment Discretion ................................................................................................................. 28
Item 17 – Voting Client Securities (i.e., Proxy Voting).............................................................................. 29
Item 18 – Financial Information ................................................................................................................. 29
Item 4 – Advisory Business
RiverFront Investment Group, LLC is an SEC-registered investment adviser located in Richmond, Virginia. RiverFront was formed in December 2007 and registered with the SEC in February 2008. It is owned primarily by its associates through RiverFront Investment Holding Group, LLC, the holding company for RiverFront. Baird Financial Corporation (“BFC”) is a minority owner of RiverFront Investment Holding Group, LLC, and therefore an indirect owner of RiverFront. BFC is the parent company of Robert W. Baird & Co. Incorporated (“Baird”), a registered broker/dealer and investment adviser.
RiverFront has two main lines of business: (1) we offer model investment portfolios, including Fixed Income, Balanced, and Equity asset allocation model portfolios for a range of investment objectives, risk tolerances and investment themes (each referred to as an “Investment Solution” or “Investment Strategy”) that can be bought through wrap fee programs at dually registered brokerage and investment advisory firms (“Sponsor Firms”); and (2) we serve as a sub-adviser to certain exchange-traded funds (“ETFs”) and mutual funds (“Mutual Funds”). Our Mutual Funds and some of our asset allocation strategies will invest in our sub-advised ETFs.
MODEL PORTFOLIOS OFFERED THROUGH WRAP FEE PROGRAMS
Under wrap fee programs, Sponsor Firms (and the financial advisors at those Sponsor Firms) assist clients with the selection of RiverFront (or they have the discretion to select RiverFront for clients) to manage the assets in accounts maintained at the Sponsor Firm, collect RiverFront’s investment advisory fee on behalf of the client (if any), monitor and evaluate RiverFront’s performance, and provide custodial and execution services for the client’s assets.
RiverFront provides these portfolios on a discretionary or non-discretionary basis through wrap fee programs to Separately Managed Accounts (“SMAs”), Unified Managed Accounts (“UMAs”), and Model Delivery Platforms (“MDPs”). Offerings listed below are as of the date of this ADV 2A and subject to change. For current offerings available at your Sponsor Firm, please visit our website: www.riverfrontig.com and/or contact your Financial Advisor.
In wrap fee programs, clients generally pay an asset-based fee to the Sponsor Firm; out of that fee, the Sponsor Firm is responsible for paying an investment advisory fee to RiverFront. In some circumstances, clients will see those fees payable to RiverFront itemized, and in other cases, they will be aggregated together with the fees charged by the Sponsor Firm. In contrast, clients invested in RiverShares portfolios do not directly or indirectly, through a Sponsor Firm, pay RiverFront such an investment advisory fee.
Clients participating in wrap fee programs also pay other fees, including certain brokerage charges, as further detailed in Item 5 and Item 12 below, and other custodial or administrative charges. In particular, clients pay additional brokerage commissions and/or an undisclosed markup/markdown when their transactions are stepped out, as described more fully in Item 5. For a more complete description of the fees involved with wrap programs, please see Item 5 of this Brochure and your Sponsor Firm’s Brochure.
RiverFront’s asset allocation model portfolios are not tailored to the individual needs of clients. Each Financial Advisor at a Sponsor Firm can suggest which of RiverFront’s model portfolios is most appropriate for that client. In addition, an individual client’s account can be modified by the Sponsor Firm for certain client-imposed restrictions. For more information, please consult your Sponsor Firm. The model portfolios are described briefly below and in more detail in Item 8 of this Brochure.
DIFFERENT TYPES OF WRAP FEE PROGRAM ACCOUNTS
Clients can access our model portfolios through wrap fee program SMA, UMA, or MDP accounts at Sponsor Firms. Below is a brief description of each type of account and discussion of how they differ from each other with respect to RiverFront’s offerings.
A separately managed account (“SMA”) is an individually managed account offered by Sponsor Firms through one of their Financial Advisors and managed by an independent investment management firm (the “investment manager” or “manager”). These programs typically offer a wide array of investment managers from which the client can choose.
When a client (or a client’s Sponsor Firm with discretion) selects an investment manager for an SMA, the client will usually grant the investment manager full discretion (including trading discretion) over the account. With this authority, the manager directs trading activity in the account according to its investment process and securities selection discipline. Trading discretion requires the investment manager to seek best execution for trades executed in the SMA. Each SMA requires its own custodial account. As a result, a client who chooses to invest with multiple managers maintains multiple custodial accounts at the Sponsor Firm – one for each investment manager selected.
If selected to manage the assets in a client’s SMA maintained by a Sponsor Firm, RiverFront will provide investment management services on a discretionary basis to that client in accordance with one or more model portfolios selected by the client. For more information about RiverFront's trading policies, please see Item 12 of this Brochure.
MDPs and UMAs
Model Delivery Platforms (“MDPs”) are wrap program accounts for which RiverFront only provides a model to the Sponsor Firm. Under these arrangements, RiverFront generally provides non-discretionary investment advice through investment models. RiverFront generally does not have discretion, trading or otherwise, over these accounts. These programs are often referred to as SMA Model Delivery Arrangements, Model Manager Sub-Advisory Arrangements, or Model Delivery Platforms. RiverFront does not operationally distinguish between MDP accounts and UMA (as defined below).
Unified Managed Accounts (“UMAs”) are similar to MDPs, but there are important differences that investors should take the time to understand. A UMA combines all of a client’s assets into a single account. While an MDP account holds the securities associated with a single investment manager in a unique custodial account at the Sponsor Firm, a UMA typically holds multiple investment strategies in the same custodial account, as well as other investment products such as mutual funds, individual stocks, or bonds.
In a UMA or MDP account, the investment manager delivers an investment model to the Sponsor Firm and often does not have trading discretion over the account. RiverFront is considered to have limited discretion to select investments for accounts through Morgan Stanley Select UMAs. RiverFront does not place trades or exercise trading discretion for these accounts. Clients should speak to their Financial Advisor about the similarities and differences associated with SMAs, UMAs, and MDP accounts so they fully understand their specific account structure.
Performance Differences between RiverFront SMA, UMA, and MDP Accounts
While RiverFront SMA, UMA, and MDP accounts utilizing the same Investment Solutions may perform similarly, there are expected to be performance differences between them. There will be performance dispersion between UMAs and MDP accounts as compared to SMAs because RiverFront does not have trading discretion over the UMAs and MDP accounts. (For more information on RiverFront’s trading policies and procedures, please see Item 12 of this Brochure.) Also, Advantage SMAs have the ability to use individual fixed income securities, individual equity securities and/or Exchange Traded Products (“ETPs”) to achieve desired investment exposure, whereas ETF Advantage UMAs and MDP accounts use only ETPs. These variances will cause the accounts to achieve different performance. Additionally, Advantage, ETF Advantage, and RiverShares portfolios will contain different investments based on their investment guidelines and usage of different investment products as well as other restrictions.
RIVERFRONT ASSET ALLOCATION MODEL PORTFOLIOS
As pictured below, RiverFront’s seven asset allocation model portfolios can be accessed through Advantage, ETF Advantage, and RiverShares portfolios.
Advantage portfolios are asset allocation portfolios that may be invested in stocks, bonds, and third-party ETPs, which include ETFs and exchange-traded notes (“ETNs”). As noted above, Advantage portfolios are offered through wrap fee programs to SMAs, UMAs, or MDPs, depending on the Sponsor Firm.
ETF Advantage portfolios differ from Advantage portfolios in that they do not hold individual stocks or bonds; rather, they invest predominantly in third-party ETPs. Like Advantage, ETF Advantage portfolios are offered through wrap fee programs to SMAs, UMAs, or MDPs, depending on the Sponsor Firm.
RiverShares portfolios are comprised solely of actively managed ETFs that are sub-advised by RiverFront namely, the “RiverShares-Eligible ETFs”. RiverShares-Eligible ETFs are (1) sub-advised by RiverFront, and (2) pay a sub-advisory fee of 0.35% per annum to RiverFront. As further described in Item 5, RiverFront does not earn any account-level fee for its management of RiverShares portfolios. For more information on the fees and expenses associated with RiverShares portfolios and RiverFront Sub-Advised ETFs, please see Item 5 below. RiverShares portfolios are made available via a password-protected, Advisor-only portion of RiverFront’s website, and through wrap fee programs to SMAs, UMAs, and MDPs, depending on the Sponsor Firm.
RIVERFRONT STRATEGAS POLICY OPPORTUNITIES PORTFOLIO
RiverFront has entered into a Model Provider agreement with Strategas Asset Management (“SAM”), whereby SAM provides an investment model that is used to make the investment selections for the RiverFront Strategas Policy Opportunities (“RSPO”) portfolio. SAM is a registered investment adviser wholly owned by Baird Financial Corporation (“BFC”). BFC is the parent company of Robert W. Baird & Co. Incorporated (“Baird”), a registered broker/dealer and investment adviser. SAM is an affiliate of RiverFront but is operationally independent from RiverFront. The model portfolio is generated by SAM’s affiliate, Strategas Securities, LLC (“STS”), a FINRA member broker-dealer and registered investment adviser. SAM, pursuant to an agreement with STS, is authorized to offer and distribute the model portfolios to its clients, including RiverFront. STS is also wholly owned by Baird and an affiliate of RiverFront. Baird, SAM, STS and RiverFront are all affiliated entities via their common ownership under BFC.
RIVERFRONT CHAUTAUQUA INTERNATIONAL ADR PORTFOLIO
RiverFront has entered into a Model Provider agreement with Chautauqua Capital Management (“CCM”), a division of Robert W. Baird & Co., Inc. (“Baird”) whereby CCM provides an investment model that is used to make the investment selections for the RiverFront Chautauqua International ADR (“RCIADR”) portfolio. Baird Financial Corporation (“BFC”) is the parent company of Baird, a registered broker/dealer and investment adviser. CCM and Baird are affiliates of RiverFront via their common ownership under BFC. CCM and Baird are operationally independent from RiverFront.
SUB-ADVISOR TO ETFS AND MUTUAL FUNDS
RiverFront serves as sub-adviser to certain ETFs and Mutual Funds. Each is described in more detail below.
RiverFront Sub-Advised ETFs
Throughout this document, the term “RiverFront Sub-Advised ETFs” refers to all ETFs sub-advised by RiverFront, including RiverShares-Eligible ETFs. Currently all RiverFront Sub-Advised ETFs are also RiverShares-Eligible ETFs. Certain RiverFront associates, as registered representatives of ALPS Distributors, Inc., actively market the RiverFront Sub-Advised ETFs and Mutual Funds.
RiverFront Sub-Advised ETFs are actively managed ETFs that are sub-advised by RiverFront and advised by either ALPS Advisors, Inc. (“ALPS”) or First Trust Advisors, L.P. (“First Trust” and, with ALPS, collectively the “Advisors”). These ETFs can be purchased individually or as part of RiverShares Investment Solutions. Additionally, the Mutual Funds will invest in RiverFront Sub-Advised ETFs. Each RiverFront Sub-Advised ETF pays the same annual sub-advisory fee of 0.35% to RiverFront. For more information on the investment objectives, principal risks, and fees associated with the RiverFront Sub-Advised ETFs, please see each Fund’s prospectus and statement of additional information (“SAI”), which is available on the Advisors’ websites at alpsfunds.com and ftportfolios.com.
RiverFront Sub-Advised Mutual Funds
RiverFront serves as sub-adviser to a series of mutual funds (each individually, a “Fund” and collectively the “Funds”) that are advised by ALPS. These Funds invest in RiverShares-Eligible ETFs and will follow investment strategies similar to RiverShares asset allocation model portfolios; however, due to investment constraints on the Funds, the weightings of individual ETFs in the mutual fund portfolio and a similar RiverShares portfolio will differ. For more information on the investment objective, principal risks, and fees associated with these Funds, please see each Fund’s prospectus and SAI, which are available on the ALPS website at alpsriverfront.com.
ASSETS UNDER MANAGEMENT
As of December 31, 2019, RiverFront’s discretionary assets under management were $3,189,911,941. Non-discretionary assets under management were $4,106,126,790. The total assets under advisement (discretionary and non-discretionary) were $7,296,038,730. RiverFront’s discretionary assets include all assets it manages through SMAs, Mutual Funds, and RiverFront Sub-Advised ETFs. RiverFront has limited discretion over assets managed through Morgan Stanley’s UMA platform and includes these assets as non-discretionary assets for purposes of calculating assets under management. Non-discretionary assets include all other assets managed through UMAs and MDP accounts.
Item 5 – Fees and Compensation
Advantage, ETF Advantage, RiverFront Strategas Policy Opportunities (“RSPO”) And RiverFront Chautaqua International ADR (“RCIADR”) SMAs
In Advantage, ETF Advantage, RSPO, and RCIADR SMAs, clients generally pay an asset-based fee to the Sponsor Firm; out of that fee, the Sponsor Firm is responsible for paying an investment advisory fee to RiverFront as the manager of the SMA. With regard to the RSPO and the RCIADR portfolios, RiverFront will pay SAM and CCM, respectively, 50% of the advisory fees received from accounts invested in RSPO and RCIADR portfolios. Furthermore, prior to remitting this portion of advisory fees to SAM or RCIADR, RiverFront will deduct certain agreed upon expenses that are shared between RiverFront and SAM or CCM pursuant to the respective model delivery agreements.
RiverFront’s advisory fees are generally charged quarterly in advance or in arrears, depending on the Sponsor Firm or UMA/MDP platform, fees are based on the market value of a client’s assets under management at the end of the prior calendar quarter. These fees are typically deducted by the Sponsor Firm directly from a client’s account. In some cases, negotiation of fees may result in different fees being charged for similar services and may be less than the stated fee schedule. In the event that a client terminates the advisory relationship and fees have been paid in advance, RiverFront’s investment advisory fee is prorated through the effective date of termination, and any remaining balance is refunded to the client. RiverFront will not be compensated on the basis of a share of capital gains or capital appreciation of client accounts. For information on your specific billing schedule, please contact your Financial Advisor.
Advantage, ETF Advantage, RSPO And RCIADR SMA – Contractual Arrangements
Clients who select RiverFront to manage their SMA assets within Advantage, ETF Advantage, RSPO or RCIADR portfolios will typically do so under either a “single contract” or “dual contract” arrangement.
Under a single contract arrangement, the client pays an asset-based fee to the Sponsor Firm; out of that fee, the Sponsor Firm is responsible for paying an investment advisory fee (as described above) to RiverFront. In these programs, the Sponsor Firm and RiverFront enter into a sub-advisory or other agreement under which RiverFront agrees to manage the assets. As part of that agreement, RiverFront and the Sponsor Firm agree on the investment advisory fees to be charged by RiverFront on the assets. RiverFront’s advisory fees are negotiable and will vary from program to program, but typically do not exceed 0.50% per year on assets under management. There are other non-asset-based fees that will be charged to the client as discussed below and in Item 12 of this Brochure.
Under a dual contract arrangement, the client has one contract with the Sponsor Firm and another contract with RiverFront. As such, the client pays RiverFront an investment advisory fee in addition to the asset-based fee they pay to the Sponsor Firm for investment advice, custody, execution, and reporting. RiverFront’s advisory fee is negotiable, but typically does not exceed 0.50% per year on assets under management. Other fees will also apply and are discussed in more detail below and in Item 12 of this Brochure.
Specific information on the investment advisory fees payable to RiverFront under a wrap fee program will be provided by the applicable Sponsor Firm. For information on the asset-based fees charged by the Sponsor Firm, clients should consult with the Sponsor Firm or refer to the Sponsor Firm’s Wrap Fee Program Brochure (also known as ADV Part 2A Appendix 1).
Advantage, ETF Advantage, RSPO And RCIADR UMA/MDPs
RiverFront has agreements with certain Sponsor Firms to provide model portfolios to UMA and MDP clients for a negotiated fee. Under these arrangements RiverFront will not have any direct agreement with the client. RiverFront’s advisory fees are negotiable and will vary from program to program, but do not exceed 0.40% per year on the value of the client assets in the wrap fee program. RiverFront’s fees are generally charged quarterly in advance or in arrears and are based on the market value of a client’s assets under management at the end of the prior calendar quarter. In the event that a client terminates the advisory relationship and fees have been paid in advance, RiverFront’s investment advisory fee is prorated through the effective date of termination, and any remaining balance is refunded to the client. These fees are typically deducted by the Sponsor Firm directly from a client’s account per their agreement with the Sponsor Firm. For information on the specific billing schedule that would be applicable to an account, please contact your Financial Advisor.
RiverShares SMAs And UMA/MDPs
RiverShares portfolio solutions are asset allocation model portfolios that are comprised solely of RiverShares Eligible ETFs, each of which pays the same annual sub-advisory fee to RiverFront. RiverFront does not earn an account-level fee, including from a Sponsor Firm, with respect to SMAs, UMAs, or MDPs that employ a RiverShares model portfolio in an effort to prevent. a client from paying more than once for the investment advice provided by RiverFront. Clients who access RiverShares portfolios through a Sponsor Firm, however, will typically pay fees to the Sponsor Firm. Clients should speak to their Financial Advisor for more information on such fees, as they may vary among Sponsor Firms.
Each RiverShares-Eligible ETF pays RiverFront an annual sub-advisory fee of 0.35%, as described in the next section. This fee structure has been implemented so that RiverFront is not incentivized to choose one RiverShares-Eligible ETF over another for inclusion in RiverShares portfolios.
In the case of tax loss harvesting for RiverShares SMA clients, RiverFront will use third-party ETFs as tax loss position placeholders for the RiverShares Eligible ETFs. The third-party ETFs used for this purpose may cause clients to incur additional fees, expenses, and risks. This and all other tax loss harvesting is a client-directed activity and performed only at the request of individual clients or their Financial Advisors. Clients should speak with their Financial Advisor and/or tax professional for further information.
RiverShares-Eligible ETFs are also available for purchase outside the RiverShares program. Because RiverFront does not earn a fee on the management of the RiverShares model itself, RiverFront earns the same fee whether a client accesses a RiverShares-Eligible ETF through a RiverShares model or an individual account. As is customary with all ETFs, the RiverShares-Eligible ETFs will carry other expenses as detailed in their prospectuses, including an advisory fee paid to the relevant ETF’s Advisor. Investors should carefully read the Eligible ETFs’ prospectuses for further information on the ETFs, their fees, and their risks.
SUBADVISORY SERVICES TO ETFS AND MUTUAL FUNDS
Sub-Advisory Services To ETFs
RiverFront acts as sub-adviser to ETFs (each individually, a “Fund” and collectively the “Funds”) that are advised by either ALPS or First Trust. For its sub-advisory services to these Funds, RiverFront receives an annual sub-advisory fee based on the average daily value of the assets under management in the
Fund(s). In the event the Fund terminates the sub-advisory relationship, RiverFront’s sub-advisory fee is prorated through the effective date of termination and any remaining balance is refunded to the Fund. RiverFront’s annual sub-advisory fee for these Funds is 0.35%. Please see each Fund’s prospectus for applicable fees.
Sub-Advisory Services To Mutual Funds
RiverFront acts as sub-adviser to a series of Mutual Funds (each individually, a “Fund” and collectively the “Funds”) that are advised by ALPS. Because RiverFront uses RiverShares Eligible ETFs (described above) as investments for the Fund portfolios, RiverFront does not receive a sub-advisory fee for the services provided to the Fund. In this way, RiverFront does not receive duplicative investment advisory fees. Please see each Fund’s prospectus and SAI for investment objectives, applicable fees and other important information and disclosures as they relate to the Funds.
ADDITIONAL FEES AND EXPENSES
As described above, RiverFront receives different fees for different services. RiverFront’s management fees are separate and distinct from fees and expenses charged by registered investment companies (i.e., mutual funds, closed-end funds, and ETPs), which are held in client accounts or recommended by RiverFront to clients. A description of these fees and expenses is available in each fund's prospectus.
Additionally, the fees charged by RiverFront are exclusive of all fees paid to Sponsor Firms, custodians, brokers, and other third parties. For a more detailed description of RiverFront’s brokerage practices, please see Item 12. These fees or expenses are what a client pays directly to third parties, whether a security is being purchased, sold, or held in a client’s account(s) through a RiverFront model portfolio. They are paid to broker-dealers, custodians, the mutual fund, or other investment a client holds. The fees can include but are not limited to the following:
• Brokerage commissions, mark ups and mark downs (including step-out costs, which are discussed in detail in Item 12)
• Transaction fees
• Exchange fees
• SEC fees
• Advisory fees and administrative fees charged by mutual funds and/or ETPs
• Custodial Fees
• Deferred sales charges (on mutual funds or annuities)
• Odd-Lot differentials
• Transfer taxes
• Wire transfer and electronic fund processing fees
• ETF creation/redemption fees
Neither RiverFront nor any of its supervised persons accept compensation for the sale of securities or other investment products, including asset-based sales charges or service fees from the sale of mutual funds or ETFs. Certain RiverFront associates receive compensation based in part on gross sales and assets under management of RiverFront’s investment programs and Funds. This compensation received by those associates is structured so that it does not incentivize the sale of any given product over another.
Clients should review all fees charged by RiverFront, Sponsor Firms, custodians, brokers, and others to fully understand the total amount of fees incurred.
Item 6 – Performance-Based Fees and Side-By-Side Management
RiverFront does not currently accept performance-based fees – that is, fees based on a share of capital gains on or capital appreciation of the assets of a client.
Item 7 – Types of Clients
RiverFront provides investment advice to a wide range of clients including, but not limited to, individuals, trusts, estates, pension and profit-sharing plans, charitable organizations, and corporations. RiverFront also serves as sub-adviser to investment companies. The minimum account size depends on the services offered and can be waived at RiverFront’s discretion. Advantage SMA minimums are generally $200,000; ETF Advantage, RiverShares, RSPO and RCIADR SMAs generally require a $100,000 minimum. RiverFront does not have the ability to impose minimums on UMA or MDP accounts. For investment minimums of the RiverFront sub-advised ETFs or Mutual Funds, please see the relevant Fund’s prospectus.
Item 8 – Methods of Analysis, Investment Strategies, and Risk of Loss
ASSET ALLOCATION MODEL PORTFOLIOS
We believe that a successful investment process combines two market forces: value and momentum. We seek to identify strategic relative value as asset classes deviate from established trends, and we structure long-term allocation strategies to capitalize on these relative value assessments. We modify the long-term strategy with tactical tilts designed to accommodate cyclical factors and current trends. The goal of this tactical process is to mute the tendency of a pure value discipline to buy undervalued assets too quickly or sell overvalued assets too soon. We reserve our largest allocations for those asset classes that RiverFront believes represent long-term value and for which RiverFront believes that market momentum has started to turn positive. In other words, our asset allocation Investment Solutions seek to combine value with momentum, making our largest bets when our evaluations of value and momentum are aligned.
Due to the investment strategies and methodologies of RiverFront, our portfolios are subject to high portfolio turnover. Portfolio turnover is defined as a change in the securities held by an account. Higher portfolio turnover is a result of frequent trading and involves correspondingly greater expenses to a client account, including brokerage commissions or dealer mark-ups/mark-downs and other transaction costs on the sale of securities and reinvestments in other securities. Such turnover may also represent tax risk. The trading costs and tax risk associated with portfolio turnover may adversely affect performance.
RiverFront offers seven different asset allocation strategies available in three different types of portfolios (Advantage, ETF Advantage, and RiverShares); these strategies or Investment Solutions are designed to address investor needs for diversified portfolio solutions with defined risk objectives. The seven Investment Solutions are: Dynamic Fixed Income, Conservative Income Builder, Moderate Growth & Income, Dynamic Equity Income, Global Allocation, Global Growth, and International Opportunities. Please refer to the chart in Item 4 for information about how to access the various Investment Solutions.
Our Investment Solutions are based on a multi-layered investment process comprised of the following four steps:
• Strategic Asset Allocation (“SAA”)
• Tactical Adjustments
• Portfolio Construction
• Risk Management
At the beginning of the SAA process, RiverFront utilizes its proprietary Price Matters® framework to set capital markets assumptions. The inputs for Price Matters® reflect RiverFront’s qualitative judgments about market conditions, and the outputs provide return estimates that fall as prices rise and increase as prices fall, consistent with historical market behavior. Downside risks as calculated by Price Matters® are similarly a function of price, as overvalued markets have historically suffered the largest declines. Throughout the year, RiverFront updates its Price Matters® estimates of expected return and downside risks for a wide array of global asset classes. Then, at least annually, RiverFront incorporates the asset class return estimates generated from the Price Matters® process into its Mean Reversion Optimization (“MRO”) process, which quantitatively simulates potential outcomes of combining each asset class based on probability and historical experience. The final SAA guidelines determine asset allocation options for each asset allocation Investment Solution depending on its stated risk tolerance and time horizon, based on the array of potential outcomes generated from the MRO process. The results from the SAA process serve as asset allocation guidelines for the following strategies: Conservative Income Builder, Moderate Growth & Income, Dynamic Equity Income, Global Allocation, and Global Growth. While Dynamic Fixed Income and International Opportunities are also based on the same Price Matters® and MRO disciplines, their specific asset allocation guidelines are generated via a different process than the SAA in order to better model their more specialized focuses on fixed income and international securities, respectively.
Throughout the year, asset allocations for the portfolios will vary from the SAA guidelines when RiverFront’s portfolio management team determines that a modified asset allocation offers better potential returns. These tactical adjustments, or asset allocation “tilts,” will generally be limited to a maximum of 20% variance from each of the SAA targets. For example, Moderate Growth & Income may have an SAA target for fixed income of 50%. As a result, in most instances, this portfolio model’s allocation to fixed income will range between 30% and 70% but may vary outside of this range at RiverFront’s discretion.
Members of the portfolio management team construct portfolios by selecting securities that provide desired exposure based on their asset allocation guidelines. The final layer of the process is risk management, which seeks to proactively and reactively ensure that risk within each portfolio aligns with its stated risk tolerance and current investment strategy.
Each asset allocation Investment Solution is not necessarily offered as an Advantage, ETF Advantage, or a RiverShares portfolio; for example, Dynamic Fixed Income is not currently offered as a RiverShares portfolio or as a Mutual Fund (please refer to the Investment Solutions Overview in Item 4 of this Brochure).
A brief description of each asset allocation Investment Solution is provided below. For additional information on each strategy and the asset classes around which these Investment Solutions are built, please visit the RiverFront website at riverfrontig.com. Note that some Sponsor Firms alter or use their own naming conventions for the strategies.
Fixed Income Solutions
Dynamic Fixed Income is currently the only strategy offered as a Fixed Income Solution. It seeks to provide current income through investments in fixed income securities. While this portfolio typically invests in all fixed income securities, it also has the ability to invest up to 15% in equities such as real estate investment trusts (“REITs”).
Conservative Income Builder seeks to provide income and growth consistent with capital preservation. The strategy targets an allocation of 30% equities and 70% fixed income and a 3- to 5-year investment time horizon. Tactical strategies typically seek to add value by shifting 5% to 10% of the portfolio among
asset classes based on the shorter-term momentum in their economic fundamentals and technical price movements. The portfolio looks across multiple asset classes, including developed international, emerging market, and income-oriented equities. In this portfolio, tactical strategies more aggressively seek to protect against shorter term market fluctuations than our portfolios with higher allocations to equities, even at the risk of reducing long-term appreciation potential.
Moderate Growth & Income seeks to provide growth of capital with an equal emphasis on growth of income. The strategy targets an allocation of 50% equities and 50% fixed income and a 5- to 7-year investment time horizon. Tactical strategies typically seek to add value by shifting 5% to 10% of the portfolio among asset classes. The portfolio looks across multiple asset classes, including developed international, emerging market, and income-oriented equities. Given the investment objective, this strategy may sometimes need to emphasize short-term asset protection even at the risk of reducing long-term appreciation potential.
Dynamic Equity Income seeks to provide growth of capital with income. The strategy targets an allocation of 70% equities and 30% fixed income and a 7- to 10-year investment time horizon. Tactical strategies typically seek to add value by shifting 5% to 10% of the portfolio among asset classes. The portfolio looks across multiple asset classes, including developed international, emerging market, and income-oriented equities. Equities will typically be supplemented by a low to modest allocation to fixed income, offering attractive income and the potential to diversify some of the portfolio’s equity investment risks. Diversification does not ensure a profit or protect against a loss.
Global Allocation seeks to provide high total return. The strategy targets an allocation of 80% equities and 20% fixed income and a 7- to 10-year investment time horizon. Tactical strategies typically seek to add value by shifting 5% to 10% of the portfolio among asset classes. This strategy is typically concentrated in equity investments, including, but not limited to, US, developed international, emerging market, and income-oriented equities, and commodities. Equity investments will typically be supplemented by a modest allocation to fixed income investments, offering reasonable returns and the potential to diversify some of the portfolio’s equity investment risks. Diversification does not ensure a profit or protect against a loss.
Global Growth seeks aggressive growth of capital investment by concentrating in equity investments, including, but not limited to, US, developed international, emerging market, and income-oriented equities, and commodities. The strategy targets an allocation of 100% equities and a 10+ year investment time horizon. Global Growth seeks to tactically add value by shifting 5% to 10% of the portfolio among asset classes based on the shorter-term momentum in their economic fundamentals and technical price movements.
International Opportunities is designed to serve as the broad international equity component within a client's asset allocation mix. The portfolio will generally invest in ETFs that represent a diversified portfolio of securities across the globe, but it also has the ability to invest in individual stocks. In an attempt to outperform its benchmark, the portfolio managers will employ a combination of both qualitative and quantitative analysis, and the general strategies employed typically include, but are not limited to, country, currency hedging, region, sector and/or thematic rotation.
In addition to the above strategies, some RiverFront clients may be invested in the Conservative Growth Strategy. This strategy was closed to new investors as of April 30, 2013. Clients invested in the Conservative Growth Strategy will continue to have their portfolios managed and are allowed to add new assets to their accounts; however, the composition of the portfolio, while still within the initial investment strategy parameters, has evolved to be identical to that of the Moderate Growth & Income Strategy.
ADVANTAGE AND ETF ADVANTAGE
Advantage and ETF Advantage portfolio quality and concentration requirements are established to provide an overall discipline and structure to the portfolios. Advantage Strategies ordinarily include long-
and short-term purchases of equity and/or fixed income securities typically via ETPs, but these strategies will also hold individual companies. ETF Advantage strategies will include long- and short-term purchases of equity and/or fixed income securities, but only via investments in ETPs. ETPs are used to manage sector, asset class, and country/region allocations of the portfolios. Diversification and liquidity are paramount risks in the management of fixed income allocations, and RiverFront seeks to achieve suitable diversification and liquidity levels through investments in ETPs and potentially investments in closed-end funds (“CEFs”). Similarly, the specialized knowledge and transaction costs associated with international equity investing make ETPs, and potentially CEFs, desirable strategies for this sector of the portfolios. For the fixed income and international equity asset classes, investments in ETPs form a core portfolio strategy. Domestic equity investments will be “all cap” in nature and, depending on the portfolio, can take a variety of forms, including individual equity securities, ETPs, and CEFs. Because RiverFront’s asset allocation Investment Solutions typically rely on the use of ETPs, and ETFs in particular, investors should consider the risks inherent to ETPs, including ETFs, before investing in Advantage or ETF Advantage. For information on the material risks associated with ETPs, see “Risks Related to ETPs” below.
Certain strategies may purchase commodities and emerging market debt or equity. Investors in commodity ETPs are likely to be subject to K-1 filings. The income and certain expenses of commodity ETPs are passed through to the owners, who report and pay tax on the income. The K-1 is the form used to report each owner’s share of income and certain expense items.
RiverShares Solutions are asset allocation portfolios comprised solely of RiverShares-Eligible ETFs, as defined above. The models are built based on a quantitative methodology, the inputs for which reflect RiverFront’s qualitative judgments about market conditions. As with the Advantage and ETF Advantage portfolio solutions, RiverShares portfolio solutions are available through SMA, UMA, and MDP wrap programs at participating Sponsor Firms. The models are also available on the password-protected Advisor-only portion of the RiverFront website. RiverShares portfolios are available for six different Investment Solutions: Conservative Income Builder, Moderate Growth & Income, Dynamic Equity Income, Global Allocation, Global Growth, and International Opportunities.
Using Price Matters® assumptions on the asset classes available within the RiverShares-Eligible ETFs, as well as the quantitative MRO results, the RiverShares portfolio team uses the SAA guidelines and then varies the allocation across the investment options to generate the RiverShares portfolios. If the portfolio management team wants to add asset classes to the MRO process beyond those available in the RiverShares-Eligible ETFs, then new RiverShares-Eligible ETFs must be launched with the appropriate mandates, benchmarks, and prospectus disclosure. The portfolio management team may reduce or eliminate an allocation to a RiverShares Eligible ETF consistent with its outlook for that asset class.
While certain RiverShares, Advantage, and ETF Advantage portfolios will have similar strategies and investment objectives, it is important to understand that there will be key differences between RiverShares, Advantage, and ETF Advantage portfolios. First, each program will invest in different securities as described above and will, therefore, perform differently. Further, RiverShares, Advantage, and ETF Advantage portfolios will typically incur different costs/fees (see Item 5 of this Brochure). Also, RiverShares portfolios will target a 2% cash allocation and will enact defensive tactical strategies by shifting portfolio assets into bond ETFs; whereas Advantage and ETF Advantage portfolios may enact defensive tactical strategies by shifting portfolio assets into cash. In periods of market decline, RiverShares portfolios may perform worse than Advantage or ETF Advantage portfolios that can have a higher allocation to cash/cash equivalents should the selected RiverFront Sub-Advised ETF underperform an equivalent cash allocation.
RIVERFRONT STRATEGAS POLICY OPPORTUNITIES PORTFOLIO
As discussed in Item 4 of this Brochure, The RiverFront Strategas Policy Opportunity (“RSPO”) portfolio solution uses the Policy Opportunities Portfolio (“POP”) model, provided by SAM, to determine the investment selections for the RSPO portfolio. The POP model identifies companies listed in the S&P 500 index universe with the highest lobbying strength based on the aggregate amount of dollars spent on lobbying activities by that company relative to the size of the company measured by reference to several fundamental factors (reported in quarterly corporate filings) and market factors (market capitalization, liquidity). The companies are scored in rank order and the top 50 stocks are chosen for inclusion in the model portfolio on an equally-weighted basis. The model portfolio is updated four times per year. RiverFront will generally implement the POP model as delivered from SAM; however, the RSPO portfolio and the POP model will differ for the following reasons: (i) we have implemented a 12 basis- point (basis point =1/100%) tolerance for variance between the RSPO portfolio and the POP model. This variance is put in place to avoid what we believe is unnecessary turnover within the portfolio; (ii) we are required to maintain a 2% cash balance in the portfolio, the POP model does not have this requirement; and (iii) we are only able to make trades in the portfolio that equal at least one share of a specific security, we cannot place trades for a fractional amount of shares.
Specific risks associated with this strategy include (without limitation) political risks, including changes that may impair the ability of companies to affect government policy.
RIVERFRONT CHAUTAUQUA INTERNATIONAL ADR PORTFOLIO
As discussed in Item 4 of this Brochure, The RiverFront Chautauqua International ADR (“RCIADR”) portfolio solution uses an investment model provided by CCM to determine the investment selections for the RCIADR portfolio. The RCIADR model invests in 25-35 securities in companies that CCM believes possess sustainable competitive advantages and are positioned to benefit from long-term thematic growth opportunities. The strategy will hold positions in several, but not necessarily all, economic sectors. Individual issuers will be headquartered in various regions around the world, primarily excluding the United States.
SUBADVISORY SERVICES TO ETFS AND MUTUAL FUNDS
Please refer to each RiverFront Sub-Advised ETF and Mutual Fund prospectus and SAI for information on the investment strategy and methodology of each individual fund.
Risk of Loss
All investments in securities include a risk of loss of principal (invested amount) and any profits that have not been realized (i.e., the securities were not sold to “lock in” the profit). Stock markets and bond markets fluctuate substantially over time, and markets have experienced increased volatility in recent years. As recent global and domestic economic events have indicated, performance of any investment is not guaranteed. As a result, there is a risk of loss of the assets we manage. RiverFront cannot guarantee any level of performance or that account assets will not be lost.
RiverFront does not represent, warrant, or imply that the services or methods of analysis used can or will predict future results, successfully identify market tops or bottoms, or insulate clients from major losses due to market corrections or crashes. No guarantees are offered that clients’ goals or objectives will be achieved. Further, no promises or assumptions can be made that the advisory services offered by RiverFront will provide a better return than other investment strategies.
Varied fluctuations in the price of investments are a normal characteristic of securities markets due to a variety of influences. RiverFront’s managed account programs should be considered a long-term investment; as long-term performance and performance consistency are among our key objectives.
Domestic Equity Market Risks
Under strategies utilizing equity securities, the portfolios are subject to the risk that stock prices may fall over short or extended periods of time. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These factors contribute to price volatility, which is the principal risk of investing in equity securities.
International Equity Market Risks
Investing in foreign companies poses additional risks since political and economic events unique to a country or region may affect those markets and their issuers. In addition to such general international risks, the portfolios may also be exposed to currency fluctuation risks and emerging markets risks as described further below.
Changes in the value of foreign currencies compared to the US dollar may affect (positively or negatively) the value of the investments in the portfolios. Such currency movements may occur separately from, and/or in response to, events that do not otherwise affect the value of the security in the issuer’s home country. Also, the value of the portfolios may be influenced by currency exchange control regulations. The currencies of emerging market countries may experience significant declines against the US dollar, and devaluation may occur subsequent to investments in these currencies by the portfolios.
Foreign investments, especially investments in emerging markets, can be riskier and more volatile than investments in the US and are considered speculative and subject to heightened risks in addition to the general risks of investing in non-US securities. Also, inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries.
Dynamic Hedging Risk
All RiverFront portfolios that invest in non-US securities employ a dynamic currency hedging strategy. Because of this, these portfolios may have lower returns than equivalent non-currency hedged investments when the component currencies are rising relative to the US dollar. As such, contracts to sell foreign currency will generally be expected to limit any potential gain that might be realized by the portfolios if the value of the hedged currency increases. In addition, although the portfolios seek to minimize the impact of currency fluctuations on returns, the use of currency hedging will not necessarily eliminate exposure to all currency fluctuations. Hedging against a decline in the value of a currency does not eliminate fluctuations in the value of a portfolio security traded in that currency or prevent a loss if the value of the security declines. Moreover, it may not be possible for the portfolios to hedge against a devaluation that is so generally anticipated that RiverFront is not able to contract to sell the currency at a price above the devaluation level it anticipates. RiverFront’s ability to hedge currencies in the portfolios does not necessarily mean that their currency hedging decisions will always be additive to the performance of the portfolio.
US federal law imposes obligations on companies to disclose certain information on lobbying spend. If the law were to limit or eliminate such disclosures, that change could have a material, negative impact on the ability of STS to gather information regarding corporate lobbying spend. In addition, federal law governing corporate taxes has been relatively stable for decades. The US federal government is evaluating possible reforms to corporate taxes. It is unclear at this time whether and to what extent the federal government will amend corporate tax law.
Quantitative Model Risk
Any imperfections, limitations, or inaccuracies in models could affect the viability of the model portfolio. By necessity, model portfolios make simplifying assumptions that may limit the model’s effectiveness.
Models that appear to explain prior market data can fail to predict future market events. Further, the data used in models may be inaccurate and/or may not include the most current information available.
Third Party Model Risk
As discussed above, the POP and RCIADR model is not produced by RiverFront. If STS or SAM can no longer deliver the POP model to RiverFront, or if CCM can no longer deliver the RCIADR model to RiverFront, there is a risk that RiverFront would not be able to make the RSPO or the RCIADR portfolio available to clients. With respect to the RSPO model, companies are responsible for reporting their lobbying expenses, if this data is reported inaccurately it could cause a company to be included in the portfolio when it would not otherwise be included. Additionally, errors in reporting could cause the model to not perform as expected.
Investments could be concentrated within one industry or group of industries. Any factors detrimental to the performance of such industries will disproportionately impact investment returns. Investments focused in a particular industry are subject to greater risk and are more impacted by market volatility than less concentrated investments.
Factors considered in the model, including the dollar amount spent on lobbying activities, fundamental factors, and market factors are not necessarily predictive of company stock performance.
Fixed Income Risks
Under strategies utilizing debt securities, changes in interest rates could affect the value of a client’s investment. Rising interest rates tend to cause the prices of debt securities (especially those with longer maturities) to fall. Rising interest rates may also cause issuers to pay off mortgage-backed and asset-backed securities later than anticipated, forcing a portfolio to keep its money invested at lower rates. Falling interest rates, however, generally cause investors to pay off mortgage-backed and asset-backed securities earlier than expected, forcing a portfolio to reinvest the money at a lower interest rate.
The concept of duration is useful in assessing the sensitivity of a fixed income portfolio to interest rate movements, which are the main source of risk for most fixed income securities. Duration measures price volatility by estimating the change in price of a debt security for a 1% change in its yield. For example, duration of five years means the price of a debt security will change about 5% for every 1% change in its yield. Thus, the higher the duration, the more volatile the security.
Debt securities have a stated maturity date when the issuer must repay the principal amount of the bond. Some debt securities, known as callable bonds, may repay the principal earlier than the stated maturity date. Debt securities are most likely to be called when interest rates are falling because the issuer can refinance at a lower rate.
The credit rating or financial condition of an issuer may affect the value of a debt security. Generally, the lower the quality rating of a security, the greater the risk that the issuer will fail to pay interest fully and return principal in a timely manner. The issuer of an investment-grade security is more likely to pay interest and repay principal than an issuer of a lower rated bond. Credit ratings are not an absolute standard of quality, but rather general indicators that reflect only the view of the originating rating agencies from which an explanation of the significance of such ratings may be obtained. If an issuer defaults or becomes unable to honor its financial obligations, the security may lose some or all of its value.
High yield or “junk” bonds are highly speculative securities that are usually issued by smaller, less credit worthy and/or highly leveraged (indebted) companies. Compared with investment-grade bonds, high yield bonds carry a greater degree of risk and are less likely to make payments of interest and principal. Market developments and the financial and business conditions of the corporation issuing these securities
influences their price and liquidity more than changes in interest rates, when compared to investment-grade debt securities. Insufficient liquidity in the junk bond market may make it more difficult to dispose of junk bonds and may cause the portfolio to experience sudden and substantial price declines.
Liquidity risk exists when particular investments are difficult to purchase or sell. Such securities may become illiquid under adverse market or economic conditions and/or due to specific adverse changes in the condition of a particular issuer. If the portfolio invests in illiquid securities or securities that become illiquid, portfolio returns may be reduced because the Fund may be unable to sell the illiquid securities at an advantageous time or price. RiverShares portfolios may face additional liquidity risk given that some of the ETFs in the portfolios are smaller and trade less frequently.
Risks Related to ETPs
The majority of RiverFront’s Investment Solutions’ investment holdings are ETPs (which include ETFs and ETNs), which will be subject to substantially the same risks as those associated with the direct ownership of the underlying securities owned by the ETP. An ETP is a type of investment vehicle that attempts to achieve a return similar to a set benchmark or index. In some cases, an ETP is actively managed, similar to a mutual fund. Additionally, the value of the investment will fluctuate in response to the performance of the underlying index or securities. ETPs can be bought and sold throughout the day like stocks, and their prices can fluctuate throughout the day. During times of extreme market volatility, ETP pricing may lag versus the actual underlying asset values. This lag usually resolves itself in a short period of time (usually less than one day); however, there is no guarantee this relationship will always exist. While ETPs generally provide diversification, risks can be significantly increased for funds concentrated in a particular sector of the market, or that primarily invest in small cap or speculative companies, use leverage (i.e., borrow money) to a significant degree, or concentrate in a particular type of security (i.e., equities) rather than balancing the fund with different types of securities. ETPs incur investment advisory and other fees that are separate from those fees charged by RiverFront (see disclosure in Item 5 titled “Other Fees”). Accordingly, RiverFront’s investments in ETPs will result in the layering of expenses. As a result, the cost of the investment strategy will be higher than the cost of investing directly in ETPs.
Risk of Conflict Related to Third-Party ETFs
RiverFront may select certain ETPs for use in its model portfolios that are advised by ALPS or First Trust but not sub-advised by RiverFront. This creates a potential conflict of interest in that RiverFront also serves as sub-adviser to other ETFs advised by either First Trust or ALPS and, as a result of this relationship, may have an incentive to use First Trust or ALPS ETPs. RiverFront has implemented a process to require additional review of any investment recommendations of ETPs advised/sponsored by ALPS or First Trust that are not sub-advised by RiverFront.
Risks Related to “Start-Up” or Early Stage Funds
RiverFront Sub-Advised ETFs could be considered “start-up” or early stage funds with low assets under management. RiverFront has discretionary control of a significant amount of RiverFront client assets invested in its Sub-Advised ETFs. Withdrawing RiverFront client assets from the Sub-Advised ETFs could disadvantage the Funds and, as a result, other investors in the Funds, including other RiverFront clients.
Risks Related to Management of Multiple Investment Products
We specialize in managing asset allocation portfolios, which invest in various investment vehicles, including ETPs (some of which are sub-advised by us), to obtain targeted amounts of exposure to different asset classes, such as equities, bonds, commodities, etc. Certain Funds were developed to serve as, and will serve as, investment vehicles for the asset allocation portfolios managed by RiverFront. As the manager of such Funds and the portfolios, RiverFront will owe a fiduciary duty to the Fund and the
portfolios and is likely to encounter conflicts of interest from time to time. For example, under certain market conditions (as identified by RiverFront’s quantitative and qualitative investment processes), RiverFront may need to reduce its asset allocation portfolios’ exposure to an asset class to which the portfolios obtain exposure by investing in a Fund. Under such circumstances, pursuant to its fiduciary duties as an investment adviser, RiverFront would be required to liquidate some or all of the portfolios’ investments in the Fund. This could adversely affect the trading volume and/or the market price of Fund shares, particularly if RiverFront needs to significantly reduce the asset allocation portfolios’ exposure to the asset class. RiverFront has adopted policies and procedures that are designed to mitigate this and other foreseeable conflicts of interest. In this regard, among other things, RiverFront has assigned primary responsibility for the management of the Funds and management of the asset allocation portfolios to different teams of professionals. However, there can be no assurance that the policies and procedures adopted by RiverFront will successfully address every conflict that arises.
Please see the section entitled “Management of Multiple Investment Products” at the end of Item 11.
Catastrophic Events Risk
The value of securities may decline as a result of various catastrophic events, such as pandemics, natural disasters, and terrorism. Losses resulting from these catastrophic events can be substantial and could have a material adverse effect on RiverFront’s business and client portfolios.
Risks Related to Company Size
RiverFront strategies may invest in small-capitalization and mid-capitalization stocks, which are often more volatile and less liquid than investments in larger companies. The frequency and volume of trading in securities of smaller and mid-size companies may be substantially less than is typical of larger companies. Therefore, the securities of smaller and mid-size companies may be subject to greater and more abrupt price fluctuations. In addition, smaller and mid-size companies may lack the management experience, financial resources, and product diversification of larger companies, making them more susceptible to market pressures and business failure.
Risks Related to REITs
RiverFront strategies may invest in real estate investment trusts (“REITs”). The share prices of REITs may decline because of adverse developments affecting the real estate industry, such as declining real estate values, changing economic conditions, and increasing interest rates. The returns from REITs may trail returns from the overall market. Additionally, there is always a risk that a given REIT will fail to qualify for favorable tax treatment or may not remain qualified as a REIT.
Risks Related to MLPs
RiverFront strategies may invest in Master Limited Partnerships (“MLPs”). MLP investing includes risks such as equity and commodity-like volatility. Also, distribution payouts sometimes include the return of principal and, in these instances, references to these payouts as “dividends” or “yields” may be inaccurate and may overstate the profitability/success of the MLP. Additionally, there are potentially complex and adverse tax consequences associated with investing in MLPs. This is largely dependent on how the MLPs are structured and the vehicle used to invest in the MLPs. It is strongly recommended that an investor consider and understand these characteristics of MLPs and consult with a financial and tax professional prior to investment.
Risks Related to ADRs
American Depository Receipts (“ADRs”) are typically issued by a US bank or trust company and represent ownership of underlying foreign securities. In addition to the risks presented in any investment – changes in value, changes in demand – there are several risks unique to ADRs that must be considered. For instance, while they will react to normal market fluctuations like regular stocks, ADRs are still vulnerable to currency risks. If the value of the company's home currency falls too much relative to the
US dollar, the effect will trickle down to the ADR eventually. The same can be said for changes in the home country's government.
Risks Related to Commodities
Buying commodities allows for a source of diversification for those sophisticated persons who wish to add this asset class to their portfolios and who are prepared to assume the risks inherent in the commodities market. Any commodity purchase represents a transaction in a non-income-producing asset and is highly speculative.
Item 9 – Disciplinary Information
On July 14, 2016, RiverFront, without admitting or denying any violation or wrongdoing, consented to the entry of an Order Instituting Administrative Cease-and-Desist Proceedings (“Order”) to resolve an inquiry by the Securities and Exchange Commission (“SEC”). The proceeding related to whether RiverFront, which had disclosed that it may trade away (or “step out” trades), had sufficiently updated certain prior disclosures in its historical Form ADVs with respect to the volume it was trading away from Sponsor Firms when executing trades in wrap fee accounts. As noted in the Order, RiverFront increased its trading away activity in an effort to obtain improved execution prices for its clients and did not profit by trading away. The Order contains findings that RiverFront did not promptly update its Form ADVs when it began to significantly increase its trading away activity during the 2009 to 2011 timeframe, causing certain information in the March 31, 2010, August 31, 2010, and March 31, 2011 Form ADVs to become materially inaccurate and misleading in violation of certain non-fraud, non-scienter based provisions of the Investment Advisers Act of 1940 (“Advisers Act”). RiverFront was censured, ordered to cease and desist from committing or causing any violations and any future violations of Sections 207 and 204(a) of the Advisers Act and Rule 204-1 thereunder, and paid a civil money penalty in the amount of $300,000. RiverFront amended its Form ADV disclosures in August 2011 to address these concerns and, in connection with this proceeding, RiverFront also undertook to disclose on a quarterly basis, the volume of trades by market value executed away from Sponsor Firms and the associated transaction costs. This information is available at the following website: https://www.riverfrontig.com/wrap-fee-trading-disclosures/
Item 10 – Other Financial Industry Activities and Affiliations
RiverFront is affiliated with Baird Financial Corporation (“BFC”) as a result of BFC’s minority ownership of RiverFront Investment Holding Group, LLC. BFC is the parent company of Robert W. Baird & Co. Incorporated (“Baird”), a registered broker-dealer and investment adviser. RiverFront provides various investment advisory and consulting services to Baird and clients of Baird, including providing discretionary and non-discretionary asset management services to Baird clients. Baird also provides certain benefits to RiverFront and/or RiverFront associates, including insurance policies and 401K platform services.
As stated above, RiverFront is also affiliated with STS, SAM and CCM via their common ownership under BFC. RiverFront is approximately 48.6% owned by Baird Financial Corporation, and SAM and Baird are 100% owned by Baird Financial Corporation. As part of the model provider agreements between SAM and RiverFront, and CCM and RiverFront, SAM and CCM, from time to time, will provide marketing support in the form of sharing expenses for conferences, meetings, and other events designed to educate clients and potential clients about the RSPO portfolio or the RCIADR portfolio, respectively. Additionally, SAM and CCM are responsible for 50% of the fees charged to RiverFront by SEI Global Services, Inc., its affiliate, or similar third party for performing account reconciliation of accounts managed pursuant to the RSPO and RCIADR portfolios, respectively. These expenses will be netted out of the model portfolio fees that RiverFront pays SAM and CCM. SAM and
STS associates and CCM associates will also make themselves available from time to time to assist in the marketing of the RSPO or the RCIADR portfolio. RiverFront also purchases hard-dollar macro-economic research from STS at a discounted price.
The majority of RiverFront associates are registered representatives of ALPS Distributors, Inc. (ALPS), a FINRA member broker-dealer. The associates are registered due to their work with respect to the registered investment companies for which RiverFront serves as Sub-Advisor. ALPS is not affiliated with RiverFront.
Item 11 – Code of Ethics, Participation or Interest in Client Transactions and Personal Trading
RiverFront has adopted a Code of Ethics (“Code”) that governs a number of conflicts of interest we have when providing advisory services to our clients and serves to establish a standard of conduct for all of RiverFront’s associates based upon fundamental principles of transparency, integrity, honesty, and trust. The Code is designed to ensure we meet our fiduciary obligation to our clients (or prospective clients) and to foster a culture of compliance within our firm. The Code is also designed to detect and prevent violations of securities laws. A copy of the Code of Ethics is available to any client or prospective client upon request by contacting the Chief Compliance Officer (“CCO”).
The Code is distributed to each associate at the time of hire and at least annually thereafter and upon any material changes. It is supplemented with annual training and ongoing monitoring of associate activity.
The Code includes the following:
• Requirements related to the confidentiality of our client information;
• Prohibitions on: o Insider trading (possession of material, non-public information);
o The acceptance and giving of gifts and entertainment that exceed our policy standards;
• Reporting of political contributions;
• Reporting of gifts;
• Reporting of business entertainment -- RiverFront routinely provides meals, lodging, and travel expenses during meetings with advisors and clients where RiverFront products and services are discussed; as well as sponsorship money for meetings and conferences;
• Reporting of personal conflicts of interest;
• Pre-clearance of certain associate and firm transactions; and,
• Reporting of personal securities transactions on an ongoing basis (referred to in the Code as “reportable securities”) as mandated by regulation.
At least annually, all associates are required to: (1) certify their understanding of and compliance with the Code, (2) identify members of their household and any account over which they have a beneficial ownership (they “own” the account or have “authority” over the account), and (3) identify any securities held in certificate form and all reportable securities they own at that time.
RiverFront associates may also attend educational seminars and events hosted by vendors, Sponsor Firms, or ETP providers (“Outside Parties”). These Outside Parties pay for reasonable travel, lodging, and other expenses related to the event; they may also co-sponsor or sponsor RiverFront’s attendance at these events. RiverFront often uses the ETPs managed by Outside Parties within client models. Outside Parties will share expenses for RiverFront-sponsored events, marketing campaigns, and/or broker-dealer sponsored events in the form of sponsorships. These activities create conflicts of interest as RiverFront will have an incentive to use vendors and/or ETPs sponsored by firms that participate in the activities
above. RiverFront does not consider these benefits provided by Outside Parties when selecting investment products for client portfolios. Nonetheless, RiverFront monitors these activities and requires that any expenses paid, or sponsorships received be reasonable in value.
Certain RiverFront associates may have significant personal relationships with associates of Outside Parties, for example, spouses, siblings, parents, and/or children. RiverFront associates are required to report these relationships and the Firm monitors these relationships to ensure that no material conflict of interest exists as a result of the relationship.
Participation or Interest in Client Transactions and Personal Trading
RiverFront permits its associates to engage, on a limited basis, in personal securities transactions. As a result, associates may purchase or sell the same or similar securities at the same time that we place transactions for our clients.
To avoid potential conflicts of interest involving personal trades, RiverFront has adopted formal insider trading and personal securities transactions policies and procedures. RiverFront’s Code requires, among other things, that its associates:
• Place the integrity of the investment profession, the interests of clients, and the interests of RiverFront above one’s own personal interests;
• Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, associates, colleagues in the investment profession, and other participants in the global capital markets;
• Adhere to the fundamental standard that he or she should not take inappropriate advantage of his or her position;
• Avoid actual or potential conflicts of interest;
• Conduct all personal securities transactions in a manner consistent with the Code;
• Use reasonable care when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities;
• Promote the integrity of, and uphold the rules governing, capital markets; and,
• Comply with applicable provisions of the federal securities laws, and any other rules and regulations applicable to RiverFront’s business.
The insider trading and personal securities transactions policies and procedures of RiverFront are reasonably designed to safeguard and protect against the improper use of material non-public information. Among other things, these policies and procedures recognize that, in the ordinary course of its business, RiverFront will have access to material non-public information about Funds managed or sub-advised by RiverFront.
For example, RiverFront associates may have information as to whether RiverFront intends to buy or sell (or recommend that others buy or sell) securities, including shares of the RiverFront Sub-Advised ETFs, within Advantage, ETF Advantage, or RiverShares portfolios and within Mutual Funds. This information is confidential and reasonably may affect the decision of an investor to buy or sell a security. Accordingly, RiverFront’s policies and procedures prohibit associates from disclosing or using such information separately for their personal benefit or for the benefit of any other person. To the extent a person or associate, however, is an Advantage, ETF Advantage, RSPO, RCIADR or RiverShares client, Mutual Fund, or RiverFront Sub-Advised ETF investor, they will be treated the same as all other Advantage, ETF Advantage, RSPO, RCIADR and RiverShares clients, Mutual Fund, and RiverFront Sub-Advised ETF investors – meaning, RiverFront associates may trade (or recommend trades) on their behalf while in possession of such information.
Associates of RiverFront must pre-clear personal securities transactions in accordance with the Code of Ethics. With respect to the RiverFront Sub-Advised ETFs (excluding those purchased via managed accounts or RiverShares models), RiverFront associates are prohibited from purchasing or selling shares
except on pre-determined quarterly designated trading dates and subject to RiverFront’s standard preclearance procedures.
Management of Multiple Investment Products
The management of multiple different investment products, including model portfolios, ETFs, and Mutual Funds, may result in a portfolio manager devoting unequal time and attention to the management of each product. RiverFront seeks to manage such competing interests for time and attention of a portfolio manager by having the portfolio manager focus on a particular investment discipline. In order to mitigate the potential for conflicts of interest to arise, investment personnel are divided into portfolio management teams, assigned to specific portfolios. For example, the RiverShares portfolio management team is distinct from the Sub-Advised ETF portfolio management teams. Additionally, investment personnel are divided into cross-functional support teams. While the teams do collaborate on firm-level investment strategy, different investment products are managed in accordance with RiverFront’s policies and procedures, which are designed to mitigate the foreseeable conflicts of interest associated with the management of multiple investment products.
From time to time, RiverFront intends to invest internal capital in certain portfolios (“Seed Portfolios”) that are not available to outside investors. These Seed Portfolios are intended to test new investment strategies. Some of these Seed Portfolios will invest in positions in equity or fixed income securities, some of which may also be held in RiverFront client accounts. This practice gives rise to potential conflict of interests involving allocation of investment opportunities and/or allocation of certain portfolio managers’ time and attention.
To mitigate these conflicts of interest, RiverFront will typically seek to effect trades for these Seed Portfolios at different times than and after the trades for client accounts (as these client and Seed Portfolio accounts are often rebalanced on different schedules). If this is not possible from time to time (for example, when the rebalancing schedules converge), trades for client accounts will be placed before trades for the Seed Portfolios, or if there are no conflicts identified with the trade, we may block the Seed Portfolio with other client trades according to our trading practices as described in Item 12 of this brochure. Once third-party money is invested in a Seed Portfolio, such account will be treated as a client account.
Item 12 – Brokerage Practices
In the course of providing our services, we will execute trades for our clients through broker-dealers.
When selecting broker-dealers for execution, we consider a number of factors, described in detail below. Based on these factors, we will trade through broker-dealers that may charge fees that are higher than the lowest available fees. Baird, a minority owner of RiverFront Investment Holding Group, LLC, is also a Sponsor Firm, and RiverFront conducts maintenance trades with Baird on behalf of its discretionary wrap-fee client accounts. RiverFront does not, however, direct any step-out transactions through Baird.
Additionally, RiverFront will invest its portfolios in various ETPs. Some of these ETPs will be sponsored by or affiliated with broker-dealers through which RiverFront also executes client trades. RiverFront’s due diligence and security selection process does not take into consideration whether the ETP sponsor for a particular security is affiliated with a broker-dealer that RiverFront uses to execute client trades.
ASSET ALLOCATION MODEL PORTFOLIOS
In cases where RiverFront has trading discretion over a client account, we typically perform two types of trades for our clients. One type of trade is called a “model trade,” which is the purchase or sale of securities for our portfolios in one or more Investment Solutions. By its nature, a model trade is a block trade that will affect many client accounts at once. Model trades are almost always executed through a “step-out transaction,” meaning that they are traded away from the client’s Sponsor Firm for best execution purposes (described below).
The second type of trade is referred to as a “maintenance trade.” Maintenance trading reflects individual activity in a client’s account, such as initial investment positioning, rebalancing due to additions or withdrawals of cash or securities, account liquidations, or other account-specific transactions, such as client-directed tax transactions. These trades will generally be executed as orders with the client’s Sponsor Firm at the then-current market price due to the small trading volume.
With respect to certain transactions, including, without limitation, block trades in which RiverFront aggregates securities purchases or sales for a client account with those of one or more of its other clients, RiverFront will often, pursuant to its duty to seek best execution, determine to execute using step-out transactions (also referred to as “trade-aways”), even though such transactions require additional costs not covered by the wrap fee. Whenever RiverFront makes such a determination with respect to such a transaction, RiverFront will cause the account and, in the case of a block trade, any other included client accounts, to pay the executing broker-dealer the commission, commission equivalent, or undisclosed mark-up/mark-down such broker-dealer requires. For many, if not all, trade-away transactions, there will likely be no disclosed mark-up/mark-down. In these instances, the undisclosed mark-up or mark-down is netted into the price the client receives. Since the executing broker does not provide data to us regarding the amount of the mark-up or mark-down in these instances, we are unable to disclose the amount to the client. These types of trades include, but are not limited to, transactions in shares of ETPs in which an Authorized Participant or market maker is providing RiverFront with a two-sided market for execution. These commissions, commission equivalents, or undisclosed mark-ups/mark-downs are netted into the price received for a security and will not be reflected as individual items on the client trade confirmation. Because RiverFront has found that step-out transactions for model trades almost always allow it to obtain better trade executions for its clients, all or nearly all of the transactions in some client accounts will be traded away from the Sponsor Firm via step-out transactions. Given RiverFront’s trading practices, a wrap account with RiverFront as the appointed investment manager may not be suitable for clients with minimal maintenance trades. For more information on RiverFront’s wrap fee trading practices, please see the Wrap Fee Trading Disclosures page of RiverFront’s website, available at http://www.riverfrontig.com/wrap-fee-trading-disclosures/.
It is our understanding that, under a typical wrap fee program, clients are not charged a commission on trades executed through the Sponsor Firm. It may be an option for clients to select what is known as an “unbundling option,” which allows a client to disaggregate certain trading fees from the wrap fee. If “unbundling” is selected, the client will be charged separately for transactions in the account. These charges would be in addition to the wrap fee negotiated between the client and the Sponsor Firm and in addition to any commissions paid as a result of RiverFront’s step-out transactions. Because RiverFront places a significant amount of trades away from the Sponsor Firms, and the commissions or other fees for these trades may be considered redundant to the wrap fee, you may wish to explore the unbundling option to determine if it would be advantageous to select this option if it is offered by your Financial Advisor’s Sponsor Firm.
Some Sponsor Firms may not permit the use of step-out trades for their accounts. Clients/firms that do not allow us to engage in step-out trades will not benefit from our judgment when we believe it would be beneficial overall to implement trades in this manner.
In evaluating the wrap fee arrangement, a client should recognize that brokerage commissions for the execution of transactions in the client’s account through the Sponsor Firm are solely determined by the Sponsor Firm. It is our understanding that these transactions are generally executed without commissions and a portion of the wrap fee is generally considered as being in lieu of brokerage commissions. When placing trades through Sponsor Firms (instead of stepping them out), we will generally aggregate orders where it is possible and in the client’s best interests.
Both in deciding to execute step-out securities transactions and in selecting a broker-dealer to do so, we consider a variety of factors, including:
• our experience with the firm on prices and other results obtained in prior trading transactions;
• the quality of the brokerage services provided to us (and thus to our clients);
• the liquidity of the security being traded;
• the level of commissions (or commission equivalents per share when traded on a net basis) charged by that firm;
• the firm’s ability to source liquidity in the underlying constituents when trading ETPs and the ability to provide transparency when doing so;
• the firm’s market making activity in a stock; the firm's access to liquidity in the stock (described further below);
• the research (if any) services provided by the broker-dealer for the benefit of our clients (as discussed below);
• the speed and attention we receive from the trading desk for our clients; whether the firm has been able to trade anonymously for us (i.e., without others in the market knowing a buyer is interested in volume);
• whether the brokerage firm can and will commit its capital (if we request this) to obtain or dispose of the position for our clients;
• the market capitalization of the security being traded;
• the nature of our portfolio managers’ desire (for example a desire for speed versus other factors, including concern with obtaining the stock within a price range for all accounts) to own the stock;
• the use of limit orders and the likelihood of getting within the limit or missing the desired trade if the trading process takes too long;
• any particular trading expertise of the firm;
• access or potential access to blocks of a particular stock;
• market conditions at the time of the trade (both general conditions and conditions impacting the specific stock); and,
• any past issues we encountered when using a particular broker-dealer for similar trades.
For RiverFront Sub-Advised ETFs and Mutual Funds for which RiverFront has trading discretion, RiverFront will place trades for the underlying securities purchased and sold by these Funds with broker-dealers that are affiliated with Sponsor Firms for RiverFront clients, in instances where we believe best execution can be achieved. In all cases, RiverFront seeks best execution, as described above, when selecting broker-dealers for Fund trades. ALPS and First Trust each place trades on behalf of the equity-based RiverFront Sub-Advised ETFs. RiverFront places trades on behalf of the fixed income RiverFront Sub-Advised ETFs.
When appropriate, RiverFront, consistent with its duty to seek best execution, directs trades for client accounts to broker-dealers who provide RiverFront with proprietary research. RiverFront may select broker-dealers that provide it with research and may cause the client to pay such broker-dealer commissions in excess of the commission other broker-dealers may have charged. Such research and other services may be used for RiverFront or other client accounts to the extent permitted by law.
When we receive research from a broker-dealer, it is a benefit to us because we do not have to produce or pay (with hard dollars) for the research. As such, we have an incentive to direct trades to specific broker/dealers based on our interest in receiving the research, rather than on our clients’ interest in receiving a most favorable execution. Research received is used to benefit all client accounts, and not just the accounts that were traded with the executing broker who provided the research. When evaluating the merits of executing trades via step-out transaction or via each client’s Sponsor Firm, we consider both the trading benefits to participating and non-participating accounts, as well as the research benefits to all clients. We seek to balance these considerations appropriately and in our clients’ best interests.
RiverFront does not participate in commission sharing arrangements or receive soft dollar credits. Additionally, RiverFront does not pay for research with client commissions. We subscribe and pay for, in hard dollars, a number of resources that we consider fundamental to providing quality research for our clients.
Within the 2019 fiscal year, RiverFront received research solely through its trading activities with broker-dealers that provide proprietary research, and consistent with RiverFront’s duty to seek best execution for all trades in client accounts. This proprietary research includes information such as economic reports, statistical information, and analyses of particular companies or industries prepared by a research firm's analysts.
Although RiverFront no longer participates in commission sharing arrangements or receives soft dollar credits, the Firm continues to review the brokerage allocation in relation to research benefits received. Broker-dealer fees may vary and be greater than those typical for similar investments if we determine that the research, execution, and other services rendered by a particular broker-dealer merit higher-than-typical fees.
We have an ongoing list of broker-dealers that meet our standards regarding execution and research capabilities. Our trading department and Brokerage Committee evaluate the quality of the trading and execution services and capabilities (in part as described above) of various broker-dealers over time. Members of the investment team evaluate the nature and quality of the research services provided by the broker-dealers involved to confirm that our clients are receiving material value, in our opinion, from those relationships to warrant use of such firms for trading. Our list of firms whose research is particularly helpful for our clients is reviewed and updated regularly.
For a complete list of broker dealers with whom RiverFront executes client transactions, please contact us at 804-549-4800 and/or firstname.lastname@example.org.
Brokerage for Client Referrals
RiverFront does not currently select or recommend broker-dealers based on client referrals.
Clients may not direct RiverFront to use a particular broker-dealer to execute transactions for that client’s account; however, certain Sponsor Firms may require that all client trading be done through the client’s Sponsor Firm as described above.
Trade Aggregation and Allocation
Orders for the same security entered on behalf of more than one client, including investment companies sub-advised by RiverFront for which RiverFront has the ability to execute trades, will generally be aggregated pursuant to RiverFront’s trade aggregation policy. Subsequent orders for the same security entered during the same trading day may be aggregated with any previously unfilled orders; filled orders are allocated separately from subsequent orders within the same day. All clients participating in each aggregated order receive the average price and if applicable, pay a pro rata portion of commissions. Transactions are usually aggregated to seek a more advantageous net price and/or to obtain better execution for all clients. However, trades executed through the same Sponsor Firm may not be aggregated if a material time lag exists between client trade requests in the same security on the same day.
RiverFront’s allocation procedures seek to allocate investment opportunities among clients/portfolios in the fairest possible way taking into account clients’ best interests. RiverFront will follow procedures to ensure that allocations do not involve a practice of favoring or discriminating against any client or group of clients. Account performance or compensation is never a factor in trade allocations.
The Firm has one allocation policy applicable to all product types. Each portfolio manager or the portfolio management team (depending on the product) allocates trades among his/her eligible accounts. In allocating trades, portfolio managers allocate orders across portfolios with similar investment guidelines and investment styles fairly and equitably, taking into consideration relevant factors, including without
limitation: applicable portfolio investment restrictions and guidelines; regulatory restrictions; account-specific investment restrictions and other client instructions; risk tolerances; amounts of available cash; the need to rebalance a client’s portfolio (e.g., due to investor contributions and redemptions); whether the allocation would result in an account receiving an amount lower than the typical transaction size or an “odd lot”; and other account-specific factors.
Although allocating orders among clients may create potential conflicts of interest because we receive greater fees or compensation from some clients compared to other clients, or because we may be affiliated or have other relationships with certain clients, we do not make allocation decisions based on greater fees or compensation. Considering our policy to treat all clients fairly and equitably over time, any particular allocation decision among accounts may be more or less advantageous to any one client or group of clients and certain allocations may, to the extent consistent with our fiduciary obligations, deviate from a pro rata basis among clients in order to address, for example, differences in legal, tax, regulatory, risk management, concentration, exposure and/or mandate considerations for the relevant clients. We may determine that an investment opportunity or particular purchases or sales are appropriate for one or more clients, but not for other clients, or are appropriate for, or available to, clients but in different sizes, terms, or timing than is appropriate for other clients.
Trade Order Rotation
RiverFront’s trade order rotation policy is two tiered and comprises two distinct groups of clients, those over which RiverFront exercises trading discretion (SMA accounts) and those over which it does not (UMA/MDP accounts). In the first tier, RiverFront uses an alternating order between these two groups of clients following model changes so that neither group of clients is consistently favored or disfavored. Recommendations to the second group of clients in the rotation are distributed after the first group either completes all transactions for client accounts (in the case of SMA accounts) or the Sponsor Firms have been properly notified of the model changes (in the case of UMA/MDP accounts). The second tier occurs within each distinct group of clients. As discussed above, RiverFront almost always executes model changes (as defined above) for SMA portfolios as step-out transactions. Therefore, a trade rotation is rarely used for model changes for these accounts. However, for certain strategies or solutions that are only available on a limited number of platforms and/or have small asset levels, RiverFront will implement SMA model changes through a trade rotation amongst the Sponsor Firms that offer the program. When updating models on the UMA/MDP platforms, RiverFront contacts the Sponsor Firms in a pre-determined order so that no group of clients is consistently favored or disfavored over any other clients.
Item 13 – Review of Accounts
SMA client accounts in which RiverFront has investment and trading discretion are reviewed on a weekly basis by the trading team to ensure that they are in line with the model portfolios. RiverFront reviews any SMAs that experience client-directed activity (withdrawals, additions, tax-loss selling, etc.) on a daily basis and rebalances them to the model accordingly.
Clients are kept fully informed about their portfolio activity by receiving copies of all transaction confirmations and monthly/quarterly statements from their brokerage firms and/or custodians, unless they opt out of receipt. RiverFront produces quarterly factsheets that focus on asset allocation (where applicable) and portfolio performance for each of RiverFront’s model portfolios. Clients can obtain these quarterly factsheets by contacting their Financial Advisor. Additionally, SMA, UMA, and MDP clients will receive quarterly performance reports concerning their individual portfolios from the wrap program Sponsor Firms.
Members of the portfolio management team review the asset allocation model portfolios via daily data sheets comprising information about the specific holdings in each of the portfolios, as well as via attribution information, which details how each sector and sub-set of the portfolio is performing relative to its benchmark. Particular attention is given to continued suitability of securities in relation to the
portfolios’ investment objectives, performance of individual investment, and changes in company fundamentals, industry outlook, market outlook, price levels, and asset allocation policy ranges.
For the RSPO and RCIADR portfolios, RiverFront reviews the performance of the portfolios daily relative to their respective benchmarks. On a quarterly basis, RiverFront will compare each portfolio’s performance to model performance produced by SAM and CCM RiverFront also conducts initial and ongoing due diligence on SAM and CCM, the model providers for the RSPO and RCIADR portfolios respectively.
Item 14 –Client Referrals and Other Compensation
As previously noted, RiverFront provides advice as part of wrap fee programs sponsored by various broker-dealers, including its affiliate, Robert W. Baird & Co., Inc. Certain economic benefits are received as a result of these broker-dealer relationships. These benefits may include receipt of duplicate client confirmations and bundled duplicate statements; access to a trading desk serving wrap program participants; the ability to have investment advisory fees deducted directly from client accounts; access to an electronic communication network for client order entry and account information; receipt of various publications and proprietary research; and participation in Sponsor Firm conferences .
Additionally, as previously noted in Item 5 and Item 10 above, RiverFront is also affiliated with STS and SAM via its common ownership under BFC. RiverFront is approximately 48.6% owned by Baird Financial Corporation, and SAM and Baird are 100% owned by Baird Financial Corporation. RiverFront will pay SAM 50% of the advisory fees received from accounts invested in RSPO portfolio. Furthermore, prior to remitting this portion of advisory fees to SAM, RiverFront will deduct certain agreed upon expenses that are shared between RiverFront and SAM pursuant to the model delivery agreement. As part of the model provider agreement between SAM and RiverFront, SAM, from time to time, will provide marketing support in the form of sharing expenses for conferences, meetings, and other events designed to educate clients and potential clients about the RSPO portfolio. Additionally, SAM is responsible for 50% of the fees charged to RiverFront by SEI Global Services, Inc., its affiliate, or similar third party for performing account reconciliation of accounts managed pursuant to the Model Portfolios. These expenses will be netted out of the model portfolio fees that RiverFront pays SAM. SAM and STS associates will also make themselves available from time to time to assist in the marketing of the RSPO portfolio. RiverFront also purchases hard-dollar macro-economic research from STS at a discounted price.
Item 15 – Custody
RiverFront does not maintain custody of clients’ funds or securities. The client’s custodian generally deducts RiverFront’s fee from the client’s account and then sends the fee to RiverFront. Clients will receive account statements directly from their custodians and should carefully review the statements for accuracy.
Item 16 – Investment Discretion
When a client agrees to discretionary management, in writing through the signing of an Investment Advisory Agreement with RiverFront or through the Sponsor Firm agreement, we will be responsible for selecting the amount of securities to be bought and sold and when the transactions will be affected. In certain cases, RiverFront may be given discretionary authority in writing through an agreement with the Sponsor Firm. The only limitations on the investment authority will be those imposed in writing by the client or their Financial Advisor. Any client-imposed investment restrictions involving a security held in RiverFront’s model portfolio will be pro-rated across the remainder of the model holdings. Therefore, in
certain market conditions, clients could obtain higher or lower performance than RiverFront’s similarly managed accounts. RiverFront cannot restrict specific securities that are held within an ETP.
RiverFront does not have trading discretion over UMA and MDP accounts.
Item 17 – Voting Client Securities (i.e., Proxy Voting)
RiverFront has voting responsibility for all discretionary client accounts (including registered investment company clients), unless explicitly noted otherwise in the client’s Advisory Agreement or, for clients that are registered investment companies, the Sub-Advisory Agreement. RiverFront generally casts votes for all shares for which it has voting authority, and therefore has adopted and implemented Proxy Voting Policy and Procedures.
RiverFront has implemented processes designed to mitigate conflicts of interest from influencing proxy voting decisions that RiverFront makes on behalf of advisory clients and to help ensure that such decisions are made in accordance with RiverFront’s fiduciary duties to its clients. In light of such fiduciary duties and given the complexity of the issues that may be raised in connection with proxy votes, RiverFront votes client proxies using Glass Lewis & Co. guidelines, which are reviewed annually, and which RiverFront obtains from Broadridge Financial Solutions (“Broadridge”). RiverFront engages Broadridge to assist in the coordination and voting of client proxies. The services provided to RiverFront through Broadridge also include timely delivery of meeting and record date information, proxy analysis through an electronic web-based vote execution platform, and detailed recordkeeping consistent with RiverFront’s proxy voting function.
Under certain circumstances, RiverFront may face a conflict of interest voting proxies for client accounts. For example, RiverFront has voting discretion with respect to client accounts (including registered investment company clients) that own ETFs for which RiverFront serves as a sub-adviser. Determinations by RiverFront as to whether and how to vote proxies with respect to such securities may pose a conflict of interest for RiverFront, particularly to the extent that the proxy relates to the (continued) appointment of RiverFront as the mutual fund or ETF sub-adviser. When faced with a conflict of interest in voting a client’s proxy, Broadridge and RiverFront will, as under other circumstances, use the pre-determined guidelines and research from Glass Lewis & Co. to determine the appropriate vote by RiverFront. Notwithstanding such proxy voting processes, proxy voting decisions made by RiverFront may benefit RiverFront and/or another client account, provided that RiverFront believes such voting decisions to be in accordance with its fiduciary duties.
Our proxy voting policy and procedures are memorialized in writing and are available upon request. In addition, our complete proxy voting record is available to our clients. Please contact us if you have any questions or if you would like to review these documents.
Item 18 – Financial Information
RiverFront does not require or solicit the prepayment of more than $1,200 in fees six months or more in advance of the services rendered.
SEC-registered investment advisors who have discretionary authority or custody of client funds or securities are required to disclose any financial condition that is reasonably likely to impair the advisor’s ability to meet contractual commitments to clients. RiverFront has no financial condition that is reasonably likely to impair its ability to meet its contractual commitment to clients. RiverFront has not been the subject of a bankruptcy petition at any time during the past ten years.