Understanding mutual fund and annuity pricing and marketing

Transcription

1 Understanding mutual fund and annuity pricing and marketing When you choose an investment product, you should examine many factors, including your risk tolerance, investment objectives and time horizon, for example. Mutual funds and variable annuities have an additional element for you to consider: different share classes, with different expense structures. The expense structure can affect your overall return, so Piper Jaffray would like you to understand these fee structures to help ensure you choose the mutual fund or annuity that is most suitable for you. Mutual fund pricing Class A shares Class A shares typically charge a front-end sales charge (also called a load ) on purchases but generally have lower fees (including 12b-1 fees*) and operating expenses than other share classes. Class A shares often offer you discounts known as breakpoints when you reach certain levels of cumulative investments. This means that when you reach certain asset levels within a fund family, the sales charge you pay is reduced. *While you do not directly pay them, 12b-1 fees are ongoing and are taken out of a mutual fund s assets annually to cover marketing and distribution expenses. They can also be used to compensate a financial advisor or other investment professional. 12b-1 fees can apply to all share classes.

2 Here are factors that may allow you to receive discounts; you should be sure to discuss them with your financial advisor to see if you qualify for reduced sales charges. Rights of accumulation (ROA): ROAs allow you to combine a current fund purchase with previous transactions to reach a breakpoint. For example, if you invest $10,000 today and your previous transactions total $40,000, you may be able to combine those amounts to reach a $50,000 breakpoint and a lower sales charge on your current purchase. Letters of intent (LOI): LOIs express your intent to invest a certain dollar amount within a given period of time. All of your transactions during that time receive the sales charge based on the amount you committed to purchasing. However, if you do not meet the terms of the LOI, you would lose the discount and the fund company would retroactively adjust your sales charge. Family discounts: You and your immediate family members may be able to combine assets invested in the same mutual fund or in different funds offered by the same fund company in order to receive discounts. Rights of reinstatement (ROR): If you redeem shares in a mutual fund, RORs may allow you to reinvest or repurchase shares at net asset value within the same share class in a family of funds during a defined time period. Be sure to make your financial advisor aware of any mutual funds you hold at other firms or directly with a fund company. You may be able to combine these with your Piper Jaffray holdings to reach breakpoint levels. Please contact your financial advisor or refer to the fund s prospectus for specific details on breakpoint qualifications. Class B shares Class B shares do not impose a front-end sales charge, but they impose higher ongoing fees and operating expenses than Class A shares. Also, they typically impose a contingent deferred sales charge (CDSC), which you pay if you sell your shares sooner than a stated number of years. The CDSC decreases annually until it is eventually eliminated, usually after six years (and it is also generally waived should the owner pass away within that period). 2

3 In addition, Class B shares will often convert to Class A shares after a specified number of years, at which time they will begin to charge the same operating expenses as Class A shares. Because of the higher fees and expenses, Class B shares can be the most expensive share class if you sell shares during the CDSC period. Class C shares Many fund companies do not charge a front-end load on Class C shares, but some may, typically 1 percent of the investment. (The Class C shares offered by Piper Jaffray do not charge a front-end load.) Class C shares charge a CDSC, although it is usually lower than that of a Class B share and spans a shorter time period (normally between 12 and 18 months). Fees and expenses are higher than those of Class A shares, and, unlike Class B shares, Class C shares typically do not convert to Class A shares over time. Class C shares are often used as an alternative investment vehicle for fee-based accounts. Wrap accounts Another purchase option is to buy funds at net asset value (NAV) with no front-end load in wrap or fee-based accounts. In a wrap account you are charged an annual fee based on the value of the assets in the account; you do not pay a commission on each transaction. Like those held in traditional, commission-based accounts, funds purchased in wrap accounts impose ongoing fees and expenses. But because of the billing structure of a wrap account, you will also be charged an annual fee based on the value of that fund holding. Tools you can use Mutual fund fee schedules can be complicated. The National Association of Securities Dealers (NASD) and the Securities Exchange Commission (SEC) have created online fee analyzers to help you. These tools allow you to change variables such as share class and time horizon to compare projected fees and expenses among share classes within one fund or compare fees and expenses of different funds. The NASD fee analyzer can be found at expense_analyzers.asp. The SEC fee analyzer can be found at 3

4 Variable annuity pricing B share variable annuities Most variable annuity contracts are B share products. They are offered with no initial sales charge, but cancellation of the contract during its early years may trigger a surrender charge. These surrender charges typically range from 5 percent to 7 percent in the first year and subsequently decline to zero, generally after seven to nine years (known as the surrender charge period). Some B share variable annuities offer a bonus or upfront credit on any additional investments to the contract. However, variable annuities that offer this bonus may have higher ongoing mortality and expense (M&E)* and administrative charges, compared to contracts that do not offer this bonus. L share variable annuities L share variable annuities typically have shorter surrender charge periods, such as three or four years, but may have higher ongoing M&E and administrative charges compared to B share variable annuities. C share variable annuities The C share, or no-surrender charge, annuity offers full liquidity at any time, without any upfront or contingent sales charges (although tax penalties may apply to withdrawals before age ). Compared to the B share variable annuity, the M&E and administrative charges are typically higher for a C share variable annuity. *Mortality and expense charges compensate the insurance company for insurance risks it assumes under the annuity contract (to cover insurance for a guaranteed death benefit, for example). These charges are based on a percentage of the contract value, typically around 1.25 percent per year. 4

5 How Piper Jaffray and your financial advisor are compensated for mutual fund and annuity sales Each time you purchase a mutual fund or annuity product through Piper Jaffray, the mutual fund family or annuity sponsor generally pays Piper Jaffray compensation. This compensation varies based on the product or fund selected, the amount of your investment and the share class purchased. For front-end load mutual fund share classes, we generally receive most of the initial sales charge that you pay. For back-end mutual fund share classes and annuities, we generally are paid a selling fee at a rate set by the mutual fund or annuity sponsor. Compensation for Piper Jaffray may also include mutual fund shareholder servicing payments or annuity contract servicing payments (both of which are sometimes called trails). This compensation may be paid to us as long as you hold the mutual fund in your Piper Jaffray account or as long as the annuity contract is in force and Piper Jaffray is the broker-dealer of record on the contract. We pay a portion of the commission and trails to our financial advisors based upon our standard compensation formulas. The product or fund and the share class that you purchase will affect the compensation paid to your financial advisor. Full Access List for Piper Jaffray We have identified a group of approximately 18 mutual fund families and 9 annuity sponsors, which constitute our 2006 Full Access List. The primary characteristics of the Full Access List include companies that have had strong sales at Piper Jaffray, have a relationship history with us, provide marketing support and make revenue sharing payments to us (See Revenue Sharing below), among other characteristics. Mutual fund families and annuity sponsors that are on our Full Access List receive increased access to our financial advisors to promote their products and higher visibility at firm training events, and we provide additional promotional support for them on our company intranet site and in business sales reports. Consequently, companies on our Full Access List have enhanced opportunities to promote their funds and annuities to our financial advisors, which could lead our financial advisors to focus on and recommend their products. See Revenue Sharing below for the companies on the Full Access List. 5

6 Revenue sharing Like most other securities firms, we also receive payments, sometimes called revenue sharing payments, from some mutual funds and annuity sponsors and their affiliates. All companies on the Full-Access list make revenue sharing payments to Piper Jaffray. Other mutual fund companies and annuity sponsors may also make revenue sharing payments to Piper Jaffray. Our financial advisors do not receive extra compensation for selling products offered by a company that pays revenue sharing, and, as a client, you do not incur any additional sales charge when you purchase such products. Each Piper Jaffray financial advisor evaluates individual funds and annuities based on your needs and will work with you to determine the investments most appropriate for you. Revenue sharing payments made are not paid from mutual fund assets, the annuity contract value or assets of the annuity sub-accounts. Revenue sharing payments are generally paid based on sales volume and/or the amount of assets that Piper Jaffray clients hold in the funds and annuities. Mutual fund companies with revenue sharing arrangements at Piper Jaffray Mutual fund companies on the Mutual Fund Full Access List pays Piper Jaffray up to 0.15 percent (15 basis points) of an investor s total sale amount and up to 0.15 percent (15 basis points) on assets in their funds. We may also receive up to $50,000 from each company on the Full Access List to support our financial advisor educational and training meetings. Other fund families that are not on the Full Access List pay us up to 0.15 percent (15 basis points) of an investor s total sales and up to 0.05 percent (5 basis points) on assets in the fund family s funds. Following is a list of the mutual fund companies that have made revenue sharing payments to Piper Jaffray during the 12 months ended December 31, They are listed in order of total revenue sharing contribution (from largest to smallest). (Note: A portion of these payments was made in a prior year under a program that preceded our 2005 Full Access List program.) 6

7 2005 Mutual Full Access List Other Fund Families American Funds Van Kampen AIM First American Alliance Bernstein Goldman Sachs Franklin Templeton Rydex Henderson Davis Eaton Vance Pacific Life Putnam Allianz/PIMCO Scudder MFS Hartford WM Funds Fidelity Advisor John Hancock Lord Abbett Federated Annuity Sponsors with Revenue Sharing Arrangements at Piper Jaffray Annuity companies on the Full Access List pay us up to 0.10 percent (10 basis points) of an investor s total purchase amount and up to 0.08 percent (8 basis points) on assets. We may also receive up to $50,000 from a company on the Full Access List to support our financial advisor educational and training meetings. Other annuity sponsors that are not on the Annuities Full Access List pay us up to 0.25 percent (25 basis points) of an investor s total purchase amount and up to 0 percent (0 basis points) on aged assets. Following is a list of the annuity sponsors that have made revenue sharing payments to Piper Jaffray during the 12 months ended December 31, They are listed in order of total revenue sharing contribution (from largest to smallest). (Note: A portion of these payments was made in a prior year under a program that preceded our 2005 Full Access list program.) 2005 Annuities Full Access List Other Annuity Sponsors AXA/Equitable Pacific Life Transamerica GE Financial SunAmerica Hartford Jackson National John Hancock Metlife Investors MFS Regatta 7

8 Other fees, reimbursements and compensation We receive compensation from or on behalf of mutual funds (but not annuity sponsors) for providing certain record keeping and related services to those funds. These fees may also be referred to as shareholder accounting fees, sub-transfer agent fees or networking fees. These charges are negotiated and payments are made based upon the number or aggregate value of client positions and the level of service provided. As of December 31, 2005, we receive up to $19 per year per client position for those fund families on whose fund trades we maintain all individual client and transaction information, and we receive up to $10 per year per client position for those fund families on whose fund trades we maintain only certain parts of that data. We may also receive contributions and reimbursements from mutual funds and annuity sponsors and their affiliates for expenses we incur in connection with financial advisor training or client meetings that have an informational or educational component. Piper Jaffray and its financial advisors may receive nominal non-cash benefits from mutual funds, annuity sponsors or their affiliates. The foregoing payments and reimbursements may be considered branch marketing support and are not included in the data above. We may also receive brokerage commissions on portfolio trades executed for mutual funds or annuity sponsors and their affiliates. We prohibit the use of such brokerage commissions to offset revenue sharing payments. Such commissions are not paid to or shared with Private Client Services, the retail division of Piper Jaffray. For additional information regarding particular fund or annuity sponsor payment and compensation practices, please refer to the mutual fund or annuity offering documents, including the prospectus and Statement of Additional Information (SAI), which are available by request from the appropriate fund company or annuity sponsor. If you have any questions regarding these practices, please speak with your financial advisor and/or registered representative. Since Member SIPC and NYSE Piper Jaffray & Co. #5002 2/06 PC