Directional Financial Services, LLC (“Directional”, “DFS”, “we”, “us”) is a wholly-owned subsidiary of Empirical
Financial Services, LLC doing-business-as Empirical Wealth Management (“Empirical”), an investment adviser
registered with the U.S. Securities and Exchange Commission (“SEC”) pursuant to the Investment Advisers Act of
1940, as amended (the “Advisers Act”).
Directional was started by Kenneth Smith (Empirical’s majority owner and CEO) in 2014 to meet the investment
needs of clients that do not meet the minimum requirements of Empirical. Kenneth Smith started Empirical in
December 2009. Empirical is a spin-off from Empirical Wealth Management, LLC an Oregon company that Ken
was a founding member of in 2006. On December 31, 2012, Empirical purchased Empirical Wealth Management,
LLC from its remaining original members, re-merging both companies as a Washington LLC under the name of
Empirical Financial Services, LLC doing-business-as Empirical Wealth Management.
Asset Management
Directional provides portfolio management services both through Institutional Intelligent Portfolios™, an
automated, online investment management platform for use by independent investment advisors and sponsored
by Schwab Performance Technologies, Inc. (the “Program” or “SIIP” and “SPT,” respectively), as well as for clients
that are not involved with the Program (“Non-SIIP Clients”). The portfolios of clients enrolled in the Program are
monitored by the online investment management platform sponsored by SPT. Non-SIIP Clients are monitored
manually by Directional’s trading team.
Through the Program, Directional offers clients a range of investment strategies that we have constructed and
manage, each consisting of a portfolio of exchange traded funds (“ETFs”) and a cash allocation. For Non-SIIP
Clients, the investment strategies offered that Directional constructs and manages consist of both a portfolio of
ETFs, a portfolio of mutual funds, and a cash allocation. For all clients, the client’s portfolio is held in a brokerage
account opened by the client at SPT’s affiliate, Charles Schwab & Co., Inc. (“CS&Co”). Directional is independent of
and not owned by, affiliated with, sponsored by, or supervised by SPT, CS&Co, or their affiliates (together,
“Schwab”). The Program is described in the Schwab Performance Technologies, Inc. Institutional Intelligent
Portfolios™ Disclosure Brochure (the “Program Disclosure Brochure”), which is delivered to clients by SPT during
the online enrollment process.
Directional, and not Schwab, is the client’s investment advisor and primary point of contact with respect to clients
enrolled in the Program, as well as those not enrolled in the Program. We are solely responsible for choosing a
suitable investment strategy and portfolio for the client’s investment needs and goals, and managing that portfolio
on an ongoing basis. SPT’s role with regard to the Program is limited to delivering the Program Disclosure
Brochure to clients and administering the Program so that it operates as described in the Program Disclosure
Brochure.
Directional’s advisory services include, among other things, providing advice regarding asset allocation and the
selection of investments, which is guided by the stated objectives of each client. In addition, Directional considers
its client’s risk profile and financial status prior to making any recommendations. Directional maintains ongoing
and continuous discretionary authority and management for client accounts, subject, however to any reasonable
restrictions the clients have placed on their accounts. Directional will choose which model is appropriate for each
client based upon the items discussed above. Directional offers several investment portfolios designed to meet
various needs, but portfolios are not designed specifically for each client.
Directional has contracted with SPT to provide us with the technology platform and related trading and account
management services for the Program. This platform enables us to make the Program available to clients online
and includes a system that automates certain key parts of our investment process (the “System”). The System
includes an online questionnaire that helps us determine the client’s investment objectives and risk tolerance and
select an appropriate investment strategy and portfolio. Clients should note that we will recommend a portfolio
via the System in response to the client’s answers to the online questionnaire. The client may then indicate an
interest in a portfolio that is one level less or more conservative or aggressive than the recommended portfolio,
but we then make the final decision and select a portfolio based on all the information we have about the client.
The System also includes an automated investment engine through which we manage the client’s portfolio on an
ongoing basis through automatic rebalancing and tax-loss harvesting (if
the client is eligible and elects).
Directional also offers a separate financial planning service that clients may elect to utilize. The financial planning
service is designed to provide on-going, non-discretionary consulting services on the following topics: Cash Flow
Planning, Insurance Planning, 401k Assessment and Recommendations, Mortgage Assessment, and School Loan
Assessment. Clients who require more complex planning topics may opt-in for hourly financial planning to replace
or supplement the on-going financial planning.
Clients do not pay fees to SPT in connection with their services, but we charge clients an investment advisory fee
for our services as described below under Item 5 Fees and Compensation. Our fees are not set or supervised by
Schwab. Clients do not pay brokerage commissions or any other fees to CS&Co. Schwab does receive other revenues
in connection with the Program, as described in the Program Disclosure Brochure.
Directional does not currently pay Schwab fees for its services under the Program, but this arrangement is subject
to change. Directional will not be required to pay fees to Schwab for the services it provides under the Program so
long as Directional and/or its affiliated entity, Empirical, maintains at least $100 million in client assets in accounts
custodied at CS & Co. that are not enrolled in the Program. If Directional and/or Empirical does not meet this
condition, then Directional would be required to pay Schwab an annual fee of 0.10% on the value of its clients’
assets in the Program. In this situation, the fee would not be passed down to clients and would be absorbed by
Directional exclusively.
This fee arrangement presents a conflict of interest, as it provides an incentive for Directional to recommend that
client accounts be maintained with Schwab. However, per Directional’s code of ethics and as a fiduciary,
supervised persons of Directional will recommend that a client’s assets be custodied wherever is in their best
interest and will place the firm’s and the individual’s economic benefits secondarily. Directional’s Compliance
Officer, Justin Buller, remains available to address any questions that a client or prospective client may have
regarding the above conflict of interest.
As of December 31, 2023, Directional managed $9,341,251 on a discretionary basis and $0 on a nondiscretionary
basis.
Retirement Accounts – Acknowledgement of Fiduciary Status under ERISA and the Code
Guidance from the US Department of Labor (“DOL”) under Title I of the Employee Retirement Income Security
Act (“ERISA”) and/or the Internal Revenue Code (“Code”), requires us to inform you that when we provide
investment advice to you regarding your retirement plan or participant account or your individual retirement
account (collectively retirement accounts), we are fiduciaries within the meaning of ERISA and/or the Code, as
applicable, which are laws governing retirement accounts. The way we make money creates some conflicts
with your interests, so for retirement accounts we operate under a special rule that requires us to act in your
best interest and not put our interest ahead of yours. Under this special rule’s provisions, we must:
• Meet a professional standard of care when making investment recommendations (give prudent
advice);
• Never put our financial interests ahead of yours when making recommendations (give loyal advice);
• Avoid misleading statements about conflicts of interest, fees, and investments;
• Follow policies and procedures designed to ensure that we give advice that is in your best interest;
• Charge no more than is reasonable for our services; and
• Give you basic information about conflicts of interest.
Retirement Account Rollovers
When leaving an employer, you typically have four options regarding your existing retirement plan:
1. leave the assets in the former employer’s plan, if permitted,
2. roll over the assets to the new employer’s plan, if one is available and rollovers are permitted,
3. roll over the assets to an Individual Retirement Account (“IRA”), or
4. take a full withdrawal in cash, which would result in ordinary income tax and a penalty tax if you
are under age 59 1/2.
If we recommend that you roll over your 401(k) or other qualified plan assets to an IRA, this rollover
recommendation presents a conflict of interest in that we would receive compensation (or may increase
current compensation) when investment advice is provided following your decision to roll over your plan
assets. We will discuss your retirement plan options including retention of your 401(k) or qualified plan assets
with your current plan, if allowed. Prior to making a decision you should carefully review the information
regarding your rollover options. You are under no obligation to rollover retirement plan assets to an account
managed by us.