Wall Street V. Main Street Podcast – Episode 17

Episode 17: Master Limited Partnerships MLPs

The following is a transcription of Wall Street vs. Main Street, a radio show/podcast hosted by the firm’s managing partner D. Daxton White.

In this episode, Mr. White answers questions sent in from investors.

Producer: Welcome to Wall Street versus Main Street, a different take on the investment show, with our host Dax White. Dax White is the managing partner of the White Law Group, a national securities fraud, securities arbitration and investor protection law firm with offices in Chicago, Illinois and Vero Beach, Florida. The White Law Group has represented hundreds of investors in FINRA arbitration claims against their brokerage firms and throughout this show Mr. White will shine a light on some of the tricks of the brokerage industry while also providing valuable information for investors on how to successfully navigate the investor/ financial advisor relationship.
Dax: Welcome everyone my name is Dax White I’m the host of Wall Street versus Main Street as our lead-in indicated this is sort of a different take on the investment show. Our objective is not to give investment advice tell you what to buy sell etc. I’m not a licensed investment professional rather I’m a securities attorney who represents investors in claims against their brokerage firm. And through the years of doing that there are certain things that I’ve come to know about the industry that I wish more investors knew. And so the objective of the show is to pass along some information and try to even the playing field a little bit so that your next interaction with your financial advisor you’ll be better equipped to ask the right questions, to protect yourself, and make sure you’re getting the investment advice that you expect and that you want. So each week we’ll tackle different topics and hopefully through that be able to pass along some of that information. Today we’re going to answer some questions that have come up, things that are on people’s mind that they wanted me to address, just to, you know, a questions and answers segment. And without further delay let’s jump in. What’s our first question?

Producer: I’ve seen a bunch of commercials advertising MLPs. What are they and is there anything I should be concerned about before investing?

Dax: That’s a great question, I think it’s tough. I’ve seen these same ads. I almost religiously watch CNBC in the morning while I work out and in particular I think I recall seeing in Alerian MLP ETF ads running periodically right now. So they’re certainly out there and I’m not surprised that other people have been seeing them. MLPs it’s a new way of investing in, generally in energy, natural resources, sometimes real state. But basically it’s a way that investment is structured to take advantage of certain tax rules that are out there.

The parameters are that 90% of the partnerships, its cash flows, have to come from certain criterion and the advantage, in theory, as it combines certain tax benefits of it being a limited partnership with the liquidity of being publicly traded. These are you know there’s a stock ticker’s and you can trade these publicly so it sort of the next generation to what we’ve been seeing over the last years in our practice, we see oil and gas limited partnerships, where there wasn’t that liquidity so this takes it a step further and provides that. But it doesn’t necessarily do so without some risk to investors so you know that the ads I’ve seen and undoubtedly what this person is referring to sort of sell on the income that can be provided from these investments. And certainly if you’re a retired investor who needs income for retirement it could appeal to you, but what it doesn’t talk about, and what would certainly need to be discussed before deciding whether to invest, would be the risks that come with it. You know that the reality is these investments are typically like I said, that they’re commodities driven there either oil and gas deals maybe real state or other commodities. And as we’ve seen over the last year to 18 months the commodities market, in particular oil, has suffered enormous losses and in these MLPs it’s the same. I’ve checked recently and a lot of these MLP funds are down 50 60 70% over the last year. So while you might be getting an income stream of 5 to 6% and that’s what you want, if you’re eroding your principle so enormously it’s not doing you any good long-term your money is just going to evaporate. Some of the ones that we’ve seen that are common out there are that Alerian MLP ETF that I mentioned. And that, if it was the play for you, and obviously I can’t give investment advice, but if you wanted that kind of exposure maybe that’s the safer way to do it just because that is structured as sort of a mutual fund if you want of various MLPs.

You don’t have at least a specific risk of a particular MLP going under, you’re buying a basket of them. So that was the Alerian MLP ETF. The other ones we’ve seen in terms of the people who put these deals together, Enbridge Energy Partners, American Midstream, Columbia Pipeline, Midcoast Energy, Mark West Energy and Enlink, there’s a variety of them. I think there’s like 20 or 30 I’ve seen recently I’m sure there is more even than that. But the ones that have been suffering the losses again, are the oil and gas MLPs. And certainly you know while there are those advantages in terms of income, you know just like with any investment you want to look at the diversification, you’re going to want to look at how much exposure do I want, and then you’re going to want to look at your risk versus return because there is a direct correlation between the amount of risk-taking and the possible return.

So when you see these advertisements that are advertising income of 5, 6, 7% and it’s basically a zero yield environment because interest rates are at zero. So if you have an investment that’s paying that much, typically in order to get there, it’s gonna have to involve in an enormous amount of risk. You know eight/nine years ago when CDs were paying 5%, then to have an investment that paid 5 or 6%, you can typically assume it was gonna be pretty safe. But in today’s market climate, if that’s what it’s touting is this this large income stream, it’s probably getting there with an amount of risk that should be considered before making that investment. What’s the next question?

Risks to the Markets at the Fed, Rising Rates

Producer: What are some risks to the markets at the Fed and potential raising rates?

Dax: Sure, so that’s, you know, certainly if you watch investment programs that’s something that’s gonna be a hot button issue right now is the Fed is meeting very shortly to decide whether or not to finally raise rates after a zero rate environment for you know, going on before even the 2008 market correction. And that’s going to create some volatility in the market as the marketplace tries to figure out how that’s going to impact some investments. What I would anticipate is that it will flush out some bad investments that are already in the market that have been able to exist in a zero rate environment without too much volatility.

But as rates rise they’ll be exposed, in particular, I’ll be looking at junk bonds and risky corporate debt. These are investments that if you are chasing yield, which is a frightening to be doing right now. If you’re a retired investor, I’m sorry and I’m sorry the Fed has kept rates this low for this long because of course the problem is that you know maybe you retired and you expected to live on 4% of your money and it’s really hard to find 4% right now so you’re you’re looking for yield and in this environment, what you would need to do to find it is to start looking at more and more distressed debt like junk bonds like risky corporate debt. And what’s gonna happen as the Fed raises rates is those investments will become less attractive. Right now they’ve got a spread of. Let’s say you got a corporate bond paying 5 or 6%, interest rates are at zero and there’s gonna be a premium there. And there are people who are willing to accept the risk because of that premium. But as interest rates rise, you get more on your CDs, you get more on your corporate bonds that are safer. You’re not going to want to buy junk bonds because you’re not gonna need that much yield. And that’s going to reduce the value of those investments, just a supply demand, as fewer people want them.

The other thing that’s going to probably happen is it’s gonna make it harder for companies to refinance bad debt. So let’s say you’re an energy company who raise money to do oil gas exploration and you’ve got certain problems because of oil prices regardless. Let’s say that you went to the bank and took out a loan based off of some multiple of your reserves and now that loan comes due and it’s time to refinance. If you’ve got a bad balance sheet your, number one, you’re gonna have a hard time refinancing. But even if you do your gonna be refinancing at less favorable terms to you. It’s now to get more expensive. And again, if you’re an energy company and if your debts more expensive and your oil reserves are now worth less, you’re gonna have a credit crunch there. So you know, certainly we’re seeing it already in some energy investments. And I’m not talking about the big boys.

It seems like your Exxons your Conical Phillips, your BP, you know they have a very long-term horizon, they’re looking 20 to 30 years, and short-term price movements don’t really seem to affect them in the same way that some of the smaller players are. And again, you’re seeing it, there’s a host of bankruptcies already in oil and gas companies, I think the numbers is over 30 this year and they’re anticipating many more. And it’s all sort of related to the same thing. The way that they borrow money is based off of the oil in the ground. The bank evaluates how much that oil’s worth. And when the oil prices tank, now you got less valuable reserves and oh by the way, now you have to borrow money again, and it’s harder to refinance because the raising rates.

One counter to that is I would expect as the Fed raises rates that banks should do better. Because obviously they loaned money and as interest rates go up they should be making more money off of those loans. Unless you’re a bank who is already over exposed to some of that risky debt that’s out there, so it would sort of depend on which bank you’re talking about. But again, you know, the rate moving is going to sort of flush out a lot of stuff. A onetime move is probably not going to be as catastrophic for anyone in any particular direction. But what I think with the market is really monitoring is sort of long-term what’s going to happen, not necessarily what the Fed will do this coming week, but you know, what are they gonna do as they try to normalize. If you start seeing two three four moves of 25 basis points than yah, some of these bad junk bond investments are gonna be in trouble. What’s next question?

Producer: If your business is countercyclical, what kinds of things do you see when the market is going up?

Dax: Sure, obviously as a securities attorney that represents investors and claims against brokerage firms, our business actually is very much countercyclical. Typically when the market is rising there is fewer people who are upset with their financial advisor. Not necessarily because they’re not still getting ripped off, but you look at 2014, the markets up 30% and you’re only up 10 to 15%, you might be unhappy with your financial advisor, you might be looking for a new financial advisor but you’re not necessarily going to sue them. And so it usually is when the market corrects and maybe the markets down 20% but you’re down 50% that you’re sufficiently mad enough to call somebody like me so that is typically when we get busy. 2008 happened in 2009 through really “13 “14 were very busy years, and now we’re sitting here, we haven’t had a market correction in seven years and things have slowed just in terms of volume but we still see stuff and it’s things that would happen regardless of what happened in the market. You know, again fraud or bad advice from advisors is happening regardless. It does typically take a market correction to sort of flush it out and make it so that you’re aware of it. But there are certain types of fraud, that I mean regardless of what’s happening externally in markets you’re still going to figure it out. And those are to what I call your lone Wolf brokers or your one-off brokers were you just have you know a bad guy or girl who is taking advantage of clients whether it be through theft or you know a Ponzi scheme or you know investments away from their firm that their firm doesn’t know about. You know that kind of stuff is happening all the time unfortunately. It’s rarer, than just your sort of garden-variety , you know over concentration or negligence or what have you that gets flushed down the bad markets. But it happens regardless of cycle regardless of you know what’s happening in the marketplace. We will always have those types of cases.

Churning Claims

The other things that we see when the market is good that usually increases as opposed to decreases so that would be cyclical as opposed to countercyclical would be churning claims. You know churning is when your financial advisor turns over the account at such an aggressive pace that there really could be no justification for it in terms of being suitable for you and can clearly just be to enrich the advisor that’s doing the trading. And we see that actually more when the markets going up because it’s just easier to get away with. Again, going back to 2014 when the market was up you know maybe 30%, it’s easier for a financial advisor to churn that account over and over and over again to create commissions but still creating a profit such that you think, well I’m getting a lot of confirmation slips in the mail but in I’m still up so he’s doing something right. But maybe you’re not up as much as you should be. And so you know that’s the type of claim that we would see even more when the markets are going up because it’s just, like I said, it’s easier for financial advisors to sort of think, well you my commissions are down this year you know which of my clients do I think I could trade a bunch in their account and they would notice or wouldn’t care or what have you. So we see those when the markets are going up and then occasionally we’ll see what would be just called a gross underperformance case. These are pretty difficult cases but it depends factually on what’s occurring, again 2014 being an example, let’s say the markets up 30% but you’re only up 5%. Maybe there’s a legitimate reason for that maybe the reason you’re up 5% is because your profile is such that you shouldn’t really be in in the equities markets, it’s the S&P that was up 30% maybe you’re 88 years old and you need income and safety and so you should probably not be experiencing that 30% increase and for you to have a 5% increase is probably perfect for what your objectives would be.

But for other investors, we’ve got some ongoing cases right now, where 2014 markets up 30%, their invested equity funds that grossly underperform the market. We have some that were they actually went down a little bit. And if the market had been going down and they were down a little bit I probably don’t take the case. But the reason it becomes an actionable claim is because these are people who are actually looking to capture market growth but they’re in an over concentrated into poorly managed funds at the recommendation of their financial visor that actually didn’t track the market. So what you’re looking at is the difference between the 30% growth where they actually performed. So those are cases that we would still see regardless of what’s happening in the market were you’re just underperforming relative to benchmarks. Yet again, they’re rarer but that’s type of case we might see again countercyclical even when the markets going up.

Those are the questions we had for today. We’re going to take a commercial break and then when we come back, I’ll pass along some more information I think that investors might want.

Dax: Welcome back everyone. You’re listening to Wall Street versus Main Street. I’m your host Dax White. Each week we try to pass along information to investors that I think based on my experience as a security attorney that people would like to know about the brokerage industry. So that we can try to improve that relationship between you and your financial advisor, obviously it’s a very important one, you’re trusting all of your life savings all of your hard work it with an individual and you want to make sure that your pick and the right person, getting the right advice. And each week we try to tackle those topics and pass along information. Before the break I answered some questions and now I just want to mention where you can find some of those resources I would think that would be informative for you. The best way is to go to our website, it’s Wall Street V MainStreet.com on their you’ll find information on how to contact us in case you have a question you want an answer to in a future week I would certainly encourage you to do so.

You’re also going to see literature on sort of well-managed you know best practices on investing you know how to make sure you’re properly diversified and you can certainly read that, make sure when talking to your financial advisor of doing that in your own portfolio. You’re also going to see literature on the impact of commissions on your portfolio. There’s a lot of studies out there that will talk about how if you’re overpaying for your advice how they can really erode the performance of your portfolio over the long-term. It sounds like okay will you maybe I’m paying .5% more than I should but I like this person and you know that I think they’re doing a good job for me and you’re thinking you know I’ve got $100,000 portfolio we’re only talking about a couple hundred bucks. These studies show that over the course, let’s say you’re my you’re in your late 30s like me, by time I retirement were talking 30 possible years it starts to add up when you start compounding those things. And so you can have the difference between maybe a portfolio in, you’re now in your 60s of 600,000 versus 900,000. And that can make a huge difference it really starts the compound. there’s literature on our website on that. There’s also information there on how to locate regulators. if you see a problem you want reported to report, there’s links to those. How to file an arbitration claim if you if you think that you want to do that. And then there’s also a link there on how to research your financial advisor.

FINRA Broker Check

I know I’ve talked about this in previous episodes, but I think it’s probably the most important thing that we do with the show which is just to let people know, and I wish everyone knew this, you can look up your financial advisor. You can find out all the information that you would want to know on whether or not I want to stay with this person, hire this person, wherever you’re in that relationship you can go to FINRA’s website, FINRA is the regulatory body for the brokerage industry here in the United States, go to FINRA.org F-I-R-A.org and again this is on our website as well but go to FINRA.org and in the upper right-hand corner there’s something says Broker Check. All you do is type their name in there, its going spit out a report. The report says how they did on their licensing exams, have they ever declared bankruptcy, have they had any liens on them, have they ever been sued by a customer before, have they are been fired by one of their employers. All the things, to me at least, that would be important if your evaluating whether not trust my life savings with someone. It’s all there. There are so many times where people call us and the person had already been sued 20 times when they hired them and you just wish they knew that because maybe they wouldn’t be in the situation. So again I would invite you to check out our website or go to FINRA directly if you want but check out your financial advisor. Other resources you can look at would be our law firm’s website that’s white securities law.com on their you’ll sees all kinds of information on current investigations that we’re doing, cases that we filed, the various places that we’ve been quoted in and in newspapers throughout the country, information on me whatever.

You can also find us on Twitter and LinkedIn and Facebook and the other social media that you would want. But certainly, again the objective of the show is to pass on this information. I would invite you to check out at least a Wall Street V Main Street website because a lot of information that’s there would provide you an army of information to really improve your relationship either with your existing person or to motivate you to go find somebody who’s going to do great job for you, because I can tell you from experience, there are great financial advisors out there. We deal with are the worst of the worst and I wish that people just never had to encounter that because it can be really catastrophic for them. But there are tools to help you to go find the good people. Find the ones that are going to take care of you, give you advice that you need, so that you can make sure that you really are set up to retire and have the performance you need ,the growth that you need in your portfolio, to get to where you want to be. Or,if you’re already retired somebody that can help you to meet those income needs going forward so you don’t have to worry about running out of money or being a burden on family or anything like that. So check out Wall Street versus MainStreet.com. Tune in next week, I’ll be answering more questions and thank you for listening.

Producer: You’ve been listening to Wall Street versus Main Street. The views expressed by the participants of this program are their own and do not represent the views of nor or they endorsed by The White Law Group, its officers, directors, employees, agents, representatives, shareholders, nor any of its subsidiaries, none of the content should not be considered legal advice. As always consult a lawyer.

This transcription has been created by Dragon Software. There may be grammatical or translation errors. For clarification, listen to Episode 17 here.