What Are Unit Investment Trusts?

Is your broker recommending that you invest in unit investment trusts, known as “UITs”? We recently represented a retired couple from the Midwest who lost a substantial amount of their retirement savings in UITs sold to them by their broker. They suffered over $400,000 in investment losses, and the brokerage firm earned $200,000 in commissions from trading those UITs. We were able to secure a favorable settlement for our clients, but they should have never been sold those investments in the first place.

We have seen quite a few cases in our offices where brokers are pushing UITs on their customers. Brokers can make UITs sound very enticing. They are pre-selected baskets of stocks or bonds, which are fixed for a predetermined time, typically packaged with an interesting strategy, and designed to meet a specific goal.

In our opinion, for most individual investors, UITs are often a poor substitute for ordinary mutual funds. One of the potential problems and risks involved with purchasing UITs is that the portfolios are not actively traded, and they follow a buy-and-hold strategy. The portfolio remains fixed until the termination of the trust, usually ranging from 13 months to as much as 30 years depending on the underlying holdings.

Because UITs are unmanaged investments, they can’t take action or make investment decisions in response to or in anticipation of market declines or other events that are likely to effect the portfolios, even if such actions or decisions may be warranted.

This is especially problematic when the units are invested in volatile and risky sectors, or prudence calls for a timely rebalancing. In addition, UITs can be very expensive, both when they are first purchased and again when they dissolve. In many cases, brokers are pushing so-called “short term strategy trusts” that typically dissolve after one or two years.

Clients are often urged to reinvest automatically, rolling their units over into another, similar, newly created UIT once the old one dissolves. With each trust purchase and dissolution, investors are hit with initial sales charges, deferred sales charges, and other fees. In a taxable brokerage account, you may owe capital gains taxes each time a UIT matures. These layers of fees can add up, and bite up the returns on your investments to the tune of up to four percent or higher. This means you would need to achieve an annual return of four percent just to break even.

Unit investment trusts are not inherently bad. However, based on our experience representing individual investors who have lost substantial amounts of money with UITs and have been charged very high fees and commissions, our biggest concern is that they are complicated. Many investors who are sold UITs by their brokers do not have a handle on their risks and costs.

You should never invest in something that you don’t understand. If you invested in a UIT and lost a substantial amount of money, we invite you to contact the securities fraud lawyers at Meyer Wilson for a free review of your case.