Disclosures, Fees, Commissions
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
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.
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