What Is a Master Limited Partnership (MLP)?
An investment that the financial industry has been pushing recently as
a hot product is Master Limited Partnerships, or MLPs. In a low interest
rate environment, many brokers sell Master Limited Partnerships to their
customers. Many MLPs have been wrongly sold as a supposedly safe way to
earn higher interest rates with little or no risk.
With the recent precipitous drop in oil and other commodity prices, many
MLPs have taken a big hit and many investors have seen their returns completely
wiped away. What exactly is an MLP? An MLP is a limited partnership that
is publicly traded on an exchange. It combines the tax benefits of a limited
partnership with the liquidity of a publicly traded securities.
To be legally classified as an MLP, the partnership must derive most of
its cash flow from real estate, natural resources, and commodities. Over
the last several years, MLPs have become one of the fastest growing asset
classes. In 2007, the amount of money invested in MLPs was about $100
billion. By mid-2014, that number was over $500 billion. With yields approaching
10% or higher, it’s little wonder why investors have taken the bait
and bought up MLPs at a record pace.
This is particularly so for retirees who may need income but who might
be earning only a little over 1 percentage on a one-year CD at a local
bank. While brokers loaded up their customers on MLPs, they’ve often
overlooked or flat out misrepresented the significant risks associated
with these investments. Contrary to many sales pitches, MLPs are not bonds.
In fact, MLPs are incredibly sensitive to oil and commodity prices. When
oil and commodity prices plunge, as they recently have, MLP prices can
drop, yield payments might be suspended, and some MLPs might even become
illiquid meaning that you can’t sell or get out of the investment.
If you suffered losses in MLPs that you believe may have been sold to you
inappropriately, give us a call. We might be able to help you recover