Disclosure of Account Options and Conflicts of Interest
This disclosure (“Disclosure”) describes various account options and conflicts of interest of which you should be aware in connection with investment recommendations or advice provided by Robert W. Baird & Co. Incorporated (“Baird” and together with affiliates, “we”, “us”, “our”) with respect to your relationship with Baird.
Brokerage Services and Brokerage Accounts | Advisory Programs and Advisory Accounts | ERISA Plans and IRAs | Account Fees and Charges | Proprietary Products and Third Party Payments | Material Conflicts of Interest
Brokerage Services and Brokerage Accounts
The Brokerage Services that Baird offers to clients are limited to providing custody of the account assets, the execution of securities transactions and other customary brokerage services. In addition to taking a client’s trade orders and executing the client’s trades, Baird may also provide investment advice “incidental to” the Brokerage Services. Investment advice “incidental to” the Brokerage Services may include investor education, investment research, financial tools, information about investment products and services, and, with respect to certain brokerage accounts, recommendations about whether to buy, sell or hold particular securities and other investments.
In providing an investment recommendation, a Baird Financial Advisor has certain suitability obligations. This means that the Financial Advisor must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through reasonable diligence to ascertain the client’s investment profile. A client’s investment profile includes the client’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance and any other information that client may disclose to the Financial Advisor in connection with the recommendation. Moreover, Baird or a Baird Financial Advisor must have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the client when taken together in light of the client’s investment profile.
A Baird Financial Advisor is not required to provide any advice or recommendations to, or provide ongoing or regular monitoring of, a client’s brokerage account, or inform the client of any recommended changes to the investments in the account. To the extent a Baird Financial Advisor provides advice or a recommendation to a client on a transaction, he or she need not provide advice to the client on a regular or continuous basis.
Advisory Programs and Advisory Accounts
Baird offers a wide array of Advisory Programs to clients. The investment advisory services offered under the Advisory Programs generally include ongoing recommendations and investment advice about investment products and services and consulting services, which are provided by Baird’s home office investment professionals and/or the client’s Baird Financial Advisor. Depending upon the particular Advisory Program that a client selects, the program may also include professional, discretionary management of the client’s account. The Advisory Programs may also include financial planning for which Baird and its Financial Advisors may charge a separate financial planning fee.
The Advisory Programs that Baird offers include the following:
- Non-Discretionary Program. Through Baird’s non-discretionary Advisory Choice Program, a client’s Financial Advisor provides ongoing advice and recommendations about the client’s investments in the account but the client must approve all trading decisions.
- Mutual Fund/ETF Asset Allocation Portfolio (Model and Custom) Programs. Baird’s mutual fund/ETF asset allocation portfolio programs offer clients the ability to invest in mutual funds and ETFs that in turn invest in various asset classes, such as U.S. equity securities, foreign securities, fixed income securities, non-traditional assets (such as real estate) and cash. Clients can select a model portfolio of mutual funds/ETFs created and managed by Baird or they can create a custom portfolio (with the assistance of their Financial Advisor) that is managed by the client. The client’s Financial Advisor also provides ongoing advice and consulting in connection with these Programs. Baird’s mutual fund/ETF asset allocation portfolio programs include the following: ALIGN Custom Portfolios, ALIGN Dynamic Portfolios; ALIGN Strategic Portfolios; ALIGN Tactical Portfolios; ALIGN Elements; BairdNext Portfolios; and Russell Model Strategies.
- Financial Advisor Managed Account Program. Under the Private Investment Management (“PIM”) Program, certain Financial Advisors have been approved by Baird to manage client accounts with full discretion (“PIM Managers”). Under the PIM Program, the client’s PIM Manager manages the account in accordance with a strategy jointly selected by the client and the PIM Manager.
- Separately Managed Account Programs. Under Baird’s managed account programs, clients can hire third party investment managers or asset management departments of Baird to manage their accounts. The client’s Financial Advisor also provides ongoing advice and consulting in connection with these programs. The managed account programs include: Baird Equity Asset Management Portfolios (which are managed by Baird Equity Asset Management, a department of Baird); Client Selected Managers (“CSM”) Service; Recommended Managers; Referred Managers; Dual Contract Managers and Riverfront Managed Portfolios, which are managed by RiverFront Investment Group LLC (“RiverFront”), an affiliate of Baird.
- Unified Managed Account (“UMA”) Programs. Baird’s UMA Programs provide clients the ability to invest in mutual funds and ETFs that in turn invest in various asset classes, such as U.S. equity securities, foreign securities, fixed income securities, non-traditional assets (such as real estate) and cash. The UMA Programs also provide clients with the option to have a portion of their accounts managed by one or more investment managers, which may include Baird Equity Asset Management. Clients can select a model portfolio that is created and managed by Baird as overlay manager and other managers selected by the client, or they can create a custom portfolio (with the assistance of their Financial Advisor) that is managed by Baird, an overlay manager and other managers selected by the client. The client’s Financial Advisor also provides ongoing advice and consulting in connection with the UMA Programs. Baird’s UMA programs include the following: Unified Advisory Select Portfolios; and ALIGN UMA Select Portfolios.
With an advisory account enrolled in an Advisory Program, Baird and your Baird Financial Advisor are investment advisers that have various obligations under and are subject to the Investment Advisers Act of 1940 and the rules thereunder (the “Advisers Act”). Among other things, the Advisers Act prohibits an investment adviser from engaging in fraudulent, deceptive or manipulative conduct. When providing investment advice to a client’s advisory account, Baird and your Baird Financial Advisor are fiduciaries under the Advisers Act and as such they are required to act solely in the client’s best interest and to disclose all material facts, particularly material conflicts of interest.
More information about Baird’s Advisory Programs, conflicts of interest and other related matters is contained in Baird’s Form ADV Part 2A Brochure, which is delivered to you when you open an advisory account at Baird or can be downloaded at https://adviserinfo.sec.gov/IAPD/Default.aspx.
ERISA Plans and IRAs
For purposes of Section 3(21)(A)(ii) of the Employee Retirement Income Security Act of 1974 (“ERISA”), Section 4975(e)(3)(B) of the Internal Revenue Code (the “IRC”), and the US Department of Labor’s “fiduciary rule” set forth in 29 CFR §2510.3-21, to the extent it is in effect (the “Fiduciary Rule”), a person is a fiduciary under ERISA or the IRC (as the case may be) to the extent such person renders investment advice with respect to moneys or other property of a plan or IRA described in the Fiduciary Rule (a “plan” or “IRA”), subject to the exemptions and exclusions described in the Fiduciary Rule. Baird and its Financial Advisors may be fiduciaries to ERISA plans, plan participants and IRAs within the meaning of the Fiduciary Rule if and to the extent they provide investment advice to them.
It is important for you to understand that the requirements imposed upon fiduciaries under ERISA, the IRC or the Fiduciary Rule on the one hand, and the requirements imposed upon fiduciaries under the Advisers Act on the other hand, are separate and distinct requirements. While there are some similarities between those requirements, there are some important and significant differences. As a result, certain programs, services and investment products offered by Baird may be made available to your taxable accounts but may not be available to your retirement accounts. For more specific information, you should consult with your Baird Financial Advisor and refer to your agreements with Baird and the related disclosure documents.
Account Fees and Charges
With a brokerage account, the client directly or indirectly pays Baird transaction-based compensation, generally consisting of commissions or sales charges or loads, on each trade. The commissions or other transaction-based compensation will vary depending on the type of security purchased and the size of the transaction. Baird will also generally receive, on an ongoing basis, applicable distribution (12b-1) fees, trail commissions and similar payments relating to the client’s mutual fund, annuity and, if applicable, other pooled investments. The costs of these fees and commissions are borne by the client in many instances because they are deducted from the client’s investment.
With an investment advisory account, the client will pay Baird an ongoing fee based on the value of the account. If the client selects a third party or affiliated manager to manage his or her account, the client will pay an additional fee for that manager’s service. With some advisory accounts, the client may pay commissions on securities trades executed by broker-dealers (which may include Baird), in addition to an advisory fee. Baird may also earn additional compensation from third parties in connection with the client’s purchases and holdings of certain investments, as explained under heading “Material Conflicts of Interest” below.
Baird may also receive additional third party payments from mutual fund and annuity providers in the form of revenue sharing or marketing support payments, volume concessions from UIT providers, and mutual fund networking fees that are based on a client’s investments or positions in those funds or annuity contracts. To the extent Baird has contracted with Charles Schwab & Co. Inc. (“Schwab”) to clear mutual fund trades for Baird on behalf of its clients and maintain an omnibus account for Baird with regard to Baird client mutual fund trades and positions, Baird will receive compensation from Schwab. Baird also receives fees from banks and money market mutual funds (or their sponsors) that participate in Baird’s Cash Sweep Program.
Proprietary Products and Third Party Payments
Baird offers Proprietary Products (as defined below) and receives Third Party Payments (as defined below) with respect to investment recommendations. The term “Proprietary Products” means a product that is managed, issued or sponsored by Baird or its affiliates. The types of Proprietary Products that Baird offers to clients are various mutual funds that are a series of Baird Funds, Inc.; mutual funds sponsored by other firms but sub-advised by Baird; mutual funds and ETFs managed or advised by RiverFront, an affiliate of Baird; private equity funds managed by affiliates of Baird; a hedge fund managed by Greenhouse Funds, LP (“Greenhouse”), an affiliate of Baird; investment partnerships managed by Baird; and separate accounts managed by Baird or RiverFront. The term “Third Party Payments” include sales charges when not paid directly by the client; gross dealer concessions; revenue sharing payments; 12b-1 fees; distribution, solicitation or referral fees; volume-based fees; fees for seminars and educational programs; and any other compensation, consideration or financial benefit. The types of Third Party Payments Baird receives include: dealer concessions paid by mutual fund distributors, annuity and UIT providers out of the front-end sales load, sales charge or commissions charged to clients when they purchase mutual fund shares, annuities or UITs; ongoing distribution (12b-1) fees and trail commissions paid by mutual fund distributors and annuity providers with respect to the mutual fund shares or annuities owned by the client; revenue sharing or marketing support payments from various mutual fund and annuity sponsors; volume concessions paid by UIT sponsors based on sales; administrative or networking fees paid by mutual funds or their sponsors in consideration for services that Baird provides to those funds; payments from Schwab pursuant to a mutual fund clearing agreement based on Baird client assets invested in mutual funds cleared by Schwab; sponsorships of Baird events by mutual fund, annuity and other product sponsors; payment by mutual fund, annuity, UIT and other sponsors for travel and related expenses incurred by Baird for its associates to attend educational and due diligence seminars, including those hosted by those sponsors; and fees and other compensation paid by banks and money market mutual fund sponsors for services provided by Baird to such banks and sponsors in connection with Baird’s Cash Sweep Program. Baird Financial Advisors may receive non-cash compensation and other benefits from mutual fund and annuity sponsors with which Baird does business. Such non-cash compensation and other benefits may include invitations to attend conferences or educational seminars, payment of related travel, lodging and meal expenses, and receipt of gifts and entertainment. These payments are further described under the heading “Material Conflicts of Interest” below.
Baird offers many investment products for purchase by clients across a wide array of asset classes, although there are some limitations on the types of products that Baird makes available due to resource constraints. For example, there are limitations on our clients’ ability to buy foreign securities, securities of privately held companies, alternative investments and complex securities. There are also limitations on the number of mutual funds and annuities (and related share classes) that are available for purchase. Baird and your Financial Advisor only offer and recommend, in addition to Proprietary Products, unaffiliated third-party mutual funds, annuities, and other investment vehicles of investment sponsors, managers, and funds (and their affiliates) (collectively, “Investment Sponsors”), with whom we have entered into selling and distribution agreements. This is due, in part, to the significant time and resources needed to conduct due diligence, enter into contracts with those product providers, set up those products on our platform and maintain and service accounts that hold those products. We also have limitations on the number of recommended third party managers we make available to our clients as a result of our due diligence and other research, and the managers’ willingness to enter into a relationship with Baird and accept wrap sponsor client accounts. We also limit the number and types of investments we make available as a result of various considerations, such as general suitability, complexity and lack of expected client demand. Nonetheless, Baird believes that it offers its clients a sufficient number and types of investments to meet their needs. Some investment products that Baird offers are Proprietary Products or are products that generate Third Party Payments to Baird and/or its Financial Advisors. However, the vast majority of the investment products Baird makes available are not Proprietary Products, and Baird believes it has comparable non-Proprietary Products as options for clients. All of the mutual funds, annuities and UITs that can be purchased by a client in a brokerage account generate Third Party Payments (such as dealer concessions and 12b-1 fees), but many mutual funds, annuities and UITs that are available for an advisory account do not. Similarly, Baird makes available through its Advisory Programs many investment managers that are not affiliated with Baird and that, as a whole, offer a wide array of investment strategies and objectives. However, some Advisory Programs make available products and services provided by Baird and its affiliates, such as RiverFront, and certain Advisory Programs solely consist of products and services provided by Baird and its affiliates. With respect to advisory accounts, Baird Financial Advisors are not limited to recommending Proprietary Products or investments that generate Third Party Payments; they are free to recommend non-Proprietary Products or investments that do not generate Third Party Payments. A client may be able to obtain the same or similar investment products and services offered by Baird from another financial institution at lower cost.
Material Conflicts of Interest
Below is a description of material conflicts of interest, which exist when Baird or your Baird Financial Advisor has a financial interest or incentive that a reasonable person would conclude could affect the exercise of its, his or her best judgment in rendering investment advice to you. We have identified the potential conflicts of interest with respect to these incentives below.
Baird is providing you with these and other disclosures, has adopted policies and procedures and is required to comply with applicable laws and regulations, all of which are intended to address and/or mitigate these conflicts of interest.
- Rollovers/Transfers of Account to Baird – Baird and your Baird Financial Advisor have a financial incentive to cause you to rollover assets in your 401(k) or other retirement plan account to an IRA at Baird, to transfer any of your retirement or other investment accounts to Baird and to add assets to your Baird accounts because those actions will result in Baird and your Baird Financial Advisor receiving additional compensation for services and recommendations provided to your accounts.
- Recommendations as to Type of Account --Your Baird Financial Advisor may recommend that your account be a brokerage account or an advisory account. With a brokerage account you pay commissions on purchases and sales of securities purchased and sold for your account, as well sales loads and charges on mutual fund, annuity and UIT purchases. In addition, mutual funds and annuities may pay ongoing distribution and/or shareholder service fees (such as 12b-1 fees) to Baird based on the value of your positions in those products. Baird and your Baird Financial Advisor may have an incentive to recommend that you have a brokerage account if they intend to make recommendations to place trades on a frequent basis. With an advisory account, you pay an ongoing investment advisory fee to Baird that is generally expressed as a percentage of the value of your account. Generally, with an advisory account your Baird Financial Advisor will monitor your account on an ongoing basis, while that is not necessarily the case with a brokerage account. With an advisory account, mutual funds can be purchased without a sales load and without ongoing 12b-1 fees. Additionally, with an advisory account there are a variety of programs from which you can choose, including non-discretionary investment advice, mutual fund asset allocation solutions, use of third party investment managers, and giving your Baird Financial Advisor discretion to manage your account. See “Advisory Programs and Advisory Accounts” above or Baird’s Form ADV Part 2 Brochure for more information. Baird and your Baird Financial Advisor have an incentive to recommend that you have an advisory account because of the recurring fee revenue they earn on an advisory account. An advisory account may be appropriate for you if you would like to take advantage of the advisory programs available in an advisory account or if you expect significant trading activity in your account during a period of time because during that period the fees you pay for having an advisory account may be comparable or less than the aggregate commissions and sales loads/charges you would pay to engage in such trading activity during that period through a brokerage account. However, due to Baird’s fiduciary obligation regarding investment choices and holdings in an advisory account, advisory accounts are generally not available to clients who frequently select their own investments and direct their own trade activity independent of their Financial Advisor’s advice, regardless of whether an advisory account would result in lower costs. Conversely, if you are not interested in taking advantage of the Advisory Programs that are available in an advisory account and you do not expect to engage in significant trading activity, a brokerage account may be appropriate. See “Commissions, Sales Loads and Trail Fees” and “Advisory Fees” below.
- Commissions, Sales Loads and Trail Fees – With a brokerage account, you will pay to Baird and your Baird Financial Advisor commissions on purchases and sales of individual equity and fixed income securities. You will also indirectly pay to Baird and your Baird Financial Advisor front-end or contingent deferred sales charges (“loads”) or commissions on mutual fund, annuity and UIT purchases, and ongoing distribution (12b-1) fees, trail fees and commissions on your holdings of mutual funds and annuities. Thus, your Baird Financial Advisor has an incentive to recommend frequent trades in your brokerage account. Your Baird Financial Advisor also has an incentive to recommend transactions that provide him or her greater levels of compensation, as some investment products provide higher compensation than other products and several smaller transactions provide higher compensation than fewer larger transactions in the same security or product type. For example, sales loads on variable annuity purchases are typically higher than sales loads on mutual fund purchases, which in turn are typically higher than sales charges on UIT purchases. Sales loads on mutual fund and annuity purchases are generally higher than commissions on purchases of individual equity securities, which in turn are higher than commissions and markups on purchases of fixed income securities. Moreover, commissions on corporate bond purchases are higher than commissions on municipal bond purchases, which are higher than commissions on US Treasury/Agency and CD purchases. Commission rates on large trades of most securities generally are lower than on smaller trades. The differential commissions across products generally reflect the additional level of effort and work involved in evaluating the product and explaining it to the client. Baird also may act as principal on securities trades effected for your account (i.e. sell securities out of its inventory to you) and thus make a profit on those transactions.
- Advisory Fees – With an advisory account, you will pay ongoing fees based on the value of your account (“Program Fee”). If you have an advice fee arrangement, the Program Fee is comprised of an advice fee (“Advice Fee”) paid to Baird and, for some Programs, an additional portfolio fee (“Portfolio Fee”). The Advice Fee covers certain investment advisory, brokerage and custody services provided by Baird. The Portfolio Fee covers portfolio management and other services provided by the manager(s) selected for your account, which may include departments or affiliates of Baird. Please refer to Baird’s Form ADV Part 2A Brochure for more detailed information. Your Baird Financial Advisor may have an incentive to recommend that you have an advisory account because your Baird Financial Advisor will receive regular, ongoing compensation, which may be greater than the compensation he or she would otherwise earn on a commission-based brokerage account.
- Account Service, IRA, and Other Fees – Each account is generally subject to certain account fees and service charges, which vary depending upon the type and size of the account and the programs or services that you have selected for the account. The fees and service charges that may apply to an account include but are not limited to annual account fees, IRA fees, wire transfer fees, and account closing and transfer fees. A Schedule of Fees and Service Charges is available on Baird’s website at www.rwbaird.com/disclosures. Baird will receive additional compensation in the form of these fees.
- Third-Party Payments
- Mutual Funds
- Sales Charges – If you purchase a mutual fund in a brokerage account, a mutual fund will compensate Baird and your Baird Financial Advisor based on the applicable front-end sales charge paid by you out of your investment in that fund. This provides Baird and your Financial Advisor an incentive to recommend mutual funds to you and, if applicable, to favor mutual funds that have higher sales charges than those with lower sales charges. Mutual funds offer different share classes and some share classes have contingent deferred, or back-end, sales loads and higher ongoing distribution or 12b-1 fees than share classes that charge a front-end sales load. Thus, your Baird Financial Advisor may have an incentive to recommend one mutual fund share class over others based on expected compensation from sales loads and 12b-1 fees over the anticipated holding period.
- Distribution (12b-1) Fees – Baird and its Financial Advisors provide certain distribution and other shareholder-related services to mutual funds and their vendors with respect to Baird clients that hold shares of such mutual funds in their accounts. Baird and its Financial Advisors may receive distribution and shareholder servicing fees from those funds out of their Rule 12b-1 plans (“12b-1 fees”) on an ongoing basis as compensation for the services provided. With brokerage accounts, the receipt of these fees provides Baird and its Financial Advisors an incentive to favor mutual funds that pay higher distribution (12b-1) fees. However, any 12b-1 fees received by Baird on your holdings of mutual funds in your advisory accounts are rebated to your account. In any event, your Baird Financial Advisor will not receive compensation related to any 12b-1 fees that are paid by mutual funds you hold in your advisory accounts.
- Revenue Sharing/Marketing Support – Baird receives financial support from the sponsors of certain mutual funds included on Baird’s Mutual Fund Leaders List. Baird also receives financial support from sponsors of certain money market mutual funds that Baird makes available to its clients. This support, which varies among fund companies, is commonly referred to as “revenue sharing.” Baird also may be reimbursed by mutual fund companies or their service providers for expenses incurred by Baird for various sales meetings, seminars, and conferences held in the normal course of business. Receipt of marketing support payments and expense reimbursements provides Baird an incentive to favor mutual funds and their sponsors that make greater levels of such payments. The marketing support and other payments that Baird receives from mutual funds and their sponsors are not paid to Baird Financial Advisors, and the compensation that Baird pays to its Financial Advisors is not tied to such payments. Baird Financial Advisors may, however, receive non-cash compensation and other benefits from Baird and mutual fund companies and their sponsors with which Baird does business as further described below.
- Administrative and Networking Fees – Baird receives compensation from certain mutual funds and their sponsors in consideration for administrative, accounting, recordkeeping, sub-transfer agency or other services (“service fees”) that Baird provides to those funds. While this provides Baird an incentive to favor funds paying higher service fees, these fees are not paid to Baird Financial Advisors, and the compensation that Baird pays to Baird Financial Advisors is not tied to such service fees.
- Schwab Clearing Arrangement – Baird has a clearing arrangement with Charles Schwab & Co., Inc. (“Schwab”) in which Schwab maintains an omnibus account with respect to certain mutual fund families for Baird on behalf of Baird clients. Although Baird pays Schwab a fee for its clearing and omnibus services, with many of the mutual funds Schwab will pay Baird a portion of the fees Schwab receives, which are based on the value of the Baird client assets in those funds. These payments will vary based on the type of fund (load or no load), the value of Baird client assets in those funds, and the relationship that Schwab has with those funds (whether or not Schwab receives payments from those funds or their sponsors, and the rates of such payments). As a result, Baird may have an incentive to recommend mutual funds from which Baird would receive higher payments from Schwab. However, Baird generally will not compensate Baird Financial Advisors based upon the amounts it receives from Schwab except with respect to amounts attributable to sales loads and 12b-1fees that Baird would otherwise receive directly from a fund if it were not for the existence of the clearing arrangement with Schwab.
- Mutual Funds
- Commissions – If you purchase an annuity in a brokerage account, insurance companies will compensate Baird and its Financial Advisors for selling their annuities. Baird and its Financial Advisors are paid by the insurance companies in various forms including upfront commissions based upon the initial sale of the product and ongoing trail commissions or residuals relating to your continued holding of the product. This provides Baird and Baird Financial Advisors an incentive to favor annuities that provide greater compensation. Commissions on variable annuities are generally higher than commissions on mutual funds, fixed index annuities and fixed rate annuities, giving Baird Financial Advisors an incentive to recommend variable annuities over other investments.
- Marketing Support – Baird may receive additional financial support from the insurance companies of certain annuity products that it sells for training and educating Financial Advisors. This support, which varies from insurance company to insurance company, is commonly referred to as “marketing support” payments. Baird also may be reimbursed by insurance companies or their sponsors for expenses incurred by Baird for various sales meetings, seminars, and conferences held in the normal course of business. Receipt of marketing support payments and expense reimbursements provides Baird an incentive to favor annuities and insurance companies that make greater levels of such payments. However, the marketing support payments that Baird receives from insurance companies are not paid to Baird Financial Advisors, and the compensation that Baird pays to its Financial Advisors is not tied to such payments. Baird Financial Advisors may, however, receive non-cash compensation and other benefits from Baird and insurance companies with which Baird does business as further described below.
- Unit Investment Trusts (UITs) – If you purchase a UIT for your brokerage account, you will pay a deferred sales charge to the product sponsor who in turn will pay a significant portion of the sales charge to Baird as an upfront dealer concession. Concessions paid to Baird give Baird and its Financial Advisors an incentive to sell UITs. Baird may also receive volume concessions based on sales of UITs, but those are not shared with Baird Financial Advisors.
- Alternative Investment Products – Baird offers and sells various alternative investment products, including hedge funds (including fund of hedge funds), private equity funds (including funds of private equity funds), managed futures and structured products. Baird and its Financial Advisors will receive commissions and, possibly trailers on the sale of alternative investment products to brokerage accounts. Those commissions will vary across the types of alternative investment products offered, thus giving Baird and Baird Financial Advisors an incentive to recommend an alternative investment product that pays a higher commission.
- Affiliated and Proprietary Products – To the extent you invest in a mutual fund, ETF or other investment vehicle managed or sub-advised by Baird or an affiliate of Baird, or select Baird or an affiliate of Baird as a third party manager to manage your account, Baird and its affiliates will receive additional or higher aggregate compensation in the form of advisory and management fees than if a client invests using unaffiliated managers or products. This compensation is not paid to Baird Financial Advisors. However, Baird pays referral fees to its Financial Advisors based on the assets of their brokerage account clients who invest in Institutional Class shares of the Baird Funds.
- Cash Sweep Revenue – Baird receives fees and other compensation in connection with Baird’s Cash Sweep Program. If your uninvested cash is swept into a money market mutual fund or an interest-bearing deposit account at a bank through Baird’s Cash Sweep Program, Baird will receive compensation based on how much you have so invested or deposited. The compensation is paid by the banks and money market fund sponsors and is intended to compensate Baird for its services in establishing and administering the Cash Seep Program and providing sub-accounting services. This compensation is not paid to Baird Financial Advisors. Baird believes that it offers clients a reasonable interest rate or yield on the cash it sweeps into a bank account or money market mutual fund.
- Payment for Order Flow – Baird selects securities trade execution venues based on the size of the order, trading characteristics of the security, speed of execution, likelihood of price improvement, availability of efficient automated transaction processing, guaranteed automatic execution levels, and other qualitative factors. Baird receives payment on certain options or equity securities orders routed to some venues, but Baird’s routing decision is always based upon obtaining favorable executions for clients rather than the availability of payment for order flow. The existence and amount of payments are dependent upon the size and type of the routed order. Baird may have an incentive to recommend the client transact in securities for which Baird receives payment for order flow. However, the payments that Baird receives are not paid to Baird Financial Advisors, and the compensation that Baird pays to its Financial Advisors is not tied to such payments.
- Selection of Managers and Their Products – Other investment management firms may select Baird, in its capacity as a broker-dealer, to execute portfolio trades for their clients, including for mutual funds they advise. Investment management firms may also select Baird to provide custody, research or other services. Baird receives compensation for those services. This may create an incentive for Baird to favor the services of such investment management firms or their products, including the mutual funds advised by such investment management firms.
- Transactions by Baird and Its Affiliates – Baird and its affiliates and associates may engage in securities transactions for their own accounts, including the same or related securities that are recommended to or owned by Baird clients. These transactions may include trading in securities in a manner that differs from, or is inconsistent with, the advice given to Baird clients, and the transactions may occur at or about the same time that such securities are recommended to or are purchased or sold for client Accounts. This creates a potential for a conflict between the interest of clients and the interests of Baird and its affiliates and associates.
- Your Financial Advisor’s Compensation
- Cash Compensation – Baird Financial Advisors and other associates offering services and providing ongoing assistance to clients receive compensation from Baird. A Baird Financial Advisor is generally compensated based upon the Financial Advisor’s total production level at Baird, which takes into account all of the advisory fees, commissions, 12b-1 fees/trailers and similar compensation paid to Baird by the clients for which the Financial Advisor is responsible. The cash payout amount made to a Financial Advisor is set forth as a percentage of his annualized production. The percentage will vary based on the relevant annualized production tier. The percentage is lower for lower annualized production tiers, and higher for higher tiers. Accordingly, as the amount of a Financial Advisor’s production increases, his or her cash payout will increase. When the commissions and fees paid by a client increase, the compensation paid by Baird to the client’s Financial Advisor increases. Thus, Baird Financial Advisors have an incentive to charge higher commissions and recommend more frequent trades for brokerage accounts and to charge higher fees for advisory accounts. They may also have an incentive to recommend that clients establish and fund accounts and to recommend more transactions near the end of a quarterly or annual production period in order to increase their production for that period so that they can get to the next annualized production tier and increase their cash payout percentage for the succeeding quarter. Cash payout percentages and production tiers also vary based on the Financial Advisor’s years of service. Baird Financial Advisors may also receive bonuses based on the number of financial plans they generate or on net new assets or advisory assets they gather. Baird Financial Advisors may also be eligible to buy common stock of Baird’s parent company, Baird Financial Group, Inc., generally based on their total production. Baird may reduce the rate of compensation it pays to Baird Financial Advisors when the commissions and fees paid by a specific client are below certain levels. This creates an incentive for Baird Financial Advisors to charge commissions and fees at or above those levels and a disincentive to reduce commissions and fees below a level that will negatively impact their production. In brokerage accounts, the size of commissions varies based upon the type of security being purchased or sold (e.g., for trades of the same principal value, the same client may pay a different commission for a transaction in an equity security as opposed a fixed income security). Therefore, Baird and Baird Financial Advisors have an incentive to recommend transactions in securities paying larger commissions. Due to the manner in which Baird compensates its Financial Advisors, a Financial Advisor may have a financial incentive to trade less for Baird Advisory Choice accounts (Baird’s non-discretionary investment advice program) than brokerage accounts and to reduce trading or increase a client’s advisory fees if trading for a client’s Advisory Choice account exceeds certain levels established by Baird.
- Deferred Compensation – Baird Financial Advisors who achieve certain total annual production thresholds can be eligible for deferred compensation in addition to their cash payouts. The amount of deferred compensation varies based on annual total production tiers and years of service. Financial Advisors can elect to receive a cash payout in lieu of deferred compensation. This may give Financial Advisors an incentive to increase their production.
- Award/Recognition Trips – Baird Financial Advisors can earn the right to go on group trips to attractive destinations based on achievement of various production levels. This may give Financial Advisors an incentive to increase their production in order to qualify for a trip.
- Recruitment Bonuses – A Financial Advisor who is recruited to join Baird generally receives an upfront bonus (in the form of a forgivable promissory note over a period of years) which is equal to a high percentage of his or her trailing 12-month production. The Financial Advisor may also be eligible to receive smaller back-end bonuses each year over a few years after they join Baird so long as they achieve certain production levels. These upfront and back-end recruitment bonuses give Financial Advisors an incentive to persuade their existing clients to transfer their accounts to Baird and to generate new business. They also give Financial Advisors an incentive to generate commissions and fees from their accounts.
- Non-Cash Compensation – Baird Financial Advisors and other Baird associates may receive non-cash compensation and other benefits from Baird and from investment managers and other sponsors of investment products with which Baird does business. Such non-cash compensation and other benefits may include invitations to attend conferences or educational seminars, payment of related travel, lodging and meal expenses, and receipt of gifts and entertainment. Receipt of these benefits provides Baird Financial Advisors an incentive to favor managers and investment products and their sponsors that provide greater levels of such benefits.
- Other Conflicts of Interest Applicable to Advisory Accounts
- For purposes of calculating a client’s asset-based Program Fee, the value of a client’s assets is generally determined by Baird. Baird generally relies upon third party sources, such as third party pricing services when valuing account assets. In some instances, such as when Baird is unable to obtain a price for an asset from a pricing service, Baird may obtain a price from its trading desk or it may elect to not price the asset. Obtaining a price from its trading desk may present a conflict of interest because Baird’s fees in advisory accounts are based upon the value of assets held in such accounts.
- Baird will include cash and cash equivalent balances in a client’s account when calculating a client’s asset-based Program Fee. However, Baird has adopted internal policies that may restrict the percentage of cash or cash equivalents for sustained periods in an account on which an asset-based fee is charged. Although these internal policies are designed to benefit clients who hold large cash balances in their accounts for sustained periods and attempt to ensure that such clients pay an advisory fee that is reasonable for the services provided, the policies, in some cases, could create a financial incentive for Baird or its Financial Advisors to recommend or select riskier investments for a client’s account.
- When an affiliated or third party manager is selected to manage a client’s account, Baird is responsible for paying the manager its fee. Baird generally charges the client a Portfolio Fee for the use of the manager (in addition to an Advice Fee for advisory and other services provided by Baird), out of which it pays the manager. In some legacy cases, the client does not pay a separate Portfolio Fee but instead pays an all-inclusive fee, out of which Baird pays the manager. In some instances, the manager’s fee charged to Baird is more than the Portfolio Fee (i.e., amount charged to the client for that manager). However, in many instances, the amount paid by Baird to the manager is less than the Portfolio Fee, resulting in Baird retaining the difference. The fee paid to the manager and amount of the Portfolio Fee retained by Baird vary based upon, among other factors, the program selected by a client, the investment strategy and other services sought by a client, the sub-advisory fee Baird negotiated with the manager, the manager’s investment style or strategy, the level of services provided by the manager, and the size of a client’s account. Thus, Baird has an incentive to recommend or favor investment managers who charge lower fees or that otherwise result in Baird retaining a greater amount of the Portfolio Fee. Baird Financial Advisors do not share in any difference between the Portfolio Fee and the fee that Baird actually pays to the manager.
- Given the nature of the Program Fee, Baird also has an incentive to recommend or select investment managers that trade less frequently with or that trade away from Baird because Baird will incur lower trading costs with respect to such managers and such relationships will be more profitable to Baird.
About this Disclosure
Certain information and assurances we provide pursuant to this Disclosure include information obtained from independent third party sources Baird deems reliable, but for which Baird is under no obligation to independently verify.
We may change the information contained in this Disclosure without prior notice. You should also refer to your Client Relationship Agreement, disclosure documents, and related paperwork that have been or will be delivered to you. Those documents contain important information about your accounts, including the terms and conditions applicable to the accounts, certain risks associated with the accounts, and the applicable fees and expenses. You should also review the prospectus or other offering or disclosure materials you receive for the investments in your accounts because they contain important information about the investment, including the investment objective, principal strategies, associated risks, fees and expenses, and management.
This Disclosure does not amend or supersede any of your existing agreements with us, our affiliates, or Investment Sponsors, including, without limitation, your Client Relationship Agreement. Except as specifically provided otherwise in this Disclosure, this Disclosure does not take precedence, nor is it controlling over, such other agreements.
Nothing in this Disclosure, express or implied, confers upon any other person any rights or remedies of any nature whatsoever. Nothing contained herein, express or implied, other than your understanding or acknowledgement of, or your agreement with, the statements made herein, will be construed to establish, amend, or modify any agreement or arrangement between you and us.