Unit Investment Trusts - Where Did It Go So Wrong?

Unit Investment Trusts (UIT’s) have been around for a very long time. They were designed as a way to deliver diversification to individual investors in a “low-cost” vehicle. Boy have these guys veered off course!

A friend recently asked me what I was doing these days and I explained that I had co-founded GuardVest to make sure investors had the information they need to hold advisors accountable. She said, “oh that’s nice. I am just really lucky I guess. I love my financial advisor.” “Well that is nice”, I responded “but do you really know how you are doing? Do you really know what you are paying and what you are getting for it?” It must have made an impact because she later logged into GuardVest.com to see if what she found out about her portfolio would provide even greater peace of mind or perhaps, reveal that things were not as good as she had thought…..

That brings me back to UIT’s. As it turns out, my friend had most of her portfolio invested in UIT’s through a major national advisory firm. As I mentioned above, UIT’s were introduced years ago as a low-cost way to deliver advice and diversification to investors. But they also are a bit “off the radar screen” and so tracking down information about performance and expenses is a bit more difficult. Well as the old saying goes, “sunshine is the best disinfectant” and as I dug into these holdings, the mildew was staggering! Across 5 of her holdings that represented almost 80% of her total portfolio, the AVERAGE annual expenses she was paying to invest in these securities was 3% PER YEAR!

Let’s put that in perspective: a fully diversified portfolio of securities with similar characteristics can be purchased for as little as 0.1% per year. The ONLY reason I can think of to pay 30X more in expenses is that you believe with enormous conviction that you will still earn a higher return even AFTER these extremely burdensome expenses are deducted from your account. But as I have always reminded friends: returns are hopeful, expenses are certain.

So how has her portfolio performed? First the good news: even after these expenses, across all of her holdings she had a positive return. But now the “rest of the story” (thank you Paul Harvey) – her returns were far less than they would have been if she had invested in the 0.1% alternative described above – a simple portfolio that just keeps expenses really low and tracks the over stock market.

And this is by no means a new revelation. Advisors have been very aware for years that after expenses, the majority of actively managed portfolios underperform the low-cost passive alternative.

So why would any advisor gamble their clients money on what they know to be a long-shot? The answer is, unfortunately, very obvious – to make more money. The UIT’s my friend held in her portfolio were among the most profitable item I have ever seen from the perspective of the advisor – for the clients? Not so much.

Given what I have written so far, what I am about to say is probably going to really surprise you. I don’t actually think her advisor is an “outlier”. That is to say, I think this type of advice is far too common simply because:

  1. investors are not given simple, straightforward answers about their returns and their expenses, and…

  2. …investors like and trust their advisors, but….

  3. ....advisors are human and since they have to constantly balance the trade-off between best for the client and profitable for the advisor, there are going to be a lot of decisions that don’t necessarily serve investors as well as they should. Unfortunately advisors push the envelope too far in their favor to the detriment of their clients.

The GuardVest mission is to help investors distinguish between high-cost / low-value advisors and good, client-centric advisors. Together we can do this. But only if investors get the information they need and then demand a fair shake. We have waited on Wall Street for far too long. It is time we take the initiative!


PS - For those that are interested in seeing the gory details I have described above, click the link below to see the prospectus outlining the expenses taken from investor portfolios. According to this prospectus, an investment of $10,000 would be charged $917 over 3 years. Ouch! I’ll let the reader do their own math on this one!


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