Beware of Alternative "Oddball" Investments:

Life Settlement Investments

Limited Partnerships

Non-Traded REIT's

Promissory Notes

Trust Deed Investing

Offshore Investments

Private Placement / Unregistered Offerings



When non-fiduciary "advisers" try to get their clients to buy annuities, limited partnerships, life settlement investments, pooled funds, house funds, non-traded REITs, or other oddball investment "products" that have "guarantees", "front end loads", "entry fees", "early withdrawal penalties", "early exit fees", "redemption fees" or "surrender fees", they are foaming at the mouth over the obscene commission money that they will earn. Instead of pitching investments that benefit YOU, they push investments that benefit THEMSELVES or their firm! It's usually when investors say "I HAVE GIVEN UP ON THE STOCK MARKET" that they get themselves into trouble with riskier, expensive, under performing oddball investments sold by commission hungry brokers, insurance agents, bank employees and other self-serving salesmen, none of whom legally work for you. You should know that since 1926 stocks have been the best performing asset class. The best, most successful and most promising companies and investments are liquid and publicly traded as stocks (or as stock-based ETF's and bond ETF's) all sold through any deep discount brokerage. In this day and age there is NO NEED to invest your money in illiquid oddball investments that you can't touch for a number of years. With liquid, super low cost, SEC regulated index funds like VOO and SPY available there is absolutely no reason to invest in oddball investments. With over 6,500 liquid, SEC regulated individual company listings traded on the NYSE and NASDAQ stock exchanges there is absolutely no reason why an investor who insists on picking and choosing individual companies would need to look elsewhere.


All of these oddball investments have one thing in common. They violate many or all of the basic rules of investing. They are not publicly traded because they are not sold on a stock exchange. They are illiquid investments because they must be held for many years. You can't buy and sell them at a moments notice as you can with other normal investments like stocks and ETF's. The people who fall for these investments make the mistake of "chasing yield" by taking on much more risk in exchange for higher yields. Also non-fiduciary "advisers" typically have no regard for diversification when pushing these investments. They'll gladly recommend that you pour much more than 5% of your money into these investments.


Often these oddball investment products are sold using buzz words like "direct investments" or "private offering" or under the headline of "not tied to stock market risk". On the surface this might sound appealing to an investor who fears stock market volatility, but in reality ALL investments have risk. It is these oddball investments that carry much more risk than disclosed by the salespeople who push them. If the economy tanks, so do stocks and other investments like private equity. Furthermore if stock market risk is the concern, an investor can simply offset it by doing as other normal investors do by diversifying more into bond ETF's (like AGG), lower volatility stock ETF's (like IDU, XLP, SPLV), cash investments, gold, etc. There is a right and a wrong way to offset stock market risk. Investing in risky oddball private equity investments should not be one of them.



The Pros & Cons: Securitized life settlement contracts have made NASAA Top 10 list of financial scams. National Life Settlements sold about $30 million worth of life settlements investments to investors and was closed down in December 2011 when it was determined to be a Ponzi scheme. Investors were lured by promised annual returns as high as 10%, but when it was all over they actually lost 31% of their principal. That's all too often what happens when you chase yield that's too good to be true.


These investments violate rule #1 and rule #4 and involve a high degree of risk that is usually understated or not stated by the salesmen who sell these duds. With even legitimate life settlement contracts, investors may be responsible to pay for premiums to insure people who outlive their life expectancies. That's when the promises fall apart. Unfortunately these investments are often sold to conservative investors who are "chasing yield".


NEVER write checks out to anyone other than to your deep discount brokerage firm (such as Schwab, Fidelity, Vanguard) for the purchase of publicly traded companies. There's no telling whether or not a supposed life settlement investment may be a Ponzi scheme! At the very least, the solicitors pushing these investments make tidy commissions which is a conflict of interest. That's why they are trying so hard to sell these odd-ball investments with paid radio spots and beautiful glossy brochures. Often they use comforting words like "fixed", creating the perception that these investments are as safe as perhaps US treasury notes.



Limited partnerships are private equity investments, meaning they are not publicly traded on a stock exchange. Avoid private equity. Brokers push limited partnerships because the commissions they earn are very large -- Often about 9% of the amount that you invest. Investors are usually lured by the promise of a higher percentage return and it has the "look" of other familiar investments like bonds and T-bills, but in fact these investments have much more risk than brokers disclose!! Brokers may tout limited partnership returns as "guaranteed". Unfortunately sometimes people lose all of their money with limited partnerships. If you are looking for a "conservative investment" then a limited partnership is NOT what you are looking for! It's what your broker wants to make a big commission off of!


While master limited partnerships are publicly traded they have more risk than most investors realize!

A "master limited partnership" is a limited partnership that is publicly traded on a stock exchange. The "Wells Fargo MLP Index" (Yahoo finance symbol ^WMLP) tracks the price of master limited partnerships that have market capitalization of at least $200 million at the time of inclusion. From July 2007 until December 2008 the Wells Fargo MLP index dropped 49 percent, while the S&P 500-stock index only fell 41 percent. So if you consider everyday large cap stocks to be too "risky" then master limited partnerships are riskier! Sometimes people lose all of their money with MLP's! Don't be duped into thinking that MLP's are as safe as bonds, treasuries or high yield stocks such as utility stocks.



Non-Traded REIT's

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3 WORDS TO BEWARE OF: UNSECURED PROMISSORY NOTE. Avoid like the plague. These investments violate rule #1 and rule #4. Beware of any investment that involves a promissory note with a guaranteed rate of return. Investors often feel comfort in these "investments" simply because they pay interest and because there is a written contract involved. Unfortunately more and more con-artists are using promissory notes as their method of choice to rip people off, just as Bernie Madoff did. Understand that promissory notes are typically NOT even sold to the general public. When they are sold to individual investors, often they turn out to be scams.


Any investment adviser who pushes a promissory note on an investor is 1) not a fiduciary adviser who legally works for you, 2) is pushing such an investment based on conflict of interest because the sales commissions that they stand to earn are too irresistible, and 3) they usually know absolutely nothing about the notes they are pushing other than what they have been told by the person or company offering them. As proof positive, many NBA and NFL players fell for this promissory note offering that is being investigated by FINRA for fraud. One of the "advisers" who sold these notes to clients openly admitted "How would we know [if fraud was involved]? We were operating on belief based on what we were told by [the guy offering the notes]… My take is I wouldn’t know if it was a Ponzi scheme." That about says it all. Avoid non-fiduciary advisers and the high commission products they carelessly sell.



For starters a massive conflict of interest exists. The salesmen (broker / "advisers") who push trust deed investments don't spend lots of money buying radio spots and mailing out nice glossy brochures for nothing. They do so because these are high commission based investment products. These non-fiduciaries legally do not work for you. NEVER ever make any financial decisions based on a non-fiduciary's "advice" to buy any securities. Often these investments are marketed toward senior citizens using the usual "Are you tired of the stock market" hard sell or they prey on investors who are tempted to violate Rule #6 by "chasing yield". I recently heard a paid radio spot that actually compared trust deed investments to 1% yielding certificate of deposits. This is like comparing apples to bananas. Trust deed investments are not even in the same ballpark as high yielding utility stocks or ETF's like IDU. I've heard other radio spots boasting about how these investments are "not tied to stock market risk", which is a red herring. All investments have risk, especially ones that are not traded on a stock market. Any investment that pays an unusually high yield must have greater risks than lower yielding investments (like utility stocks).


Private equity investments are not subject to the strict regulations that normal investments have. There is no way for any broker / salesman to fully understand what is going on behind the scenes with a trust deed investment. Often brokers know nothing more about investments than what they have been told by the promoters of these investments. Trust deed investments are not publicly traded investments so there is no way to know for sure if you are paying a fair price, where the money will go, if they will cannibalize principal to make interest payments to you, or if you are investing in a Ponzi scheme or not. Don't let anyone tell you otherwise. Investors in San Diego found this out the hard way. Even if not a Ponzi scheme, real estate investments have risk just as any other investment does.


Here's another article on Trust Deed fraud / scams. This author is an expert witness involving real estate scams, which he says are so plentiful that he doesn't even know where to begin! That about says it all.

If you are truly in love with real estate investing there are low cost ETF's that you can invest in like IYR.



The myth is that extraordinary profits can be mode offshore. This is simply not true. Because offshore banks and investments are not subject to the usual strict regulations, they are ripe environment for fraud. Many offshore "banks" turn out to be nothing more than Ponzi schemes. They start out paying a high interest rate, then eventually close down and disappear with your original principal.


Sometimes investors are falsely told that offshore bank accounts or investments are "tax shelters". This is not true, and adding insult to injury, by putting your money in so-called offshore "tax shelters" you may be unknowingly committing tax fraud.


Even if an offshore bank isn't a Ponzi scheme there are other risks. Banks sometimes become insolvent and fail. When you "deposit" money into a bank account in reality you are actually "lending" them money which they use to invest or loan to others. Only a small fraction of the money that you deposit at a bank is actually kept in cash (versus used to invest).


Cyprus Financial Crisis: Depositors holding more than €100,000 at the Bank of Cyprus will lose a whopping 37.5% of their savings in exchange for bank shares. Another 22.5% of their savings will be put into a zero interest earning fund and could be confiscated.


Private Placement / Unregistered Offerings


The Securities and Exchange Commission has issued a warning about private equity investments. Further discussion is found here.


CONCLUSION: These types of investments are sold by non-fiduciary "advisers" (salesmen) who have their own best interests at heart (high commissions). Don't allow them to talk you into investing your money into these inferior, riskier, illiquid, long-term investment products. At best the odds are that these investments will be a financial set back; At worst you may be investing in a Ponzi scheme. Never chase yield. Never let greed overcome common sense


NEXT ARTICLE: Mutual fund fleecing


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