Financial Yard Eggs

Low interest rates continue to frustrate investors as they watch gas, food, and other prices rise. In early April, the benchmark 10-year Treasury note rate was 2.788%. The average bank money market fund paid 0.41% and a 5-year CD offered 1.39%. Adjusted for inflation and taxation, low yields on conventional savings offer a negative return and add little luster to one's Golden Years!

 Consequently, a host of income-producing alternative investments has become popular. These may include non-traded investments in real estate (REITs), business development companies (BDCs), or closed-end mutual funds. These investments are public offerings; however, they do not trade on a stock exchange or trade daily like an open-end mutual fund. In other words, they are not immediately liquid.

 A liquid investment is one that is cash or may be converted to cash in a short period. Stocks and bonds may be brought to cash after a defined settlement period. A non-liquid investment is not immediately converted to cash. An example would be your house, land, other real estate, a closely held business, and investment vehicles often called "direct" or "private placements."

 Some investors may not understand the "liquidity premium." If an investment is not easily converted to cash at a fair market value, the investor may pay less for it or conversely demand a compensatory higher yield than he or she would for a liquid investment. For example, a  non-traded REIT may pay a higher yield than a similar REIT that trades every business day on an exchange. It is that potentially higher yield that is attracting investors in today's low-yield environment.

 Regulatory authorities want to make sure that investors have ample levels of liquidity and certain levels of sophistication and knowledge before they purchase non-liquid investments. For example, before an investor can purchase an interest in a non-traded REIT or a non-traded BDC, he, she, or they must demonstrate a net worth of $250,000 exclusive of home, car, and personal effects, or an income of $70,000 and $70,000 of net worth. Some states, and some investments, may require higher levels of income and net worth. States also may limit the amount of non-traded, non-liquid investments to 10% of an investor's net worth, as an example.

 Prudent advisors must be cognizant of a client's liquidity needs and their ability to judge the risks and rewards of a particular investment. Many new non-traded REIT and BDC offerings may not experience a liquidity event for a number of years. While many will redeem a certain number of shares periodically at a discount to a stated value, the advisor should ensure that the client understands the liquidity restrictions and is content to hold the investment for the income stream.

 The widow was interested in a higher yielding investment but hesitated when the lack of immediate liquidity was explained. She had ample liquidity and more than met suitability requirements. She lived in a rural area, so the advisor asked her if she ever kept chickens. When she said, “yes,” the advisor asked why? "For the eggs," she replied.

Inquired the advisor, "Well, then, did you ever kill or liquidate a chicken for dinner?" "No," she said, "because then I wouldn't get the eggs!" Suddenly the tradeoff between liquidity and an income stream became clear. She understood.

That's what certain types of non-traded alternative investments, and even income streams from immediate or deferred annuities, are—financial yard eggs!

Lewis Walker is President of Walker Capital Management LLC. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (R.I.A.) Securities and certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA).  Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with the Walker Capital Companies. ▪ 3930 East Jones Bridge Road ▪ Suite 150 ▪ Peachtree Corners, GA 30092  ▪ 770-441-2603 ▪ lewisw@theinvestmentcoach.com