Frightful Investment Sales

I thought I'd tap into the scariness of this Halloween season and share what passes for a scary story in the world of investing. It all started one dark and stormy night, or maybe it was a sunny Tuesday. Anyway, I recently reviewed the portfolio of a 93 year old woman. That's not the scary part though, the scary part came in the form of the frightful things that were sold to her, with unit trusts by First Trust being the scariest. In theory, unit trusts are like index funds but, in this story, theory meets reality in a horrifying way.

While multiple products were sold, let's take a look at one specific vehicle - the Target Dividend Multi-Strategy Portfolio. The unit trust's brochure certainly painted a rosy picture. The strategy applies predetermined screens to build portfolios it holds for 15 months. The brochure notes, "As you can see in the adjacent charts, if this strategy had been applied since 1995, investors would have realized higher total returns than by investing in the S&P 500 index."

The chart appeared to demonstrate how $10,000 invested in this strategy since 1995 would have grown to about $42,000 vs. only about $30,000 for the S&P 500. What's not to love - sign me up!

True but misleading
I have no reason to believe the numbers in the brochure are wrong, but I do think they are very misleading. I learned from talking with a First Trust Rep, that they only started this series of unit trusts on May 31, 2007. Looking at 2007 to the first half of 2010, the strategy underperformed the S&P 500 index three out of four years.

Now, I'm thinking that the far more relevant piece of information to the consumer would be how First Trust had done since they launched this product. The best this brochure does is to put in a footnote which states "strategy performance is hypothetical and not representative of the portfolio or any prior series since none existed during all the periods shown." Those footnotes will get you every time.

Sure, I too could launch a gold unit trust today and claim that Allan Roth Gold Trust would have bested the S&P 500 significantly. True, but useless. Not only did First Trust fail to show performance since they launched this strategy, I think even using the S&P 500 is misleading. Their largest single holding is Vodafone Group Plc which isn't an S&P 500 company. In fact, more than half of their largest 20 holdings are foreign and not part of the S&P 500.

It get's scarier
According to page 13 of the 92 page prospectus, $26.13 of fees could be paid for every $100 invested in this strategy over a ten year period. The company does offer discounts for larger investments but, in my opinion, it also makes an insurance annuity look pretty good by comparison. Or at least less horrifying. Yet, this unit trust is technically a passive strategy.

But of all the dangers that were lurking in the footnote of the brochure, or buried within the prospectus, the most scary thing I felt that was revealed was in the brochure, where the performance back in 2008 was disclosed as having a loss of 44.97%. Call me crazy, but I don't think this was appropriate for a 93 year old lady.

I'm lonely
I wanted to make sure I was not misunderstanding this product, yet I couldn't get anyone to speak to me. Through the First Trust advisor rep, I got the official response to my concerns - "no comment." So, I went to Wells Fargo Advisors, the firm that sold the product to this woman. Surely they would comment, especially since I've seen First Trust unit trusts in several Wells Fargo portfolios I've reviewed. No response either.

Don't get tricked
Halloween isn't the only scary season for investors, it's pretty much "buyers beware" year-round. I'm saddened to say that our regulators allow this type of marketing and disclosure. Personally, I find it reprehensible and completely unfair to the consumer.

My advice is to always ask the advisor to write down the following:

Why they think the product and portfolio is suitable for you.

The total annual costs of the product and the portfolio.

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