What is a Unit Investment Trust?

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corn18
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What is a Unit Investment Trust?

Post by corn18 » Sat Jun 18, 2016 1:22 pm

I am helping my MIL with her portfolio. It's quite the fee pit. The question I had is about the money she has in what Wells Fargo calls a Unit Investment Trust. I can't figure out what these things are and how they work. I also can't figure out if there is a fee to buy, hold or sell them. I would like her to sell all of these UIT's and get into a TBM fund. Is that possible and/or sound?

Also, anyone know how to figure out what her Wells Fargo advisor is charging her? It's not on her monthly statements.

I would ask her advisor all of this, but he's not going to like me once I tell him to sell her 28 different mutual funds, 9 stocks and 4 UIT's and put it all in 3 funds. Then drop him because she no longer needs an advisor.

Corn

alex_686
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Re: What is a Unit Investment Trust?

Post by alex_686 » Sat Jun 18, 2016 1:37 pm

Details vary, so read the prospectus. Generally speaking, a UIT is a fixed portfolio closed end fund. There should not be a fee to hold. It has a expense ratio and works more or less like a mutual fund. The expense ratio should be low - it is a fixed portfolio. The process of redemption or selling the units is highly variable between UITs.

UITs are a bit old fashion but there is nothing wrong with them. If they are invested in bonds you might even want to continue to hold them. On Boggleheads we often see a debate between holding a portfolio of bonds verse bond funds. UITs can be a good middle ground. You get diversification. However, because the portfolio is fixed you don't need to worry what wacky cash inflows / outflows will do to the portfolio.

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corn18
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Re: What is a Unit Investment Trust?

Post by corn18 » Sat Jun 18, 2016 1:39 pm

What happens to the UIT when it reaches it's expiration date? Investopedia says they should be liquidated automatically because the underlying bonds no longer exist, yet there are 3 UIT's that have expired still in her account. This makes no sense.

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Toons
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Re: What is a Unit Investment Trust?

Post by Toons » Sat Jun 18, 2016 1:41 pm

FYI :happy
What Is A Unit Investment Trust :happy

http://www.raymondjames.com/unit_investment_trusts.htm

I owned quite a few of them in the early nineties.
Without going into all the detail as to "why".
I would steer clear. :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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corn18
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Re: What is a Unit Investment Trust?

Post by corn18 » Sat Jun 18, 2016 3:10 pm

Now I'm really scared. I found the prospectus and these are all equity UIT's. I thought they were bonds UIT's. And they have an annual maintenance fee of .218%. Not awful but hidden deep in the prospectus. I thought my MIL had a nice 28/72 AA which she said would fit her nicely @ 74 and her risk tolerance. Now that I found out the UIT's are equity based, her AA is 56/44 which I know she won't like.

So, does an equity UIT behave like an equity mutual fund? Can it drop in value with the underlying holdings? From what I've read, it is and can. I am going to get her out of these ASAP.

Corn

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Toons
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Re: What is a Unit Investment Trust?

Post by Toons » Sat Jun 18, 2016 3:41 pm

corn18 wrote:Now I'm really scared. I found the prospectus and these are all equity UIT's. I thought they were bonds UIT's. And they have an annual maintenance fee of .218%. Not awful but hidden deep in the prospectus. I thought my MIL had a nice 28/72 AA which she said would fit her nicely @ 74 and her risk tolerance. Now that I found out the UIT's are equity based, her AA is 56/44 which I know she won't like.

So, does an equity UIT behave like an equity mutual fund? Can it drop in value with the underlying holdings? From what I've read, it is and can. I am going to get her out of these ASAP.

Corn
Exactly.
I recall reading UIT prosepctus also years ago.
A handful of stocks ,high fees and a front load commission around 1.5% when I purchased them from a broker.
It is what I knew at the time ,so it was the right thing to do then.
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

DetroitRick
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Re: What is a Unit Investment Trust?

Post by DetroitRick » Sat Jun 18, 2016 3:46 pm

Go slow in making changes, and worry more about all of the details outlined in the prospectus - what the UIT holds and ALL costs - not just the UIT legal structure alone. Take a look over time at how close NAV and price track. Maybe check a few times during multiple trading days to judge liquidity (I'd do that with smaller and/or newer ETF's too). But in the end, my opinion is that the specific trust holdings and how they meet your needs, are paramount.

Consider reading this very cursory overview too, which covers how they liquidate. Even the huge SPY fund is a UIT. While I don't like the fact that UIT's have a termination date, and using SPY as an example, if I'm alive in 2118 my having to redeploy those funds will probably be the least of my problems :D .

http://etfdb.com/2014/unit-investment-t ... -are-they/

I can relate on the MIL issue too, as I've done the same for mine. My inlaws were really taken advantage of and had an extremely expensive and poorly designed portfolio. It was one of the most black and white "bad" financial scenarios I've ever seen - which is the reason I got brought in to fix it. But getting it all fixed and on a good long-term path was worth the effort. It took a lot of legwork and some scotch though.

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Re: What is a Unit Investment Trust?

Post by pkcrafter » Sat Jun 18, 2016 6:05 pm

corn18 wrote:Now I'm really scared. I found the prospectus and these are all equity UIT's. I thought they were bonds UIT's. And they have an annual maintenance fee of .218%. Not awful but hidden deep in the prospectus. I thought my MIL had a nice 28/72 AA which she said would fit her nicely @ 74 and her risk tolerance. Now that I found out the UIT's are equity based, her AA is 56/44 which I know she won't like.

So, does an equity UIT behave like an equity mutual fund? Can it drop in value with the underlying holdings? From what I've read, it is and can. I am going to get her out of these ASAP.

Corn
That .218% is probably a small part of the fees. Here's some good information on UITs.

http://www.responsible-investing.net/ne ... 7_uit.html

Advisors pull their fees from your assets, but they never show them. If they did, a lot of investors would see the light and dump them.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: What is a Unit Investment Trust?

Post by LadyGeek » Sat Jun 18, 2016 7:52 pm

The wiki has some background info: Unit investment trusts, the "External links" section has links to helpful tutorial info.
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Re: What is a Unit Investment Trust?

Post by stratton » Sat Jun 18, 2016 7:56 pm

pkcrafter wrote:That .218% is probably a small part of the fees. Here's some good information on UITs.

http://www.responsible-investing.net/ne ... 7_uit.html

Advisors pull their fees from your assets, but they never show them. If they did, a lot of investors would see the light and dump them.
Interesting. I've seen others where there is an ER of ~0.5% with a 5% load fee when the UIT Is bought. Much more straight forward then your example.

Paul
...and then Buffy staked Edward. The end.

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Re: What is a Unit Investment Trust?

Post by pkcrafter » Sat Jun 18, 2016 8:12 pm

stratton wrote:
pkcrafter wrote:That .218% is probably a small part of the fees. Here's some good information on UITs.

http://www.responsible-investing.net/ne ... 7_uit.html

Advisors pull their fees from your assets, but they never show them. If they did, a lot of investors would see the light and dump them.
Interesting. I've seen others where there is an ER of ~0.5% with a 5% load fee when the UIT Is bought. Much more straight forward then your example.

Paul
I put that way because even the load may not cover all the fees. Fees are racked up on selling and buying.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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corn18
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Re: What is a Unit Investment Trust?

Post by corn18 » Sat Jun 18, 2016 8:23 pm

The more I read, the more I don't like the UIT's that she has in her portfolio. Unfortunately, they are a significant percentage of her portfolio (27%). As far as I can tell, the expired ones have all the fees paid already, so that is sunk cost. There is one that is not expired yet, but expires this quarter, so maybe they all have the fees sunk. I gave her notes on her entire portfolio to switch from the 25 mutual funds (average fee of 1.46%), 9 individual stocks and these UIT's to a nice 3 fund portfolio. Her expense ratio total fees will drop from $12,461 / year to $852 / year. Saves her a lot of money. And her monthly statement won't be 15 pages of mass confusion.

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stratton
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Re: What is a Unit Investment Trust?

Post by stratton » Sat Jun 18, 2016 10:57 pm

corn18 wrote:The more I read, the more I don't like the UIT's that she has in her portfolio. Unfortunately, they are a significant percentage of her portfolio (27%). As far as I can tell, the expired ones have all the fees paid already, so that is sunk cost. There is one that is not expired yet, but expires this quarter, so maybe they all have the fees sunk. I gave her notes on her entire portfolio to switch from the 25 mutual funds (average fee of 1.46%), 9 individual stocks and these UIT's to a nice 3 fund portfolio. Her expense ratio total fees will drop from $12,461 / year to $852 / year. Saves her a lot of money. And her monthly statement won't be 15 pages of mass confusion.
Make sure she actually wants to make changes.

I've seen UIT's with expiration dates where the investor gets their money back. So check for that. Make sure to halt any automatic roll overs if any.

Compare the exit fee with the total annual fees. Taking an exit fee equivalent to 18 months of ER wouldn't be a bad trade off.

Paul
...and then Buffy staked Edward. The end.

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corn18
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Re: What is a Unit Investment Trust?

Post by corn18 » Mon Jun 20, 2016 4:42 pm

stratton wrote: Make sure she actually wants to make changes.

I've seen UIT's with expiration dates where the investor gets their money back. So check for that. Make sure to halt any automatic roll overs if any.

Compare the exit fee with the total annual fees. Taking an exit fee equivalent to 18 months of ER wouldn't be a bad trade off.

Paul
Good advice Paul. I went through it all with her and she seems very interested in making a change. I wish I could attend the meeting she is having this week with her WF FA to see what he says. She knows nothing about all this mumbo jumbo (as she calls it) but I got her attention when I told her she could save $11k / year in fees. She also wants to simplify because she wants to understand her portfolio. It took me 6 hours to decipher all of it, so it is not simple right now.

I do think she wants to keep an FA, but is willing to look at switching from WF if he isn't willing to listen to her. We'll see.

Corn

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Re: What is a Unit Investment Trust?

Post by prairieman » Mon Mar 12, 2018 6:37 pm

Dragging this back up because we inherited a UIT in an Edward Jones account a while ago. It was one of many complicated investments, but I let this one stay because it was performing well. Then we got a call from Vanguard (where we had transferred the UIT to) telling us it was being liquidated - and did we want the individual stocks or the cash?! Heck no, I didn't want a bunch of stocks, so I said cash. The upshot is that it appears we will have an unexpected (and unwanted) $20,000 to 30,000 capital gain in 2018 based on the cost basis entered on the Vanguard site. I thought I understood this until I started doing my 2017 taxes - and here is my new question:

According to our 1099B form, it looks like we already received some UIT sale proceeds in 2017! The type of gain or loss is reported as unknown (e.g. short or long term) and it's reported as a "non-covered security" (which I think means there is no known basis value). Can anybody here help me understand this - and advise me on what to do.

Thanks for any help.

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