Unit Investment Trusts and EJ

[Trooper]

Hi,

My DW and I are both recently retired and her mom passed away in January; as a result she inherited about $300K in investments managed by Edward Jones. The portfolio has a mix of Unit Investment Trusts (UITs) from First Trust, and actively managed mutual funds - mainly Class A ones from Invesco.

I had never heard of UITs so I did a little research and am a bit concerned. On the surface they seem like mutual funds, except 1) the underlying stocks and bonds never change and 2) they have a fixed life. I am not quite sure what happens at the end of their life, but I would bet that we would get hit with capital gains, and that they would be rolled over to perpetuate the sales charges.

Question #1: Am I correct in my brief understanding of UITs?

I have always known that EJ was a firm I wouldn't want to directly deal with, but after digging into the fee structures of the mutual funds opposite their performance I became pretty upset. I am a DIYer with all of our assets in either VG index funds or Fidelity index funds through my 401(k).

The 'financial advisor' has been a friend of my DW's family's for quite a while and my DW is reluctant to take my recommendation of transferring the funds from him/EJ to Vanguard. I want to be sensitive to my wife's wishes, but also don't want to see her pay 10X-20X what we are paying at Vanguard.

Question #2: I know this is a delicate situation, but how would you handle it? One potential recommendation is that she leave the money with EJ, and that we use that money first for our spending needs during retirement...prior to spending from VG.

Couple of notes:
- All of the money at EJ is taxable (non-qualified).
- This money was never in any of our retirement modeling, so it's "bonus money" in that respect.

Thanks!

 

[REWahoo]

Since this is your DW's money, not yours, I agree you need to be very careful in how you present her with options.

If it were me I'd do a comparison by projecting what EJ fees and expenses will be leaving the funds with them over the next 10 years vs moving them to Vanguard. Then ask your DW if she thinks it is worth spending the extra $XX,XXX over that time period to maintain the friendship she has with the EJ guy.

Best of luck...

BTW, I know zilch about UITs.

 

[ERD50]

As far as cap gains, they would be stepped up to the value on the date of you MIL's passing. So you will want to get that documented.

Yes, I'd want to get out of them, but proceed with caution.

And if this guy isn't a friend after you decide to do whatever you want with your money, was he ever really a friend?

-ERD50

 

[MasterBlaster]

Just show her that if she leaves the money in those high cost funds for a few decades that they will (literally) take half or more of her money. Show her what a poor deal it is.

Where are all the customers yachts ?

 

[Gone4Good]

I've encountered several instances where people have asked my advice regarding recently inherited investments. Often times the recipients have an emotional attachment to the securities and want to hold on to them for complex reasons that have nothing to do with personal finance.

I wouldn't fight that.

My approach has been to lay out as best I can the costs, risks and potential benefits of all the options. I state my recommendation softly and let them decide what to do.

Eventually it may be possible to revisit the initial decision at a time when raw emotions don't weight so heavily. Sometimes that takes years. But until they're ready, I wouldn't push too hard.

 

[haha]

My approach to anything involving a woman is to figure out what she wants, and be either mildly or very approving depending how on how good or awful it is.

IMO, never oppose anything she wants to do with her money. Sooner or later this will bite you where you would rather not be bitten.

Ha

 

[harley]

Leaving aside EJ and your wife, UITs are exceedingly bad choices. The capital gains issue is definitely a problem. But things can be worse. Back when I still used a FA, he convinced me to invest in some UITs with the argument that they were like super concentrated MFs that focused on just "the best" companies. I should have known better but I was still in the mindset that he knew more than I did. Well, they did OK for the first couple of years, beating the S&P by a bit although I suspect the taxes ate up the difference pretty effectively. The third year the UIT period happened to end in Feb. 2009. When the fund period ends the assets are sold, whether you want them to or not. Without getting into too much detail, let me say that I would still be carrying capital losses forward from that "investment" if I hadn't decided to use them up while doing Roth conversions the last few years.

I would advise against maintaining them as investment vehicles. You'd be much better off investing in a standard index. That way, at least you'd have the option of holding the investment during a big market drop, instead of being forced to liquidate at exactly the wrong time.

And yes, run away from EJ and the family friend/FA. That is the situation I was in too, although it wasn't EJ. The advisor was a friend of FIL, and moving my money away from him was a very difficult decision. But it was one of the best ones I ever made. And it very likely would have taken me even longer to do had I not been invested in those UITs. So maybe they did make me money in the long run.

 

[harley]

I just read the second part of the OP, and if getting DW to move the money away from the family friend is really an issue, then I think the idea of using that money first for retirement income would be a great way around the problem. How long would it take to suck down the $300K? If 5 years or less, I would suggest to DW that you could move the money out of UITs and high cost funds into a MM or CD format, just to "keep it safe". But the possible downfall of that choice would be that she might get upset seeing "her" balance go down, while "yours" stays up or grows. So that would require tact and a good understanding of her personality. Good luck. To paraphrase Ha, better safe than sorry in these situations.

 

[akck]

My wife was in the same position, inheriting 2 accounts at different brokerages with one being a long time advisor of her father. For the other account, it took me 5 minutes to realize most of the funds never beat their benchmark, so there was little convincing needed to transfer that account. The other account was managed by the long time advisor. At first, there was hesitancy to combine the accounts under self-management. The first difficulty was I reported to her only the account I managed so we'd have to add in the other account. Eventually, she decided to cut ties with everything related to her father, so they are now combined.

I'm going to assume that the funds don't beat their benchmark, so I'd show your wife that information just as I did with the first account. Throw in any fees as an added drag on returns. Eventually, she'll hopefully get the idea the advisor is not the best choice.

If she decides to transfer, you'll likely have to sell the funds. My wife's were inherited IRAs, so no tax event. It's likely in your best interests to transfer the account sooner as values hopefully haven't changed much since her stepped up basis.

 

[Trooper]

Thanks everyone for the great responses.

As far as cap gains, they would be stepped up to the value on the date of you MIL's passing. So you will want to get that documented.

ERD50, do you main that the basis will be stepped up to the time of MIL's passing (rather than the capital gains)?

That makes sense, although if we choose to sell soon to take advantage of that we will still be hit with back-end sales charges. However we will pay sales charges whenever we sell. They really have a way of locking you in.

 

[ERD50]

Thanks everyone for the great responses.



ERD50, do you main that the basis will be stepped up to the time of MIL's passing (rather than the capital gains)?

That makes sense, although if we choose to sell soon to take advantage of that we will still be hit with back-end sales charges. However we will pay sales charges whenever we sell. They really have a way of locking you in.

Right, the cost basis is stepped up. So for example, if the value was flat from date of death to the time you sell, no capital gains on the sale (or any other in-between scenario).

I'd guess that a back-end sales charge is counted the same as any other commission/fee associated with a sale (like the comm and fee for a stock sale)? If so, then for example, if you had $1,000 gain and a $1,000 back-end sales charge, the net gain would be zero.

-ERD50

 

[Sunset]

.....I'd guess that a back-end sales charge is counted the same as any other commission/fee associated with a sale (like the comm and fee for a stock sale)? If so, then for example, if you had $1,000 gain and a $1,000 back-end sales charge, the net gain would be zero.

-ERD50

In this example, while the net gain is zero, since the cost basis was stepped up assuming you soon sold, then effectively you have a $1,000 expense or capital loss on the funds.

 

[Steevo]

I had to check the location of the OP to see if it was the same EJ scumbag that my MIL is hooked up with.
I have never seen more blatant abuse of the "advisor" relationship that some of the crap EJ foists on unsuspecting folks who don't know any better.

 

[nwsteve]

I had to check the location of the OP to see if it was the same EJ scumbag that my MIL is hooked up with.
I have never seen more blatant abuse of the "advisor" relationship that some of the crap EJ foists on unsuspecting folks who don't know any better.

I wonder if these unit trusts will still be offered by EJ now that Fiduciary care is required of all "advisors"?
No great loss if so but it will be interesting to see what kinda of gymnastics they go through to justify.
Perhaps the OP can use these new standards to leverage their way out of the current batch of unit trusts they inherited.
Nwsteve

 

[Trooper]

I had to check the location of the OP to see if it was the same EJ scumbag that my MIL is hooked up with.
I have never seen more blatant abuse of the "advisor" relationship that some of the crap EJ foists on unsuspecting folks who don't know any better.

Probably not the same 'advisor', Steevo. When discussing this with my DW I am trying to separate the advisor from the firm. I think in many cases the advisors may have good intentions, but their hands are tied by EJ's policy of pushing their 'preferred partner' funds to unsuspecting clients.

 

[fourinone]

Response

It seems you've determined that the investments are bad without knowing anything about UITs or Invesco. If you compare the return of Invesco Comstock to Vanguard's 500 Index over years even with the load Comstock outperforms by a wide margin.

As for the fees thing, I've used 2 advisors in the past and been a DIY investor with Vanguard and still have some Vanguard funds. When I had no money I thought I could learn enough to do it on my own and I did alright but also made some stupid mistakes. Now that I have more $ I appreciate someone else's opinion a lot more, but maybe I just have a better EJ guy than the one you know.

I don't mind paying some fees as long as it's reasonable, having an objective voice is good. I think index funds are ok to build value in an account, but the one size fits all thing has too many flaws for bigger money.

 

[nash031]

It seems you've determined that the investments are bad without knowing anything about UITs or Invesco. If you compare the return of Invesco Comstock to Vanguard's 500 Index over years even with the load Comstock outperforms by a wide margin.



As for the fees thing, I've used 2 advisors in the past and been a DIY investor with Vanguard and still have some Vanguard funds. When I had no money I thought I could learn enough to do it on my own and I did alright but also made some stupid mistakes. Now that I have more $ I appreciate someone else's opinion a lot more, but maybe I just have a better EJ guy than the one you know.



I don't mind paying some fees as long as it's reasonable, having an objective voice is good. I think index funds are ok to build value in an account, but the one size fits all thing has too many flaws for bigger money.

I don't know what numbers you looked at, but VTSAX beats Invesco Comstock in every year increment before fees and loads. Then you factor in a 0.83% vs 0.04% ER and add the 5.50% front end load on Invesco Comstock and it's not even close.

Glad you're happy though.

 

[fourinone]

Morningstar has a tool, if you go back to 1976 when the Vanguard fund opened the Comstock returned average annual of over 13% vs over 11% for the index fund, including/net of fees and the load.

 

[alaska55]

We have a EJ worker in the house, Anybody can predict the past VTSAX beats over 80% of the funds in its class every year. Also for the last 10 VTSAX has beaten ACSTX by 7.24 to 5.60 and 15yr 6.59 to 5.49, 5yr 11.35 to 8.76, 3yr 12.11 to 7.71 and 1yr -1.11 to -9.08. It use to be a good fund but management changed in 2010 and they have gone down hill since.

 

[target2019]

Trooper,
Sorry for the loss.
Is the cost basis established for your wife on these inherited investments?
I think you're on the right course. Just need to share your learnings with spouse, keeping in mind it's for her benefit. If you keep this strictly analytical, it will be simpler for her. If she decides long-time advisor knows best, then you can drop discussion.

Many advisors can justify their recommendations initially. I have the opinion that most investors will accept this, and not scratch below the surface. After all, it is hard to to walk away from a nice guy.

The EJ advisor who paid me to come see him ($50 gift card) was thoroughly convinced that I "would definitely come back to do business." There is nothing I am surer of, that I will never let EJ touch my hard-earned savings.

 

[target2019]

Morningstar has a tool, if you go back to 1976 when the Vanguard fund opened the Comstock returned average annual of over 13% vs over 11% for the index fund, including/net of fees and the load.

Welcome aboard!
Always good to have a new, friendly face.

 

[nash031]

Morningstar has a tool, if you go back to 1976 when the Vanguard fund opened the Comstock returned average annual of over 13% vs over 11% for the index fund, including/net of fees and the load.

I'll take your word for it. The Morningstar fact sheets I looked at showed VTSAX ahead by quite a bit before fees and loads. Not sure if it went to since inception or not, but definitely in the last ten years it's taken a bath relative to cheap index funds.

 

[nash031]

I don't mind paying some fees as long as it's reasonable, having an objective voice is good. I think index funds are ok to build value in an account, but the one size fits all thing has too many flaws for bigger money.

Should've addressed this in my first post, but I don't understand why something works for building value but is too flawed later. It's like you're implying that once you get past, say $5 million, if you don't pay loads and fees you're doing something wrong. If it works to get you there, it should continue to work so long as your risk tolerance and investing goals remain intact. If those change, well, yeah, do something different, but I don't think that necessarily has anything to do with an arbitrary number in your account.

 

[harley]

Morningstar has a tool, if you go back to 1976 when the Vanguard fund opened the Comstock returned average annual of over 13% vs over 11% for the index fund, including/net of fees and the load.

Can you show the output of the tool? Or show the exact comparison you made? I don't think the numbers work out the way you are saying, but I'll never know unless you show details.

As far as needing to move into managed load funds once you reach a certain level of assets, I disagree totally. Like Nash031 says, if the strategy got you there, it should continue to work. For that matter, if you are paying, say, .75% on a $1M, that's $7500/year. At $5M, that's almost $40K/year. There's nothing I would pay anyone that much money for, even if it included a happy ending.


Edit: I've run comparisons against VFINX and ACSTX using 4 different chart comparisons, and the results are all over the place. Sometimes VFINX wins, sometimes ACSTX does. Obviously I don't know what I'm doing. If anybody knows how to compare these (or any) funds easily with fees included, I'd love to see how. Please educate me.

 

[harley]

It seems you've determined that the investments are bad without knowing anything about UITs or Invesco.

I determined that UITs are bad investments by the simple action of owning them. As I said in a previous post, the fact that you are forced to sell each year (or whatever period) can create unnecessary massive losses if the timing is bad, and do create significant taxable events constantly, unless you own them in a tax sheltered account. After a few years experience with them I realized my ex-FA was making more on them than I was.