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Red Flags Abound with Unit Investment Trusts

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In times when financial markets are particularly turbulent, some advisors like to pitch so-called Unit Investment Trusts.

Such a hybrid investment, which is known by its UIT acronym, is hardly a universally accepted financial product. In fact, IFA's investment committee recommends its clients steer away from these pools of money as currently  structured.

Use of UITs has proved a point of contention with regulators. Of note:

  • Oppenheimer & Co. agreed in late 2019 to pay nearly $4.7 million to settle allegations that it failed to properly supervise more than $6 billion worth of UIT sales over five years, according to the Financial Industry Regulatory Authority (Finra).1

  • A former Morgan Stanley broker a few months earlier cut a deal with Finra to pay a $5,000 fine and undergo a three-month suspension to settle allegations he made unsuitable recommendations involving short-term rollovers involving UITs. The regulator accused the broker of causing his customers to compile unnecessary sales charges and related costs.2

  • Trade publication AdvisorHub reported that Morgan Stanley Wealth Management in 2017 was fined $3.25 million by Finra and ordered to restore roughly $10 million to clients based on allegations of unsuitable UIT sales.3

  • An ex-Raymond James Financial Services broker agreed to a four-month suspension and $5,000 fine from Finra for recommending short-term trades in UITs while he was affiliated with the company, AdvisorHub reported in late 2019.4

UITs are often marketed as a way for individual investors to tap into return streams that can under certain market conditions resemble more structured products– as opposed to an actively managed open-end mutual fund or exchange-traded fund.

While UITs are regulated and covered by the Investment Company Act of 1940 (as are mutual funds and ETFs), these pooled investments offer a similar characteristic of another relatively niche market: closed-end funds. 

Unlike more widely used open-end mutual funds and ETFs in which new shares are created on a regular basis, a typical UIT issues "units" once through an initial public offering. After an IPO, such an investment more-or-less remains closed to new issuance until termination. By "more-or-less," we're referring to a process in which these more complex products can be structured to allow in certain circumstances additional issuance of units. This is one of the factors that leads IFA to remind clients of an old investment maxim: The devil's in the details. That can be especially true with UITs. 

Based on examples of regulatory actions taken against brokers using UITs, it's probably safe to assume that many investors haven't taken the time to read each trust's fine print to understand exactly how these types of products are structured. 

UITs can hold anything from stocks, bonds, American depositary receipts (ADRs) and real estate investment trusts (REITs) to business development companies (BDCs), master limited partnerships, ETFs and closed-end funds. Each trust is issued with a fixed term. It's common for such trusts holding stocks, for example, to range in length between one and two years. In fixed-income, UITs are often structured to last several years to coincide with longer terms of maturity of the underlying holdings. 

Whatever term is set at the beginning, after the UIT closes investors receive their share of the trust's net assets on a proportional basis. It's worth noting, too, that such trusts don't usually change holdings -- once someone buys into it, those underlying securities are left to grow largely unmanaged until termination. (An exception takes place when a holding's status changes, which can happen after corporate mergers or bankruptcies. Also, as a trust's bonds mature those assets can be divvied up and any proceeds paid out to investors.) 

Another caveat to unfettered investment management is that dividends and distributions can be paid to investors on a periodic basis. This is a feature that might appear attractive to some advisors since fixed-income UITs are often sold by brokers as a way to provide a fairly regular stream of income to unit holders. 

In some situations, UITs have been terminated early. Again, IFA urges anyone interested in making such an investment to closely review the trust's prospectus. Besides detailing any possible triggers for early closing, it also might help to explain how units can be sold back to the investment company -- based on the value of the UIT's underlying holdings -- before termination. 

Before making any trades, investors need to compare their cost basis (how much money they've actually invested) to the UIT's current net asset value (NAV). In our view, advisors who are acting as fiduciaries for their clients -- i.e., putting the investor's interests first, not their own -- need to explain upfront that selling units before such a trust reaches maturity can risk losing at least part of the investment's principal. 

Investors should also be warned that UITs can tack on extra sales charges and annual expenses related to trustee and supervisory fees. It's also not uncommon to be charged some sort of one-time organizational cost for investing through such a hybrid investment. 

If you're approached about investing in UITs, or read an article hyping such a trust's virtues, we strongly suggest you take such advances with a grain of salt. At IFA, our approach is one of skepticism about all pitches regarding actively managed funds. With UITs, which are marketed as a type of non-active investment vehicle, our investment committee finds an equal amount of critical review is necessary.


1.) Financial Industry Regulatory Authority, news release, Dec. 30, 2019. 

2.) Financial Industry Regulatory Authority, "Disciplinary and Other FINRA Actions," June 6, 2019. 

3.) AdvisorHub, "Morgan Stanley to Pay $13 Million for UIT Sales Violations," Sept. 25, 2017.

4.) AdvisorHub, "UIT Rollover Recommendations Sideline Another Broker," Dec. 19, 2019. 

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