Third-Party Portfolio Manager Trading Practices

This page provides information related to trading practices of third-party portfolio managers in the separately managed account platforms of both Manager Select and Manager Access Select (together, the “SMA Platforms”).  In the SMA Platforms, LPL Financial LLC (“LPL”), either through its investment advisor representatives or a third party investment advisor firm, makes available to clients the investment advisory services of third-party portfolio management firms (“SMA Portfolio Managers”).

In the SMA Platforms, clients direct SMA Portfolio Managers to execute transactions through LPL, subject to the SMA Portfolio Manager’s duty as an investment advisor to seek to achieve best execution.  Clients should understand that an SMA Portfolio Manager may choose to place some or all trades for accounts with broker-dealer firms other than LPL (“trade away” or “step out”).  Some SMA Portfolio Managers have historically placed nearly all client trades with broker-dealer firms other than LPL for execution, in particular, if the SMA Portfolio Manager follows a fixed-income, foreign or small cap investment strategy.  In addition, SMA Portfolio Managers may choose to trade away from LPL in order to aggregate all client transactions into one or more larger “block trades” that are executed through one broker-dealer.  This practice may enable an SMA Portfolio Manager to obtain more favorable execution, including a more advantageous net price, than would otherwise be available if orders were not aggregated into a single “block trade.” It may also assist the SMA Portfolio Manager in potentially avoiding an adverse effect on the price of a security which could result from simultaneously placing a number of separate, successive or competing client orders.

When securities transactions are effected through LPL, there are no brokerage commissions charged to the account.  If an SMA Portfolio Manager chooses to execute a transaction through a broker-dealer other than LPL, the execution price may include a commission or fee imposed by the executing broker-dealer. Clients should understand that the client will bear any such additional trading cost, in addition to the account fee paid to LPL.  The additional expenses charged by the broker-dealer executing the transaction may include commissions, mark-ups, mark-downs or “spreads” paid to executing broker-dealer firm.  Additionally, if a foreign currency transaction is required, there may be foreign exchange or similar fees, including but not limited to fees for foreign ordinary conversion and creation of American Depositary Receipts (“ADRs”) charged by third parties as well as foreign tax charges.  In many cases, the commission, mark-up, mark-down or other additional expenses charged by the executing broker-dealer or third party will be embedded in the purchase or sale price of such transactions, as reflected on trade confirmations and custodial account statements provided by LPL.  In evaluating whether to execute a trade through a broker-dealer other than LPL, an SMA Portfolio Manager will consider the fact that an account will not be charged an additional expenses (such as a commission) if  effected directly through LPL.

Clients should understand that LPL is not able to fully evaluate whether an SMA Portfolio Manager is meeting its best execution obligations when trading away, as it is not a party to such transactions and is not in a position to negotiate the price or transaction related charges with the executing broker.  The responsibility to determine whether to trade away arises out of an SMA Portfolio Manager’s individual fiduciary duty to clients and trading expertise.

The table below reflects the frequency of step out trades for equity securities placed by SMA Portfolio Managers and the average cost that clients incurred on a per trade/share basis.  Please note that information for step out trades for fixed income securities is not included below.  The information presented below is based solely on information each SMA Portfolio Manager provided to LPL and has not been independently verified by LPL.  Please note that this information reflects historical data and may not be indicative of the current frequency with which SMA Portfolio Managers trade away or the related costs of such trades.  An SMA Portfolio Manager’s past trading away practice is not a guarantee that such manager will follow the same practice in the future.  The table below does not include those SMA Portfolio Managers joining the SMA Platforms after the indicated dates or those SMA Portfolio Managers that began to trade away from LPL only after the indicated dates.  It is possible that SMA Portfolio Managers not listed below will trade away from LPL in the future or that SMA Portfolio Managers listed below will trade away more frequently or at a higher cost to clients. Thus, a client’s trading costs relating to step out trades could be greater than shown below.

Footnotes

^*   All percentages are approximate.  The Dollar-Weighted Percentage of Step-Outs is generally calculated by dividing the total dollar amount of step-outs placed with broker-dealers other than LPL by the total dollar amount of client step-out trades placed with all broker-dealers, including LPL.  For example, an SMA Portfolio Manager that traded a total of $10 million in the strategy and stepped out $5 million would have a Dollar-Weighted Percentage of Step-Outs of 50% ($5 million divided by $10 million).  The number of accounts, timing of inceptions and terminations, client-directed cash flows and time period under review can all be variables that affect the dollar-weighted percentage of step-outs.

^**   The Average Trading Cost per Share for Step-Outs is expressed in terms of an average cents-per-share (“cps”).  To calculate this figure, generally the total number of shares stepped out for a specific strategy is divided by the total additional costs incurred by the client for the trades that were stepped out.  For example, an SMA Portfolio Manager that stepped out the purchase and sale of 200,000 shares and incurred an aggregate cost of $4,000 in commissions for those trades would result in an additional average cost of 2 cents per share.  The average cost of 2 cents per share would be what the client paid in addition to their standard account fee for the stepped out trades.

Strategies that invest in international securities may also have additional costs assessed by the exchange where the trades were executed such as exchange fees and taxes, and may also have costs such as conversion fees and currency translation costs reflected in the Average Trading Cost per Share for Step-Outs.  For example, an SMA Portfolio Manager may purchase a security via “ordinary shares” on a foreign exchange (which may charge a fee or tax on that trade), and then the bank may charge a fee to convert the ordinary shares to American Depository Receipts “(ADR(s)”), and in so doing there may be currency translation costs associated with ordinary-to-ADR conversions that is in addition to the commission cost of the trade, if applicable.