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FOR ONE-ON-ONE USE WITH A CLIENT'S FINANCIAL ADVISOR ONLY Envestnet | PMC Investment Methodology Guide | 21 risk spectrum. Therefore, PMC uses what might be termed a "Modified MPT" by making adjustments to traditional MPT to correct some of its flaws, such as estimation risk, portfolio weight instability across risk and through time, and the tendency of both to stray materially from the world market portfolio allocations. In our methodology's optimization process, we specify several relative constraints on the various asset classes to avoid over-optimizing the portfolios that result. These constraints ensure that the relative exposure sizes in the optimized portfolio track those in the observed market portfolio, while allowing the risk/return trade-off properties of the various asset classes to shape the final portfolio. Also, as noted above, we express no style bias, and restrict the allocation to value and growth to equal weightings, which, combined with the above size constraints, allows us to mimic the market portfolio in largely avoiding either a style or size bias in our ACPs. Our ACP construction process allows for 13 domestic equity "tiers," or levels of granularity. For example, the domestic equity portion of the portfolio could be constructed using only all cap; or large cap core + small cap core; or large cap growth + large cap value + small cap core, etc. We also can add up to nine different diversifying asset classes, such as REITs, emerging markets, high yield bonds, and TIPS. To develop our series of standard PMC ACPs that span risk categories, we begin by constructing a 50 percent equity/50 percent fixed income portfolio that contains the most granular domestic tier of asset classes and all nine diversifying asset classes. We then propagate the 50/50 portfolio to other equity/fixed income splits, using the relative weights obtained in the 50/50 portfolio. PMC maintains a separate process for constructing ACPs that contain liquid alternatives. It consists of an overlay approach to incorporate liquid alternatives in the portfolio framework, maintaining the relative allocations of the existing portfolio, and finding optimal allocations for the liquid alternative sleeves' size and composition. PMC carved out a fixed 25 percent allocation from the standard allocation in each risk bucket. This fixed 25 percent sleeve is reallocated among the nine liquid alternative styles that PMC supports to provide a lower Conditional Value- at-Risk (CVaR) for the resulting overall portfolio. CVaR, also known as "expected shortfall," is the average of all the returns that fall below the determined value-at-risk, providing an idea of the size and frequency of extreme events. The 25 percent fixed allocation is chosen based on testing of various combinations of liquid alternative and standard asset allocation proportions. A 25 percent allocation has a meaningful impact on the overall CVaR adjustment, yet not so great that it would impinge on the rest of the standard asset allocation. This level seems to represent the best tradeoff for investors who can tolerate moderate change in their asset allocation that results from including liquid alternatives in their portfolio. Within the 25 percent dedicated allocation to liquid alternatives, the combinations of the weights of the nine liquid alternative sleeves vary, based on the overall risk of the asset class portfolio. The three styles that result in the most diversified liquid alternative sleeve allocations are: Event Driven, Market Neutral, and Alternative Fixed Income. The fixed 25 percent liquid alternatives overlay results in a sizeable reduction of the downside portfolio risk, an intended and desirable consequence of the methodology used for investors who desire a meaningful impact from including liquid alternatives in their portfolio. PMC's portfolio solutions are managed according to strategic asset allocations, and generally do not implement tactical biases based on prevailing financial market and economic conditions. However, certain PMC legacy offerings have historically incorporated modest asset class tilts based on relative valuations. These tilts are implemented on an annual basis, and portfolio managers of these solutions must adhere to the constraints in the Investment Policy Statement. Rebalancing Frequency PMC's strategic ACPs are generally rebalanced annually. PMC portfolio managers discuss and agree upon changes in the months leading up to implementing the changes and prepare commentary about those changes as part of the process. The commentary is distributed to advisors whose clients are invested in the portfolios. Mutual Fund Share Class Policy PMC strives to choose the lowest- priced shares available for all PMC managed models. The actual share class fund that is purchased and allocated to an advisor's client account is specific to the advisor entity's agreement with the fund company. PMC does not negotiate share class availability on behalf of entities or their clients, nor does PMC monitor actual client accounts for share class usage;