Item 5 Fees and Compensation
A. The advisory fees that FA charges are negotiable. The following chart sets forth for each
type of account described in Item 4(B), the maximum annual fees that ordinarily may be
charged:
Account Value SMA AMA TAA
First $500,000 3.75% 4.00% 3.50%
$500,000 to $1,000,000 3.50% 3.75% 3.25%
$1,000,000 to $2,000,000 3.25% 3.50% 3.00%
$2,000,000 to $5,000,000 3.00% 3.25% 2.75%
Over $5,000,000 3.00% 3.00% 2.50%
The annual fee may exceed the percentages listed above only if special circumstances
exist, and FA’s Chief Compliance Officer approves the upward deviation.
B. Fees are paid in advance at the start of each calendar quarter. NFS (or the PMM
involved) deducts the fees from customer accounts, and pays those fees to FA, which
shares the fees with the IAR who is assigned to the customer account.
C. In addition to the annual fees described in subpart A above, customers who have Indivi-
dual Retirement Accounts pay a $35.00 annual custodian fee to the trustee of the IRA,
which typically is NFS. Customers who choose to maintain AMA and TAA accounts pay
a $75.00 annual fee to NFS to cover billing and reporting services.
Customers with TAA accounts, in addition to the annual fees already described, will be
charged a “ticket charge” of $12.00 per transaction, which is a pass-through of the charge
FA pays NFS on each transaction. If FA’s total number of tickets (or transactions) for all
customers in both the BD and RIA divisions exceeds a certain target number in any given
month, FA may receive a rebate from NFS of a portion of the ticket charges for that
month. Such rebates are retained by FA and are not shared with customers.
Although margin accounts are not usually permitted in advisory accounts, if indeed such
an arrangement was requested and approved, the customer is advised that under FA’s
clearing agreement with NFS, FA receives a share of the margin interest generated on
debit balances in customers’ margin accounts.
Under FA’s clearing agreement with NFS, FA may also receive from NFS a payment
based on a percentage of the free credit balances that FA’s customers have on deposit
with NFS. In the current interest rate environment, no such payment is occurring, but if
interest rates were to rise, FA could receive compensation from NFS under the afore-
mentioned agreement.
D. The annual fee described in subpart A above is charged on a quarterly basis in advance of
each quarter, and is based upon the value of the account at the close of the prior quarter.
If a customer chooses to close an account in the middle of a quarter, the customer will
receive a refund of the prorated amount of the fee that was paid in advance.
E. In addition to the fees and charges described in subparts A and C above, FA may receive
the following forms of compensation:
1. On mutual funds, FA sells primarily “A shares” and “no load” funds to advisory
accounts. FA may receive ongoing payments from the mutual fund companies
related to those purchases, which are commonly known as “12b-1 fees.”
2. Certain new issue offerings, whether underwritten by FA or by an unaffiliated
financial institution, carry a sales credit that is built into the price of the offering –
in other words, a commission. For example, a customer may purchase an offering
at $25.00 per share that includes a built-in sales credit of $0.50 per share. If a
customer chooses to purchase that type of product in an advisory account, the
customer would be paying both a commission and an advisory fee on that product
for as long as that product is held in the advisory account. In those circumstances,
FA does not typically adjust the sales credit or the annual fee to account for the
double payment, but may do so in particular circumstances.
3. IARs may recommend the purchase of certain proprietary corporate finance
products to customers who hold TAA accounts. Such products include private
placements of securities, debt offerings, initial public offerings, and secondary
offerings for which FA serves as an underwriter for the offering. As described in
the prior paragraph, those products carry a sales credit built into the price of the
offering. If a customer chooses to purchase this type of product in an advisory
account, the customer would be paying both a commission and an advisory fee on
that product for as long as that product is held in the advisory account. In those
circumstances, FA does not typically adjust the sales credit or the annual fee to
account for the double payment, but may do so in particular circumstances. In
addition, FA receives other underwriting fees and expenses on these corporate
finance products, and typically receives stock warrants as well. On each such
offering, the sales credits, underwriting fees, warrants, and other forms of comp-
ensation that FA receives are clearly described in the offering memorandum that
each customer receives before making the investment. This information is usually
summarized on the cover page of the offering memorandum. These corporate
finance products may generate substantial revenue for FA.
4. FA’s IARs may recommend the purchase of certain products outside of the
advisory account as part of the customer’s recommended investment mix.
Examples might include variable annuities or other insurance-based products. In
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