Unit Investment Trusts

A unit investment trust (UIT) is an investment company that invests in bonds, stocks, and/or equity securities that uses the funds raised from investors during one-time public offerings. It offers investors a fixed portfolio with redeemable units. The goal of a unit investment trust is to provide capital appreciation and/or dividend income.

UITs should be considered long-term investments that will mature on a specific date, usually at 15 months or at 24 months. Upon maturity, a unit investment trust’s underlying securities are sold with the proceeds going to investors. Many investors are drawn to this type of investment company because they provide a portfolio that has been chosen professionally and has a definite investment objective and goal.

Shepherd Smith Edwards and Kantas (SSEK Law Firm at investorlawyers.com) represents UIT investors throughout the US who have suffered significant losses caused by broker negligence or misconduct, including a broker-dealer’s failure to properly supervise its financial advisors. For more than 30 years, our skilled unit investment trust attorneys have helped thousands of investors to recover their losses.

• UIT units are usually redeemable, with the unit investment trust able to repurchase them at their approximate net asset value (NAV). However, a lot of UIT sponsors will also keep up a secondary market where investors can purchase unit investment trusts at market rate.
• These units usually don’t actively trade in their investment portfolio. Their fixed portfolio of securities won’t change much, if at all, once the initial securities are purchased.
• There will be a specific termination date and time for the UIT to dissolve that will have been established when this investment company was set up. Upon termination, any securities in the portfolio are sold, with proceeds going to investors.
• UITs are companies that are registered with the Securities and Exchange Commission (SEC) and subject to the regulator’s rules.
• A UIT doesn’t have a board of directors, an investment advisor, or corporate officers that it can consult for advice.

Equity (stock) trusts: While conducting initial public offerings (IPOs), equity trusts make shares available during a specific offering period to investors. This type of UIT seeks to provide dividend income and/or capital appreciation and may pay investors on a monthly, quarterly, or biannual basis.

Fixed-income (bond) trusts: This type of UIT usually pays a monthly income. The bonds in the trust are fixed. Upon maturity of bonds in a fixed-income trust, an investor will typically see a return of principal and a lowered income while the bonds left in the UIT keep making money over time. These bond UITs may be involved in a variety of offerings, such as those specializing in international corporate bonds, domestic corporate or government bonds, and/or foreign government bonds.

While unit investment trusts are regulated, choosing to invest in this kind of investment company can come with its disadvantages for inexperienced investors. Below is a list of several risks that come with investing with a UIT:

• Having no board of directors/advisors can make it hard for the UIT to make changes if market conditions begin to negatively affect the investments in its portfolio or its investing strategy goes awry.
• While there is a secondary market to buy and sell UIT units, this is usually done so at a reduced rate that will be lower than the unit NAV.
• UITs tend to charge upfront fees, sales fees, and other fees, which can start to add up especially if a broker keeps recommending a rollover or reinvestment every time a UIT reaches its maturity date. This can increase the risk of churning. A broker may even unsuitably recommend that the rollover happen before the UIT reaches maturity, which can become costly to the investor.

As with all investments, broker-dealers and their registered representatives must make sure that a UIT is suitable for any customer according to the latter’s investing profile. Unsuitable investment recommendations of a UIT can lead to significant losses if it was never a proper fit for an investor’s goals or risk tolerance level.

It is also important that your financial advisor not only convey to you what a UIT is and why you should invest in one but also make sure you understand this investment and the risks involved. Making misrepresentations or omitting key facts, including not properly conveying the risks involved in a unit investment trust, can lead to an investor losing money.

Call SSEK Law Firm at (800) 259-9010 today or contact us online to request your free, no-obligation, case assessment with one of our knowledgeable UIT investment attorneys.