Buyer Beware – Alternative Investments

investingIn the search for higher yields in this ultra-low interest environment, some investors are being directed to non-publicly traded Business Development Corporations (BDC’s) as an investment option. While these might seem like good alternative investments at first glance, investors should be aware of the risks and costs involved.  Along with the high yields that they promise, they also come with high up-front fees, limited liquidity and limited transparency.

What you should know about BDCs
A BDC typically provides investment backing to a small or medium-sized business with limited financial leverage because they have credit ratings that are usually below investment grade. BDCs were created in 1980 by the government as an attempt to stimulate investment in middle-market U.S. companies. Not all BDCs are publicly traded.  Some are bought only through brokers, which can severely affect their liquidity.   BDCs must pass through at least 90% of their profits to their shareholders.  They do so without paying corporate income taxes, leaving the investor responsible for paying any required taxes.

In addition to the high up-front fees (commissions) that come along with non-publicly traded BDC’s, the private nature of this investment is cause for concern. The investor does not have the daily liquidity of a publicly traded investment and there is less disclosure required. This murkiness makes it easy for businesses to manipulate the numbers and delay showing losses. This means there is the danger that the value that they are estimated at may differ significantly from their actual value.  Finding a market to sell your non-publicly traded BDC can be a challenge and a significant risk that you are willing to accept.  As with any “high return” investment, you must be aware of the higher risks you are taking.

What does this mean to you as an investor?  First and foremost, you must do your homework. If your advisor or broker is suggesting a non-publicly traded BDC as part of your portfolio, take the time to investigate the associated fees and consider how long it might take to recoup the cost of those fees.  Some analysts suggest the front-end fees on these investments are as high as 12%. Additionally, there might be other fees and incentive structures associated with the management of these investments.

Our second and most important recommendation is to find an advisor that you trust.  One that will not benefit from the fees associated with their investment recommendations.  We suggest a fee-only advisor because they are not paid based on the products they sell.  This means they have your best interests in mind, not those of their bottom line.

About Objectively Speaking

Tom Batterman, founder of Vigil Trust & Financial Advocacy and Financial Fiduciaries, LLC is in the business of representing the best financial interests of his clients. Having provided objective, fee-only financial management services for over two decades, he specializes in managing the investment and related financial affairs of individuals and mutual insurance companies who do not have the time, interest or expertise to manage such matters on their own. As an objective, unbiased professional who takes on a fiduciary responsibility to his clients, he guides clients to the financial decisions they would make themselves if they had years of training and experience and the time and expertise to fully research and understand all of their options. Founded in 2010 as an outgrowth of Vigil Trust & Financial Advocacy, Financial Fiduciaries, LLC is a financial management solution for individuals and mutual insurance companies who recognize they do not have the time, interest or expertise to properly attend to their financial matters on their own. While there are many financial “advisors”, most of them have investment products to sell and the “advice” they provide is geared toward getting their clients to engage in a purchase. As one of the rare subset of advisors known as “fiduciary advisors”, Financial Fiduciaries does not sell any investment product so its guidance is not compromised by conflicts of interest which plague ordinary advisors. Prior to his employment in the financial industry in financial advocacy and trust positions, he worked at a private law practice in the Wausau area in the areas of estate planning, tax, retirement planning, corporate organizations and real estate. He is a graduate of the University of Wisconsin-Madison and the UW-Madison Law School and has during his career held Series 7, 24 and 65 securities licenses. A longtime resident of the Wausau, Wisconsin Area, Tom is active in the community. He enjoys golf, curling, skiing, fishing, traveling and spending time with his family.
This entry was posted in Uncategorized. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s