Unit Investment Trust FAQ: Here’s What You Need to Know
Conservative investors and retirees need to be cautious when it comes to unit investment trusts (UITs). This is because some are much riskier than others. The problem is, investment advisors often “gloss over” these risks when selling UITs to customers. This causes significant and unnecessary UIT investment losses.
When an FINRA-registered broker recommends and sells any kind of investment without fully educating the customer about the risks associated with the investment, it could be a violation of the law.
If you were unaware and lost your hard-earned money because of bad UIT recommendations, you might be able to get your money back. Contact the Consumer Investor Resource Center to learn about your legal rights and options regarding UIT investments losses. Also, we encourage you to browse the frequently asked questions below to learn more about unit investment trusts.
What is a unit investment trust?
A unit investment trust (UIT) is a company that sells unit shares of itself to investors. When an investor buys a unit share of an UIT, he or she is buying into a basket of securities. These contain a mix of bonds, stocks or other kinds of investments.
Since UITs are “redeemable,” the investor can liquidate units at any time. However, depending on the market value of the UITs, the investor could suffer gains or losses at the time of liquidation. Furthermore, the investor could incur penalties for liquidating UITs before their date of termination.
What kinds of unit investment trusts are there?
Unit investment trusts can be confusing for investors. They come in different forms. Depending on the investments they contain, they might not be appropriate for a given investor’s needs. Sometimes brokers recommend the wrong UIT for the job, and this can cause a naive investor to lose thousands of dollars.
In most cases, an UIT will be one of the following two types:
- Fixed Income UITs: Fixed income UITs are intended to generate investors a constant and reliable income for the time period of the investment. These UITs tend to be primarily comprised of bonds. As such, they may be attractive investments for retirees who want a safe and reliable income to finance their retirement. However, just because it’s a “fixed income UIT” does not actually mean it’s safe.
- Equity UITs: Equity UITs are targeted toward a specific stock-based investment strategy. Some might target energy stocks. Another target real estate or technology stocks. Because they tend to be highly focused on stocks in one economic sector, equity UITs are riskier than fixed income UITs. They’re rarely appropriate for those looking for safety and security.
Do the investments inside a unit investment trust change?
Unlike mutual funds and other kinds of basket-type investment products, an UIT’s portfolio does not change. Even if the economic landscape dramatically shifts, there’s no board of directors managing the investments. No one is making changes in response to changing market conditions. UITs are fixed. No investments will be bought, sold or traded them.
Under rare circumstances, the contents of the UIT could change. This happens if the UIT falls into bankruptcy, or if it merges with a different UIT company. Also, if an investment inside the UIT is found to be fraudulent or if its credit rating shifts dramatically, then it could result in a change. This is also infrequent.
Do UITs have a termination date?
Every UIT will terminate on a specific date. At termination, all investments in the portfolio are sold and the cash is distributed to the investors. UITs can last for 1 year, or over half a century. However, most investors don’t hold an UIT for its entire life because they can sell off units whenever they wish. UITs sponsors will also buy back units from investors (though at a discount rate), and resell them to new investors.
Is it normal for my UIT value to fluctuate?
Because UITs generate income and have fixed portfolios, investors can wrongly believe that the value of their UIT will stay fixed too. However, UIT values – even “fixed income UITs” – go up and down with fluctuating market conditions. The problem is, investment advisors often fail to explain this to their customers.
UIT investors commonly suffer a rude awakening at the first sign of market instability when they see their UIT share values plummet. Or investors might be surprised to discover that their UIT isn’t worth what it used to be when they try to liquidate an UIT. Investors also need to remember that even though they can sell their UITs back to the UIT sponsor, they may have to do this at a discounted rate.
What are the sales charges and fees associated with UITs?
The upfront sales charges on an UIT will usually be between 1 to 3 percent. The deferred sales charge is 1.5 to 3 percent. The deferred charges may need to be paid later if the UIT owner decides to liquidate his or her shares before the timeframe of the investment comes to a close on the termination date. In addition, organizational fees and creation fees will also apply to UIT purchases.
UIT investors need to fully understand the upfront sales fees, deferred sales fees and other costs associated with the UITs, in addition to the costs associated with selling their units before the termination date. In this respect, investors should ask a lot of questions about fees potential penalties before agreeing to purchase an UIT.
Should I roll over my UIT shares after termination?
Brokers usually advise UIT purchases to roll over their UIT units after the termination date; however, investors need to be aware that each time they roll over UITs, they will again incur sales charges and additional fees. Not only that, but investors should remember that capital gains taxes will likely apply to UIT units after the termination date.
Can I sue my stockbroker for UIT losses?
If an investment firm recommended the purchase of UIT units, and you lost money, you might be able to seek financial compensation for your losses.
Stockbrokers that recommend UITs generally have a fiduciary obligation to their customers. This means that they have to “know their customer” – i.e., the customer’s needs, life situation, investment experience, age, stated investment goals – and what kinds of investments are in the customer’s best interests.
Furthermore, an investment advisor’s fiduciary obligation requires the advisor to recommend suitable investments in accordance with the goals, life situation, and other information that the broker is obliged to know about the customer.
If an FINRA-registered advisor violates his or her fiduciary obligation to the customer by recommending unsuitable investments, the advisor and the employing investment firm can be held liable for the customer’s resulting financial losses. If you or a loved one has been hurt by unsuitable UIT recommendations, call the Consumer Investor Resource Center or send us an email. We will listen to your story and advise you of your legal rights and options.