A Guide to Alternative Investments Compensation at Raymond James
Alternative Investments generally refer to investments that serve as alternatives to more traditional asset classes and may include investments such as hedge funds, private equity funds and private real estate funds.
Raymond James offers qualified clients a wide range of alternative investments. Deciding if a particular alternative investment is appropriate for you is an involved decision. It is important for you to work with your financial advisor to evaluate how a particular alternative investment and its features fit your individual needs and objectives. An important component of the selection process includes carefully reading the accompanying offering documents or prospectus prior to making a purchase decision. The offering documents contain important information that will help you make an informed choice. As part of your review process, you will need to consider the fees and expenses associated with a particular alternative investment, along with the fact that your financial advisor and Raymond James receive compensation related to your purchase. It is important to note that the fees and expenses related to alternative investments are often higher than those of more traditional investments. Your financial advisor will answer any questions that you have regarding the total fees and expenses and the initial and ongoing compensation your financial advisor and Raymond James receives.
How Raymond James financial advisors are compensated
While each investment will differ in terms of both total fees and expenses and how those fees and expenses are calculated, the following section will discuss the primary categories of fees and expenses that are common to many alternative investments and the different ways that Raymond James and your financial advisors are compensated. For additional information regarding compensated parties and the nature of compensation in relation to each of your investments, please see the applicable offering documents or prospectus, and the investment confirmation you receive from Raymond James.
Management fees. The fund manager for any particular investment will often charge a management fee that is based on the total value of your investment. As the value of your investment increases, the total management fees that a manager receives may increase. As the value of your investment decreases, the total management fees that a manager receives may decrease. These fees are similarly structured but often higher relative to the management fees in other, more traditional, investments such as mutual funds. Raymond James and/or your financial advisor generally will share in a portion of management fees to which an investment manager is entitled. The portion of management fees Raymond James receives can be up to 100% of the management fee collected by a manager and may remain at that percentage for a specified period of time based on the level of sales or indefinitely depending on when the assets were raised.
Incentive-based compensation. Many alternative investment managers receive incentive-based compensation in addition to management fees. Incentive-based fees typically involve the manager retaining a percentage of new profits generated for clients. Fees related to incentive compensation are often referred to as incentive fees or carried interest. It is important to note that these fees are in addition to management fees that are charged and that the exact calculation of incentive fees or carried interest differs from manager to manager. Raymond James and/or your financial advisor generally will share in any incentive-based compensation to which an investment manager is entitled. The portion of incentive fees Raymond James receives can be up to 100% of the incentive fee collected by a manager.
Upfront or ongoing servicing fees or placement fees. Many alternative investments have upfront costs directly related to compensating your financial advisor and/or Raymond James. These fees are generally based on the total amount of your investment and can be as high as 5.5%. Some upfront placement fees can be discounted at the discretion of your financial advisor or by meeting certain volume discounts, commonly referred to as breakpoints. Accordingly, you should consult with your financial advisor about the ability to receive such discounts. Additionally, there will generally be ongoing fees, based on the value of your investment, that are related to compensating your financial advisor and/or Raymond James. The total level of compensation received by Raymond James may be related to the total Raymond James client capital placed with a particular manager or investment. Ongoing servicing fees can be as high as 4% of the value of your investment.
Redemption fees. Some investments may have direct or indirect costs related to liquidating your position, particularly if an investment is liquidated shortly after being purchased or if an investment is specifically designed to provide limited or no liquidity to investors. Redemption fees assessed by a manager can be as high as 5% of your investment.
Expenses. Alternative investment strategies may be accessed through a variety of legal structures, including mutual funds, limited partnerships and limited liability companies. In certain structures, particularly for new offerings, investors may incur organizational and offering expenses that are related to the creation of the legal structure and marketing of the fund. These costs ultimately serve to decrease the amount of capital that is available to invest. Additionally, investors may incur other expenses that result based on the investment activity of the fund. For instance, in a real estate fund, investors may be charged for expenses related to the acquisition of a property. In a hedge fund that shorts stock, there are costs associated with establishing and maintaining the short position. Generally, investors in alternative investment funds will also bear the cost of certain ongoing expenses related to administration of the fund. These expenses may include costs related to tax document preparation, auditing services or custodial services.
Other fees & Expenses. Fund managers may charge investors other fees and expenses. You should review the offering documents carefully for a complete listing and description of all fees and expenses associated with a particular fund.
Alternative investments in fee-based accounts
If your investment is eligible for asset-based advisory fees, your financial advisor will not receive upfront and/or ongoing servicing compensation. To the extent that Raymond James receives compensation, the portion of the compensation intended to compensate your financial advisor will be credited back to your account. While your financial advisor does not receive compensation, please note that Raymond James still receives compensation even if your investment is eligible for asset-based advisor fees.
Conversely, alternative investment products not eligible for the asset-based advisory fee typically price less frequently than quarterly and/or have an upfront commission or sales load assessed upon the initial investment purchase. Subsequently, a client may choose to hold one of these products in their advisory account, but their financial advisor will not receive an asset-based advisory fee as long as it is held in the advisory account. In the case of alternative investment security holdings that are not eligible for asset-based advisory fees, Raymond James and/or your financial advisor are eligible to receive compensation as previously discussed.
General promotional activities
Marketing representatives of alternative investment companies (who are often referred to as “wholesalers”) work with Raymond James financial advisors and their branch office managers to promote their investment products. Consistent with applicable laws and regulations, these companies may pay for or provide training and education programs for Raymond James’ financial advisors and their existing and prospective clients. The companies may also pay for due diligence meetings, conferences, relationship building events, occasional recreational activities and other events or activities that are intended to result in the promotion of their investment products. The companies may help financially support Raymond James sponsored events related to alternative investments. The most financial support provided by a company to Raymond James to sponsor a single event is $35,000.
Raymond James makes available to its clients certain alternative investment funds advised by subsidiaries of Raymond James or to which Raymond James serves as a general partner or co-general partner. Raymond James may receive more revenue for selling these alternative investments because it receives compensation for providing these affiliated funds with investment advisory, administrative, transfer agency, distribution and/or other services that Raymond James may not provide to unaffiliated alternative investments. The fees paid to the sponsor of the fund are described in the offering memorandum of the fund and the annual financial statements. Of the total fees charged by affiliated funds, up to 100% may be paid to Raymond James. The portion of the fees paid to Raymond James is indirect compensation. You should review the offering documents, as well as the annual financial statements, carefully for a complete listing and description of all fees paid to the general partner or co-general partner of a particular fund.
The subsidiary companies of Raymond James provide a wide variety of financial services to individuals, corporations and municipalities. For these services, Raymond James receives compensation. As a result, Raymond James can be expected to pursue additional business opportunities with companies whose alternative investment products Raymond James financial advisors make available to their clients. Consistent with industry regulations, these services could include (but are not limited to) banking and lending services, sponsorship of deferred compensation and retirement plans, investment banking, securities research, institutional trading services, investment advisory services, and execution of portfolio securities transactions.
Risk summary of alternative investments
Alternative Investments involve substantial risks that may be greater than those associated with traditional investments and are not suitable for all investors. They may only be offered to clients who meet specific suitability requirements, including minimum net-worth tests. These risks include, but are not limited to, limited liquidity, tax considerations, incentive fee structures, potentially speculative investment products, and different regulatory and reporting requirements.
Raymond James means Raymond James & Associates, Inc., Raymond James Financial Services Advisors, Inc., and Raymond James Financial Services, Inc.