The following is intended to provide an overview of unit investment trusts, and highlight the pros and cons associated with these types of investments.

A Unit Investment Trust (UIT) is a type of Investment Company that offers redeemable units in a diversified portfolio of securities. The portfolio is generally made up of stocks and bonds or a combination of both, and is held for a specific length of time.

UITs typically fall into one of two categories, fixed income UITs or Equity UITs. Fixed income UITs are designed to provide steady stream of income over the life of the trust. Many fixed income UITs invest heavily in bonds that mature at varying times. Equity UITs are designed to meet a specific objective or stratagey, for example, investing in alternative energy. Equity UITs tend to have a higher degree of risk.

A UIT portfolio is un-managed and fixed, meaning the investments are not actively traded. No new investments will be purchased and the portfolio will remain the same unless, for instance, the UIT company merges with another UIT or goes bankrupt. Fraud or severe changes in credit rating could also warrant the removal of an investment from the UIT portfolio, however, this is rare. Otherwise, the investments will remain in the portfolio regardless of market conditions.

A UIT will have a specified termination date at which time the portfolio is liquidated and the proceeds are paid to investors. The length of time a UIT is held can range from one year to more than fifty years from the date of inception. However, investors can usually sell their units at any time. Most UIT’s will buy back units and resell the units to new investors.

The value of the UIT will fluctuate with market conditions. Figuring out profits and losses is relatively easy with a fixed portfolio since the net-asset value (NAV) is based on the value of the underlying securities.

In general, UITs tend to be liquid investments and have low operating cost. For the most part, investors know what they are getting. There are a vast variety of UITs to choose from to fit every investor’s financial objectives.

However, no investment is without risk. Since UITs have a fixed portfolio they don’t have a board of directors or team of advisors to make adjustments if something goes wrong with the UITs strategy or to respond to changes in market conditions. If the stocks in the portfolio drop significantly, the UIT will continue to hold those stocks. Although UIT sponsors usually maintain a secondary market to buy back units, it’s at a discount and investors are likely to receive less than the NAV of the units.

Another point to consider is the sales charge and upfront fees. It’s not uncommon for the initial fees to cancel out the benefits of low operating costs. Generally there is a 1% – 3% sales charge and 1.5% – 3% deferred sales charge, in addition to an organizational fee and creation fee. Evaluating upfront fees is of particular importance when considering short-term UITs. Often clients are encouraged to reinvest or roll over their units at termination. Each time you reinvest you will get hit with the sales charge and other fees. In addition you will likely incur a capital gains tax when the UIT matures.

Most UIT are sponsored and sold by broker-dealers. As such broker dealers have a fiduciary duty to perform adequate due diligence on each and every investment in the UIT portfolio. In addition, they have an obligation to recommend suitable investment products to clients. Broker dealers are required to take into account the clients age, investment experience, financial objectives, net worth and risk tolerance. When broker dealers violate industry rules, they can be liable for investment losses.

In order to sell securities in the US broker dealer are required to register with FINRA, the Financial Industry Regulatory Authority. FINRA is the securities industry watchdog that oversees broker-dealers. When problems arise between investor and their broker dealers FINRA provides the forum to legally resolve such dispute.

If your broker dealer recommended that you repeatedly invest in short-term UITs, this may be a sign of a problem. If you are concerned about a UIT recommended to you by your broker-dealer, please feel free to contact The White Law Group at (312) 238-9650 for a free consultation.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida.

For more information on The White Law Group, please visit our website at www.whitesecuritieslaw.com.