With apologies to “My Cousin Vinnie,” a UIT is a Unit Investment Trust. UITs are investment products that brokers love to sell and investors should avoid. UITs are portfolios of stocks, bonds, or mutual funds which are assembled by trustees and then sold in units consisting of a portion of all of the assets in the portfolio.
UITs are similar to mutual funds, but there are some big differences. Unlike many mutual funds, the trustee of a UIT does not manage the holdings in the portfolio. If the manager of an actively managed mutual fund decides that the prospects for a particular holding are poor, he or she can sell and replace it. UIT trustees, however, may be able to sell poor performing holdings, but they generally cannot replace them. Another difference is that mutual funds can continue into perpetuity, but UITs have built-in expiration dates. When the expiration date hits, the securities in the UIT are sold, and the proceeds are distributed to investors. This means that the UIT trustee may have to sell its positions during a deep decline in the market. This can be calamitous if the UIT’s holdings are concentrated in a sector that falls out of favor. On the other hand, mutual fund managers can selectively trade securities whenever they feel the time and price is right.
While UITs and mutual funds both hold baskets of securities, there is no evidence that UITs perform any better than mutual funds. To the contrary, UITs generally carry very high fees and expenses which reduce their yield to investors. Those UITs that own mutual funds are weighed down by the double burden of their own expenses plus those of their mutual fund holdings.
At bottom, there are not many good arguments for buying UITs, but there is one big incentive for those who sell them—very high sales charges (i.e., 2.5 to 3%). The broker who sells a UIT typically gets a substantial chunk of this charge, which is good for him, but not so good for you. And since the UIT will terminate at a specified date, the broker has a built-in opportunity to sell his client a new UIT, with yet another sales charge.
Many UITs don’t charge a commission up front; instead, they impose what is referred to as a contingent deferred sales charge (“CDSC”). This means that if you want out of your UIT before its termination date, you may have to pay a sales charge. The CDSC is typically based on the value of the UIT when you bought it, not when you sell it. This means that if you paid $100,000 for a UIT which has a 3% sales charge, and the UIT has lost 50% of its value when you want to sell, it will cost you $3,000 (6%) to get out of a poorly performing investment. Talk about adding insult to injury! In contrast, many of the best performing mutual funds are no-load, meaning they have no sales charges.
UITs are not favored by sophisticated investors or those who understand securities markets. In fact, Jane Bryant Quinn, one of the country’s foremost financial writers, describes UITs as “Absolutely Awful Investments” in her book Making the Most of Your Money Now (Simon and Schuster, 2010).
The only good news for those who have been duped into buying money-losing UITs is that it may be possible to recover your losses through the arbitration process. In fact, Smiley Bishop & Porter LLP recently handled a FINRA arbitration for an 87 year old Alzheimer’s victim whose Wachovia/Wells Fargo broker invested 70% of the money she needed for assisted living in a single UIT. After a hotly contested FINRA arbitration hearing, the arbitrators awarded the client all of her losses back.
Smiley Bishop & Porter LLP represents individual and institutional investors in securities arbitration and business litigation. The firm focuses on cases involving defrauded investors, suitability claims, and mismarketeted investment products. Smiley Bishop & Porter LLP is available for a free initial consultation. Please visit us at www.sbpllplaw.com to obtain additional information or call us at 770-829-3850 or toll-free (800) 697-4514.