HUDSON HERITAGE CAPITAL MANAGEMENT, INC.BROKERAGE COMPENSATION AND CONFLICTS DISCLOSURE
Brokerage Conflict Disclosure fees and commissions
Page 1
Member FINRA / S I P C
www.HHCMINC.com
This disclosure provides information about the business practices, compensation and conflicts of interest related to the brokerage business of Hudson Heritage Capital Management, Inc. (referred to as “we,” “us,” or “HHCM”). Additional information about HHCM and its financial professionals is available on FINRA’s website at http://brokercheck.finra.org/http://brokercheck.finra.org/
TABLE OF CONTENTS
ITEM 1 INTRODUCTION
ITEM 2 COMMISSIONS, FEES AND OTHER TYPES OF SALES COMPENSATION
ITEM 3 THIRD PARTY COMPENSATION
ITEM 4 PRODUCT COSTS AND RELATED CONFLICTS
ITEM 5 CUSTOMER REFERRALS, OTHER COMPENSATION AND OTHER CONFLICTS
ITEM 6 FINANCIAL PROFESSIONAL COMPENSATION, FEES AND RELATED CONFLICTS
HHCM BROKERAGE COMPENSATION AND CONFLICTS DISCLOSURE
Brokerage Conflict Disclosure fees and commissions
HHCM Page 2
Member F INRA / S I P C
ITEM 1 INTRODUCTION
HHCM is a broker-dealer registered with the Securities and Exchange Commission (SEC) and member of the Financial Industry Regulatory Authority (FINRA). HHCM is also registered as an investment adviser with the SEC. In addition, HHCM is qualified to sell insurance products and annuities. As a broker-dealer, HHCM transacts business in various types of securities, including mutual funds, 529 plans, exchange-traded funds (ETFs), stocks, bonds, variable annuities, real estate investment trusts (REITs) and other investment products. HHCM maintains a network of individuals, referred to as “financial professionals,” who offer brokerage services, investment advisory services, or both, depending on their licenses. Some of HHCM’s financial professionals are investment adviser representatives (IARs) of HHCM.
HHCM sometimes refers to these specific financial professionals as “financial advisors” or “advisors.” HHCM’s financial professionals are primarily independent contractors though there are some who are employees. HHCM financial professionals are dispersed throughout the U.S. and often market services under their own business name.
Although most financial professionals offer both brokerage and investment advisory services, some only offer brokerage services and others only offer investment advisory services. You should ask your financial professional about what capacity they are acting or will be acting on your behalf, as a broker-dealer registered representative and/or an IAR. This disclosure discusses important information regarding financial professionals who act as registered representatives of HHCM’s broker-dealer. For more information about HHCM and the services financial professionals provide when they act as IARs, please see HHCM’s Form ADV disclosure brochures available on http://adviserinfo.sec.gov/
Like all financial services providers, HHCM and its financial professionals have conflicts of interest. HHCM and its financial professionals are compensated directly by customers and indirectly from the investments made by customers. When customers pay us, we typically are paid an upfront commission or sales load at the time of the transaction and in some cases a deferred sales charge. If we are paid an upfront commission, it means that we are paid more the more transactions a customer makes. When we are paid indirectly from the investments made by customers, we receive ongoing compensation, typically called a “trail” payment, for as long as a customer holds an investment. In addition, we receive compensation from the sponsors of some of the investment products that customers purchase through us. The amount we receive varies depending on the particular type of investment a customer makes. The compensation described in this disclosure represents the maximum gain or profit we receive on an investment, before subtraction of our expenses.
Please also note that not all of the conflicts described in this disclosure apply to a particular financial professional, the financial professional’s services or all the products we sell. The types and amounts of compensation we receive change over time. You should ask your financial professional if you have any questions about compensation, costs, fees, or conflicts of interest.
HHCM BROKERAGE COMPENSATION AND CONFLICTS DISCLOSURE
Brokerage Conflict Disclosure fees and commissions
HHCM Page 3
Member F INRA / S I P C
ITEM 2 COMMISSIONS, FEES AND OTHER TYPES OF SALES COMPENSATION
Commissions and Sales Charges
HHCM receives upfront commissions when it executes transactions that result in the purchase or sale of a security. A commission, which also may be called a sales load, sales charge or placement fee, is typically paid at the time of the sale and can reduce the amount available to invest or can be charged directly against an investment. Commissions are often based on the amount of assets invested. HHCM receives the sales charge or commission and shares it with your financial professional. In some cases, a portion of the sales charge or commission is retained by the investment’s sponsor. Commissions vary from product to product, which creates an incentive to sell a higher commission security rather than a lower commission security. The maximum and typical commissions for common investment products are listed below. For more information about other commissions that apply to a particular transaction, please refer to the applicable investment’s prospectus or other offering document.
• Equities and Other Exchange Traded Securities. The maximum commission charged by HHCM in an agency capacity on an exchange traded security transaction, such as an equity, option, ETF, exchange traded note (ETN) or closed-end fund (CEF), is 1.5% of the transaction amount. The commission amount decreases from 1.5% as the size of the transaction amount increases according to a schedule. In addition, the financial professional can decide to discount the commission amount to a minimum of $30 per transaction.
• Mutual Funds and 529 plans. The maximum commission or sales charge permitted under applicable rules is 8.5%, although the maximum is typically 5.75%.
• Annuities. The maximum upfront commission paid for new sales of annuities is typically 5.5%, but varies depending on the time purchased, and type of annuity, such as fixed, fixed index, traditional and investment-only variable annuities.
ITEM 3 THIRD PARTY COMPENSATION
HHCM and financial professionals receive compensation from investment product sponsors and other third parties in connection with investments that HHCM customers make in securities such as mutual funds, 529 plans, annuities,. Some types of third party compensation are received by HHCM and shared with financial professionals, and other types are retained only by HHCM.
HHCM BROKERAGE COMPENSATION AND CONFLICTS DISCLOSURE
Brokerage Conflict Disclosure fees and commissions
HHCM Page 4
Member F INRA / S I P C
Third Party Compensation Shared by HHCM and Financial Professionals
Trail Compensation
HHCM and its financial professionals receive ongoing compensation from certain investment products such as mutual funds, 529 plans, annuities. This compensation (commonly known as trails or Rule 12b-1 fees) is typically paid from the assets of the investment product under a distribution or servicing arrangement with the investment sponsor and is calculated as an annual percentage of assets invested by HHCM customers. The more assets you invest in the product, the more we will be paid in these fees. Therefore, we have an incentive to encourage you to increase the size of your investment. The amount of trails received varies from product to product. This creates an incentive to recommend a product that pays a higher trail rather than a lower trail. We also have an incentive to recommend a product that pays trails (regardless of amount) rather than products that do not pay trails. For more information about trail compensation received with respect to a particular investment, please refer to the prospectus or offering document for the investment.
• Mutual Funds and 529 plans. The ongoing payment depends on the class of shares but is typically between 0.25% and 1% of assets annually.
• Annuities. HHCM receives a trail payment from an annuity issuer for the promotion, sale and servicing of a policy. The amount and timing of trail payments vary depending on the agreement between HHCM and the issuer, and the type of policy purchased. The maximum trail payment for annuities is typically 1.5%, and varies depending on the type of annuity.
Concessions and Mutual Fund Finder’s Fee
In certain cases, HHCM and financial professionals receive compensation from a mutual fund sponsor in connection with transactions for which sales charges are waived or under other circumstances and as described in a fund’s offering documents. This compensation is generally referred to as a finder’s fee or concession and typically ranges between 0.25% and 1% of the transaction amount. HHCM also receives concessions from investment sponsors for other types of investments.
HHCM BROKERAGE COMPENSATION AND CONFLICTS DISCLOSURE
Brokerage Conflict Disclosure fees and commissions
HHCM Page 5
Member F INRA / S I P C
Life Insurance
HHCM receives compensation from issuers of life insurance (universal, variable universal, whole life, and term) and other insurance contracts that are available to brokerage customers, such as long term care insurance and disability insurance. The compensation includes commissions and trails, and may include payments for administrative services that HHCM provides and/or payments made in connection with HHCM’s marketing and sales-force education and training efforts. HHCM and/or its affiliated insurance agency, Hudson Heritage Group. (HHG), receive commissions in the range of 4% to 98% of first-year commissionable premiums. HHCM may also receive a trail payment in the range of 0.5% to 15% of subsequent premiums, if any. The amount of commission varies depending on the issuer, coverage and the premium amount. For business placed through HHG, HHG typically retains between 10% and 35% of first-year commissionable premiums to support the additional case-management services that HHG provides for products offered through HHG. Financial professionals receive a percentage of the commissions and trailing commissions the insurance company pays to HHCM and/or HHG. HHCM, HHG, and financial professionals also receive additional compensation from certain insurance companies when HHCM’s sales of the companies’ products exceed premium thresholds specified in selling agreements with HHCM and/or HHG.
Bonus Payments from Investment Sponsors
Certain insurance companies offer financial professionals bonus payments, oftentimes called persistency or retention bonuses, based on the amount of customer assets that the financial professional has placed in the insurance company’s products. Although HHCM does not participate in these bonus programs, HHCM may from time to time accept and share these payments on a one-time basis with a financial professional who recently joined HHCM and was entitled to such payments through the financial professional’s former brokerage firm.
Non-Cash Compensation HHCM, HHCM employees and financial professionals may receive non-cash compensation from investment sponsors. Compensation includes such items as gifts valued at less than $100 annually, an occasional dinner or ticket to a sporting event, or reimbursement in connection with educational meetings, customer workshops or events, or marketing or advertising initiatives, including services for identifying prospective customers. Investment sponsors also pay, or reimburse HHCM and/or its financial professionals, for the costs associated with education or training events attended by HHCM employees and financial professionals and for HHCM sponsored conferences and events.
HHCM BROKERAGE COMPENSATION AND CONFLICTS DISCLOSURE
Brokerage Conflict Disclosure fees and commissions
HHCM Page 6
Member F INRA / S I P C
Cash Sweep
If a customer holds an account with HHCM, HHCM offers a service to sweep cash held within accounts into an interest-bearing FDIC insured cash account (ICA) or, money market funds, depending on account type. In addition, accounts otherwise eligible for ICA may be swept into money market funds if there is not adequate deposit capacity in ICA than this average percentage amount.
Non-Sweep Money Market Mutual Funds
Customers are able to invest cash balances in a limited number of money market mutual funds other than as part of a sweep arrangement (Non-Sweep Money Market Funds). Depending on interest rates and other market factors,
Recordkeeping Fees
In the case of accounts held at TD Ameritrade, TDA performs recordkeeping and administrative services on behalf of mutual fund and receives fees for performing such services. These services include establishing and maintaining sub-account records reflecting the issuance, exchange or redemption of mutual fund shares by each account. For certain mutual funds TDA processes transactions on an omnibus basis, which means that TDA consolidates customer trades into one daily trade with a fund, and maintains all pertinent underlying shareholder information for the fund. The compensation TDA receives for these services can be paid based on customer assets in the fund (0% to 0.25% on an annual basis) or based on the number of positions held by customers in the fund ($0 to $25 per position). Because these fees vary, HHCM has an incentive to recommend a fund that pays more in recordkeeping fees than a fund that pays a lower amount.
Networking Fees
HHCM does not provide recordkeeping services to a mutual fund on an omnibus basis, then fund shares are traded on a networked basis, which means HHCM submits a separate order to the fund for each individual customer trade.
Product Onboarding and Maintenance Fees
HHCM does not charge a setup fee to product sponsors when adding new investment products or share classes of an investment product to its investment platforms.
• UITs. HHCM receives fees, often referred to as volume concessions, from UIT sponsors that are based on a percentage of sales volume.
These fees are set by the UIT sponsor and vary. The UIT prospectus contains detailed descriptions of these additional payments.
• Retirement Plan Products. HHCM does not receives marketing and educational support payment from retirement plan product sponsors to assist with training and educating financial professionals.
Investment sponsors do not pay HHCM different amounts of revenue sharing, or receive different levels of benefits for such payments.
Because these fees can vary by fund and share class of a fund, HHCM has no incentive to recommend a fund or share class that pays more in revenue sharing than a fund or share class that pays a lower amount. HHCM generally does not share these revenue sharing payments with financial professionals.
HHCM BROKERAGE COMPENSATION AND CONFLICTS DISCLOSURE
Brokerage Conflict Disclosure fees and commissions
HHCM Page 7
Member FINRA / S I P C
ITEM 4 PRODUCT COSTS AND RELATED CONFLICTS
Financial professionals provide recommendations with respect to a broad range of investment products, including stocks, bonds, ETFs, mutual funds, annuities. Each type of investment product carries unique risks, and many investment products charge fees and costs that are separate from and in addition to the commissions and fees that HHCM and financial professionals receive. You can learn more about these risks and the fees and costs charged by an investment product by reviewing the investment product’s prospectus, offering memorandum, or other disclosure documents. Set out below is the typical range of expenses of the various investment products we sell. In most cases, these expenses are in addition to the commissions and fees that HHCM receives for its brokerage services.
• Mutual Funds. Expense ratios can vary based on the type of mutual fund purchased. The average expense ratio for actively managed funds is 0.5% to 1.0%, for passive index mutual funds the average is 0.2%.
• 529 plans. Expense ratios for the 529 plans will vary based on the plan offered in your particular state but can range from as low as 0.0% to 1.75%.
• Annuities. The typical range of annual expenses associated with annuities is 0.60% to 5.00% dependent upon the combination of options selected by the investor including type of annuity (variable annuities have a mortality and expense fee whereas fixed index annuities do not), optional riders elected (living and/or death benefits) and investment options where applicable (subaccounts or models for variable annuities).
Share Class and Fund Selection
HHCM offers various share classes of mutual funds and 529 plans. As an example, certain mutual fund share classes, often referred to as Class A shares, charge an upfront sales charge and an ongoing trail. For other mutual fund share classes, often titled Class C shares, there is no upfront sale charge paid, however, there is an ongoing trail payment and a contingent deferred sales charge to the investor if there is a redemption within a certain period of time after purchase. Depending on the length of the holding period for the mutual fund or 529 plan, and other factors, one share class may be less expensive to the investor than another, and HHCM and the financial professional may earn more or less in compensation for one share class than another. Because of their characteristics and sales load structure, mutual funds generally are longer term investments. Frequent purchases and sales of mutual funds can result in significant sales charges unless the transactions are limited to exchanges among mutual funds offered by a sponsor that permits exchanges without additional sales charges. HHCM maintains policies and procedures that are designed to detect and prevent excessive mutual fund switching, but you should monitor your account and discuss with your financial professional any frequent mutual fund purchases and sales.
HHCM BROKERAGE COMPENSATION AND CONFLICTS DISCLOSURE
Brokerage Conflict Disclosure fees and commissions
HHCM Page 8
Member F INRA / S I P C
Some share classes or funds we offer do not charge or pay to us an upfront sales charge, and pay us ongoing trails of 0.25% or less annually (“noload funds”). HHCM makes no-load funds available only to certain customers or through certain of our programs. We may be compensated in other ways by sponsors of no-load funds, such as through revenue sharing payments. Because of the limited compensation from no-load funds, we have an incentive to limit the availability of no-load funds we offer and to recommend you invest in funds that impose sales charges and trails. HHCM also offers various mutual funds and ETFs, some of which have similar or identical investment strategies but differing fee structures. For example, a mutual fund that is designed to track an index of securities, such as the S&P 500 Index, may have higher or different types of fees than an ETF that is designed to track the same index. Whether a fund or ETF is more expensive than another fund or ETF with a similar or identical investment strategy may depend on factors such as length of holding, size of the initial investment and other factors. HHCM and a financial professional may earn more compensation for one fund or ETF than another, giving HHCM and the financial professional an incentive to recommend the product that pays more compensation to us.
ITEM 5 CUSTOMER REFERRALS, OTHER COMPENSATION AND OTHER CONFLICTS
Margin
HHCM offers customers the ability to purchase securities on credit, also known as margin purchases. When a customer purchases securities on margin, TDA extends a line of credit to the customer and charges interest on the margin balance. HHCM has a financial incentive to encourage margin borrowing because TDA earns compensation in the form of interest, transaction charges and other fees on investments made with borrowed amounts. That financial incentive creates a conflict of interest insofar as HHCM and financial professionals benefit from your decision to borrow and incur the various fees and interest described above. If contemplating use of margin, please consult the TDA Margin Agreement and related disclosures for additional details.
Error Correction
If a customer holds an account at HHCM and a trade error caused by HHCM occurs in the account, HHCM will cancel the trade and remove the resulting monetary loss to a customer from the account. If a trade correction is required as a result of a customer (e.g., if a customer does not make full payment for purchases or fails to deliver negotiable securities for liquidations before trade settlement), HHCM will cancel the trade and any resulting monetary loss will be borne by the customer. In the case of a trade that requires a correction and that resulted in a monetary gain to the customer, such gain may be removed from the account and may result in a financial benefit to HHCM.
HHCM BROKERAGE COMPENSATION AND CONFLICTS DISCLOSURE
Brokerage Conflict Disclosure fees and commissions
HHCM Page 9
Member FINRA / S I P C
Rollovers
If a customer decides to roll assets out of a retirement plan, such as a 401(k) plan, and into an individual retirement account (IRA), we have a financial incentive to recommend that a customer invests those assets with HHCM, because we will be paid on those assets, for example, through commissions, fees and/or third party payments. A customer should be aware that such fees and commissions likely will be higher than those the customer pays through the plan, and there can be custodial and other maintenance fees. As securities held in a retirement plan are generally not transferred to an IRA, commissions and sales charges may be charged when liquidating such securities prior to the transfer, in addition to commissions and sales charges previously paid on transactions in the plan.
If your financial professional makes a recommendation that you move assets from an IRA at another financial institution to HHCM, he or she is required to consider, based on the information you provide, whether you will be giving up certain investment-related benefits at the other financial institution, such as the effects of breakpoints, rights of accumulation, and index annuity caps, and has determined that the recommendation is in your best interest for these reasons:
• Greater services and/or other benefits (including asset consolidation and holistic advice and planning) can be achieved with the HHCM
IRA; and
• The costs associated with the HHCM IRA are justified by these services and benefits.
Notwithstanding whether a recommendation has been made, you understand and agree that with respect to any assets you decide to transfer/roll over from a qualified plan or move from an IRA at another financial institution now or in the future, you must: (1) evaluate the investment and non-investment considerations important to you in making the decision; (2) review and understand the fees and costs associated with a HHCM IRA; (3) recognize that higher net fees (if applicable) will substantially reduce your investment returns and ultimate retirement assets; and (4) understand the conflicts of interest raised by the financial benefits to HHCM Financial and its employees resulting from your decision to roll or transfer assets to a HHCM IRA.
Limitations on Investment Recommendations
HHCM and financial professionals offer and recommend investment products only from investment sponsors with which HHCM has entered into selling and distribution agreements. Other firms may offer products and services not available through HHCM, or the same or similar investment products and services at lower cost. In addition, HHCM may only offer certain products in a brokerage account, even though there is a version of the product that may be offered at a lower cost through an advisory account, and vice versa.
HHCM BROKERAGE COMPENSATION AND CONFLICTS DISCLOSURE
Brokerage Conflict Disclosure fees and commissions
HHCM Page 10
Member F INRA / S I P C
The scope of products and services offered by certain financial professionals may also be more limited than what is available through other financial professionals. A financial professional’s ability to offer individual products and services depends on the financial professional’s licensing, training or branch office policy restrictions. For example, a financial professional maintaining a Series 6, Series 63 and Life Insurance Agent license is limited to providing investment company securities, such as mutual funds and UITs and variable annuity contracts. A financial professional maintaining a Series 7, Series 63 and Life Insurance Agent license is able to provide solutions including all securities available for sale by a Series 6 representative as well as individual stocks, bonds, among others. As another example, a financial professional may only be licensed to provide brokerage services, and not advisory services, or vice versa. To provide investment advisory services, a financial professional is often required to be registered as an IAR with the state in which the financial professional has a place of business.
You should ask your financial professional about the securities or services your financial professional is licensed or qualified to sell, and your professional’s ability to service investments that you transfer to HHCM from another firm. You should also review the licenses held by your financial professional by visiting the FINRA BrokerCheck system at http://brokercheck.finra.org.
Compensation of Certain HHCM Employees Certain HHCM employees provide sales support resources to financial professionals who offer various types of brokerage and advisory products,programs, platforms and services. The compensation that HHCM pays to these employees varies based on a number of factors, including assets in the program and compensation earned by HHCM from the sales of these products and services. These sales employees have an incentive to promote certain HHCM programs and platforms to financial professionals over others.
ITEM 6 FINANCIAL PROFESSIONAL COMPENSATION, FEES AND RELATED CONFLICTS
HHCM generally compensates financial professionals pursuant to an independent contractor agreement, and not as employees. However, if some financial professionals are employees of HHCM. Described below are the compensation and other benefits that independent contractor financial professionals receive from HHCM.
Cash Compensation HHCM typically pays financial professionals a percentage of the revenue they generate from the sales of products and services. The percentage received can vary (typically between 40% to 70%) depending on your financial professional’s agreements with HHCM and the investmentproduct or service recommended and can be more or less than what he/she would receive at another brokerage firm. The payments can include a bonus that is based on the amount of assets serviced or revenue generated by the financial professional. When compensation isbased on the level of production or assets, the financial professional has a financial incentive to meet those production or asset levels.
HHCM BROKERAGE COMPENSATION AND CONFLICTS DISCLOSURE
Brokerage Conflict Disclosure fees and commissions
HHCM Page 11
Member F INRA / S I P C
Fees Charged to Financial Professionals
HHCM charges financial professionals’ various fees under its independent contractor agreement for, among other things, administrative services, insurance, certain outside business activity related supervision, technology and licensing. Depending on the situation, these fees make it more or less profitable for the financial professional to offer and recommend certain services or products over others. In certain cases, these fees are reduced based on the financial professional’s overall business production or the amount of assets serviced by the financial professional, which gives the financial professional an incentive to recommend that you invest more in your account.
HHCM and financial professionals can offer various types of advisory and brokerage programs, platforms, and services, and earn differing types and amounts of compensation depending on the type of service, program or platform in which you participate. This variation in compensation can incentivize a financial professional to recommend services, programs or platforms that generate more compensation for HHCM and the financial professional than others. Certain HHCM financial professionals receive a higher payout rate for selling advisory/insurance products, which can incentivize these financial professionals to sell advisory/insurance products rather than brokerage products. Please also note that not all of the conflicts described in this disclosure apply to a particular financial professional, the financial professional’s services or all of the products we sell. The types and amounts of compensation we receive change over time. You should ask your financial professional if you have any questions about compensation or conflicts of interest.
