Leaderboard

I stay out of my client's investments, until last year, I broke my rule. Client is in a PTP for 30 days, loses $100 and the K-1 drops a few dollars of interest expense and depreciation on her. Add in my charge for Sch E page 2 and the 1256 straddle form and she lost a couple hundred bucks for a 30 day investment. I asked if she knew what the partnership did, she had no clue. So I gave her some questions to ask the advisor. She called me back and said he promised not to put her into those investments again. I never know where the line is to talk to my clients about their investments when I think they are being taken advantage of. I try to tell myself it is none of my business, but I care about my clients and it pi$$3s me off when I see these "professional advisors" putting their profits before my clients best interests. Tom Longview, TX

I think the only factor that matters is the big commission stream earned by the broker. They have a huge conflict of interest. I explain to my clients that these partnerships were created because borrowing money from the banks is expensive and the operators didn't want to risk their own money, so they went public to get unsuspecting investors to buy in, and they pay brokers big fees to foist these investments on you.

I'll never forget the look on my clients' faces when they bought 10 of these K1 investments, and I told them each K1 adds $75 to their tax prep bill, every year, and $150 when the each K1 is sold, so I hope they make a lot of money on these. They went back and told their broker who then called me. Of course these are prices from about 10 years ago.

I think there are two main factors. 1) A misguided (or potentially deceptive) effort to create the illusion of "diversification". In fact, these small investments have virtually no impact on performance because they are so small in relation to the size of the portfolio. Whether they gain or lose, they don't move the needle very much in the long term. But they generate lots of paperwork which conveys the illusion that they're working hard for the client. After all, my guy must really be looking out for me if these sophisticated investments require all this fancy reporting. 2) A commitment to stay focused on focusing on specific funding objectives. Client: "You said this strategy would be good for the college fund for our kids." Broker, "Oh, you must have misunderstood. I was talking about building the college fund for MY kids. These LP's/ MLP's/ REIT's pay awesome commissions!"