Be wary of surrendering liquidity

Photo Credit: darwin Bell || You ain't getting out easily...

Photo Credit: darwin Bell || You ain’t getting out easily…

=================================================

How would you like a really good model to make money as a money manager? You would? Great!

What I am going to describe is a competitive business, so you probably won’t grow like mad, but what money you do bring in the door, you will likely keep for some time, and earn significant fees.

This post is inspired by a piece written by Jason Zweig at the Wall Street Journal: The Trendiest Investment on Wall Street…That Nobody Knows About.  The article talks about interval funds.  Interval funds hold illiquid investments that would be difficult to sell at a fair price  quickly.  As such, liquidity is limited to quarterly or annual limits, and investors line up for distributions.  If you are the only one to ask for a distribution, you might get a lot paid out, perhaps even paid out in full.  If everyone asked for a part of the distribution, everyone would get paid their pro-rata share.

But there are other ways to capture assets, and as a result, fees.

  • Various types of business partnerships, including Private REITs, Real Estate Partnerships, etc.
  • Illiquid debts, such as structured notes
  • Variable, Indexed and Fixed Annuities with looong surrender charge periods.
  • Life insurance as an investment
  • Weird kinds of IRAs that you can only set up with a venturesome custodian
  • Odd mutual funds that limit withdrawals because they offer “guarantees” of a sort.
  • And more, but I am talking about those that get sold to or done by retail investors… institutional investors have even more chances to tie up their money for moderate, modest or negative incremental returns.
  • (One more aside, Closed end funds are a great way for managers to get a captive pool of assets, but individual investors at least get the ability to gain liquidity subject to the changing premium/discount versus NAV.)

My main point is short and simple.  Be wary of surrendering liquidity.  If you can’t clearly identify what you are gaining from giving up liquidity, don’t make the investment.  You are likely being hoodwinked.

It’s that simple.

[bctt tweet=”If you can’t clearly identify what you are gaining from giving up liquidity, don’t make the investment.” username=”alephblog”]