Unit Investment Trusts at Raymond James
Client Disclosure Document
Raymond James offers clients a wide range of investment alternatives and services, including a variety of unit investment trusts (UITs). Deciding which UIT to invest in can be a complex process. It is important for you to work with your financial advisor to evaluate how each alternative’s investment objectives, risks, and associated costs fit your individual needs and objectives. UITs are offered through a disclosure document known as a prospectus, which contains important information that will help you make informed decisions. Reading the trust’s prospectus carefully is an important aspect of the screening and selection process that must take place prior to investing. We want to ensure that your investment choices best suit your personal financial objectives, risk tolerance, time horizon, diversification, and liquidity needs. Your financial advisor can provide you with a copy of the prospectus for each of the UITs you are considering. He or she will also answer your questions on how the trust’s units are priced and the compensation the financial advisor and Raymond James will receive from your investment.
This educational disclosure document is designed to provide you with a general overview of factors you should evaluate when considering an investment in a unit investment trust. This educational disclosure document is divided into two parts. In the first part, you will find general information about investing in unit investment trusts, including information that is designed to help you understand UITs. In the second part, you will find general information about how your financial advisor and Raymond James are each compensated. These parts will help you understand the costs you will incur as a result of your investment and what are some of the factors that could conceivably affect the guidance of your financial advisor and the investment alternatives that are available to you at Raymond James.
Part I: Overview Unit Investment Trust Investing
About Unit Investment Trusts
A UIT is a professionally selected pooled investment vehicle in which a portfolio of securities is selected by the sponsor and deposited into the trust for a specified period of time. A UIT is registered with the SEC as a Registered Investment Company (RIC) or Grantor trust. Trusts are categorized into these two different structures, based on the underlying holdings, for tax purposes. Consult your financial advisor for the primary differences between these two structures. The portfolio will generally remain fixed until the termination of the trust, usually ranging from 13 months to five years.
Some UITs, composed of fixed income securities, may have longer maturities depending on the underlying securities. As the underlying bonds in the portfolio mature or are called in early, the principal is returned to the investor. Although the securities within the trust generally remain fixed and are not managed, the sponsor may remove a security from the trust under limited circumstances. These situations are outlined in the prospectus.
The portfolio is designed to follow an investment objective over a specified time period, although there is no guarantee that the objective will be met. UITs are created by a trust sponsor who enters into an agreement with a trustee. When the trust is created, several investment terms are set forth, such as the trust objective, what securities are placed in the trust, when the trust will end, what fees and expenses will be charged, etc. A full accounting of the terms of the trust will be listed in the prospectus. Some UITs follow rules-based stock selection strategies that have hypothetical performance records back over several decades; this information can help investors decide if the investment strategy might be appropriate for their objectives and goals. Keep in mind that hypothetical performance, like any past performance, does not guarantee future results, which will differ from actual past performance.
The popularity of UITs results from many investor benefits and features including professional selection, transparency of holdings, diversification, daily pricing and redemption, and ease of purchase. Because Raymond James has a minimum investment threshold of $250, UITs have become the investment of choice for many investors, both large and small. Investors should note that diversification does not ensure a profit or guarantee against a loss.
A UIT’s long-term performance record is also likely to be factored into the selection criteria. Your financial advisor will help you compare and review UITs in light of your investment objectives and risk tolerances.
Since UITs have a fixed time horizon, investors at termination can elect to use the proceeds of the terminating trust to purchase a new UIT or the proceeds will be credited into the investor’s account at the net asset value. Prior to the trust’s termination, investors may sell/redeem their UIT shares at the NAV less any deferred sales charges, if applicable. Selling UITs prior to maturity may increase annualized costs. The proceeds from the sale will be credited to the investor’s account two business days after the sale (T+2). Also, under limited circumstances, certain trusts allow investors to elect to receive their pro-rata shares in-kind but this may create a taxable event.
UIT sponsors generally offer successive “series” of each UIT, giving you an option of reinvesting in the same objective or strategy with an updated portfolio of securities.
UITs that you purchase from sponsors can be based on selection criteria provided by us in the form of our intellectual property, including, but not limited to, our indices, research and trademarks.
The remaining information in Part I of this educational disclosure document is intended to provide you with a general overview of the costs associated with an investment in a UIT.
Costs
All UITs charge fees for organizational costs and annual operating expenses including portfolio supervision, bookkeeping, administrative and evaluation fees, and any trustee fees. UITs also charge a creation and development (C&D) fee, which compensates the sponsor for creating and developing the trusts. UITs also have sales charges, which are partially used to compensate financial advisors for providing financial advice and client service. These may be charged when you make your investment and/or charged over a predetermined time period (known as a deferred sales charge). If you sell your units before the deferred sales charges have been assessed, they will be charged at liquidation. All of these fees, including estimates of ongoing operating expenses and organizational costs, are listed in the “Fee Table” of the trust's prospectus.
UITs may be offered through fee-based advisory accounts and in these cases, they are not assessed the deferred sales charge but the creation and development fees do apply. Further discussion follows in the section on how your financial advisor and Raymond James get compensated.
Liquidity
Although UITs are generally considered buy and hold investments, investors may choose to redeem their units prior to termination based on changes in market conditions or personal objectives. The liquidation price will be at net asset value, calculated from the market value of the underlying securities on the day of liquidation. Any remaining deferred sales charge will be deducted at that time. UITs automatically redeem upon the required termination date at that day’s net asset value. Whether redeeming units prior to termination or redeeming at termination, investors may receive more or less than their original investments. Liquidity is based on the extent that the underlying assets are liquid. Contact your financial advisor for more information and review the prospectus for a complete discussion of risks and disclosures. Under limited circumstances, the trust may be reduced below the Discretionary Liquidation Amount, as described in the prospectus, and could therefore be terminated before the Mandatory Termination Date.
If you sell prior to maturity, be advised that you will pay the full sales charges as though you held the investment until maturity.
Generally, UITs are considered buy and hold type strategies and are not meant for short-term trading. At the same time, there can be legitimate reasons to roll to another UIT prior to termination. For instance, when market circumstances change and the returns of a particular UIT do not appear to perform as expected, or to take profits when a particular UIT performs exceptionally well. If you do choose to roll to another UIT or to another type of investment, you will most likely incur a sales charge on the new investment.
Taxes
Unit holders are subject to taxes on their investments. Investors may realize a taxable gain or loss on their federal tax forms if units are redeemed at or prior to the termination of the trust. Dividends, interest and/or capital distributions are also subject to taxes. If the unit holder elects to reinvest redemption proceeds into another UIT, it is considered a taxable event, and the unit holder will realize any gain or loss. Additionally, wash sale provisions may apply. For more information regarding these tax issues, as well as alternative minimum tax, nonresident aliens, or state or foreign withholdings, please read the prospectus and/or contact a tax advisor or attorney.
Both Regulated Investment Company (RIC) and Grantor structures are subject to reclassification. Reclassification is income and/or principal received by the trust and distributed to unit holders. Payments received can generally be reclassified as qualified dividend income, return of capital, long-term capital gain or short-term capital gain. Because the reclassification could result in a more beneficial taxable event for unit holders, it is important to take this into consideration when planning the timing of when you file your taxes. You should consult your tax advisor prior to making any such investment decision.
For IRA and other tax-deferred accounts, taxes on capital gains and income received are deferred until distributions are made.
Part II: How Raymond James and Your Financial Advisor are Compensated
In connection with your investment in the UITs offered by Raymond James, you should also be aware that Raymond James and your financial advisor each receive compensation. Part II of this educational disclosure document is intended to provide you with general information regarding how your financial advisor and Raymond James are compensated.
Your Financial Advisor
UIT sponsors pay Raymond James compensation when we sell their UITs, except when purchased through a fee-based advisory account. Raymond James receives a portion of the sales charge described above, referred to as dealer concession. The difference between the sales charge and the dealer concession is retained by the UIT sponsor. Raymond James pays a portion of the dealer concession to your financial advisor(s).
Regardless of commission charges by various UITs available to you at Raymond James, the compensation formula that determines the amount of payment to your financial advisor is the same for all UITs. Some UITs carry higher commission charges, depending on the length of the trust. As a result, your financial advisor may receive more or less compensation depending on the UIT you purchase, if purchased on a commission basis. Raymond James does not provide cash or non-cash compensation incentives to financial advisors based upon the sale of certain UITs. UITs purchased through a fee-based advisory account do not result in any additional compensation to your financial advisor; however, the advisory account’s fee will apply.
Raymond James
Raymond James receives compensation from a variety of sources. Some of the forms of compensation are directly associated with the particular type of account that you maintain with Raymond James or your particular investment. Other forms of compensation may not be as apparent since they do not directly affect the amount that you pay or that you are charged. These other forms of compensation include payments from the sponsors of UITs offered to you by your Raymond James financial advisor. The payments from these UIT sponsors to Raymond James are intended to cover a variety of expenses, including expenses associated with marketing UITs to new investors, educating Raymond James financial advisors, and expenses associated with servicing existing client accounts.
This section of this disclosure document is intended to provide an overview of the types of compensation that Raymond James receives.
Fee-based accounts: UITs may be purchased in fee-based advisory accounts. The fees associated with these accounts are generally used to compensate Raymond James and your financial advisor for advisory and custodial services. In fee-based investment advisory accounts, there is generally an annual fee, usually assessed quarterly, based on a percentage of assets in the account. The fee varies with respect to account size, type of securities managed, style of management, and/or other services provided. Since it is an asset-based fee, accounts are not charged any initial or deferred sales charge; however, they will still pay any creation & development fee and any operational expenses incurred by the trust.
When considering what type of account is right for you, you should carefully think about the projected expenses of the particular type of account given your financial situation and preferred relationship with your financial advisor. Specifically, you should consider and discuss with your financial advisor such factors as the amount of assets you intend to have in the account, the extent to which you want to exercise control over the account, the number of transactions you anticipate during a period of time, and your liquidity needs.
Education and communication: Consistent with FINRA rules, trust sponsors and/or their affiliates may compensate Raymond James for training and education seminars for Raymond James associates, financial advisors, clients, and potential clients. This may include due diligence meetings regarding their UITs, recreational activities or other non-cash items. The representatives of trust sponsors attend meetings, provide speakers for educational presentations and attend events where they can interact with our financial advisors. Marketing representatives of UIT sponsors, who are often referred to as “wholesalers” work with Raymond James financial advisors and their branch office managers to promote and provide education about their UITs.
Marketing service and support, and fees: Raymond James provides a variety of marketing and other sales support services to UIT sponsors related to their trusts, which depends on the tier level of the UIT Sponsor – Premier, Preferred, or Partner. The participants in the three tiers in the Education & Marketing Support Program (E&M Program) were selected based on a number of quantitative and qualitative factors. The level of support and types of services provided are commensurate with the tier level and increase at the higher tiers. These services include but are not limited to, providing detailed UIT information to financial advisors, strategic planning support to assist trust sponsors by making financial advisors available for educational information regarding their trusts, and branch office support, including phones, computers, conference rooms, as well as facilities and distribution support for prospectuses and promotional materials relating to their trusts. In addition, Raymond James is paid marketing service and support fees by sponsors, which come in a variety of forms, including payments that are sometimes referred to as “revenue sharing“ fees and concessions. This compensation may not be disclosed in detail in a UIT’s prospectus.
Other Raymond James Services and Compensation
Volume concessions: Raymond James receives additional volume compensation based on total assets purchased from the sponsor over a given period of time. These fees are used to cover the types of services outlined above and below and are not shared with Raymond James financial advisors or their branch managers as compensation. Raymond James does not receive an additional volume-based concession on UIT units purchased through fee-based advisory accounts. For more information, please read the trust’s prospectus.
Licensing fee: Sponsors of UITs may pay to us a fee to license our intellectual property, including our indices, research, and trademarks. Raymond James will not receive this licensing fee on UIT units purchased in any accounts held at Raymond James that are subject to ERISA or that are discretionary retirement advisory accounts.
Sub-supervisory fee: Sponsors of UITs may pay to us a sub-supervisory fee from trust expenses for certain research services related to the licensing of our intellectual property. Such fee is not an advisory or sub-advisory fee, and will not be received by us on UIT units purchased in any accounts held at Raymond James that are subject to ERISA or that are discretionary retirement advisory accounts.
Other services: Raymond James Financial, Inc. (NYSE-RJF) is a Florida-based diversified holding company whose subsidiary companies provide financial services to individuals, corporations and municipalities. For these services, Raymond James receives compensation. As a result, Raymond James can be expected to pursue additional business opportunities with companies whose UITs Raymond James makes available to its clients. Consistent with industry regulations, these services could include (but are not limited to) banking and lending services, sponsorship of deferred compensation and retirement plans, investment banking, securities research, institutional trading services, investment advisory services, and effecting portfolio securities transactions for trusts and other clients. Raymond James professionals who offer UITs to individual investor clients may introduce trust company officials to other services that Raymond James provides.
For additional information on UITs in general, contact your financial advisor or visit the educational websites of Raymond James at raymondjames.com/unit_investment_trusts.htm, or the U.S. Securities and Exchange Commission at sec.gov, as well as the UIT sponsor websites.
Risk Considerations
There is no assurance that a specific UIT will achieve its investment objective. You can lose money when investing in a UIT, and past performance is not indicative of future results. UITs are subject to market risk, and it is possible for the value of the underlying securities to decline, and consequently the value of the UIT may decline as well and your proceeds may be less than your original purchase price. UITs are unmanaged, and the underlying securities will not change during the UITs life except in limited circumstances.
Equity UITs: An investment in an unmanaged UIT should be made with an understanding of the risks involved with owning common stocks, such as an economic recession and the possible deterioration of either the financial condition of the issuers of the equity securities or the general condition of the stock market. You should be aware that some UITs may be concentrated in certain sectors, which may involve additional risks specific to the sector. Some UITs may be concentrated in or contain small-cap companies that are subject to risks including: the share prices of small-cap companies are often more volatile than those of larger companies due to several factors, including limited trading volumes, products, financial resources, management inexperience and less publicly available information. Furthermore, some UITs may contain only a few stocks, making them more volatile.
Fixed income UITs: Municipal and corporate bonds are subject to numerous risks, including higher (lower) interest rates, economic recession, and deterioration of the municipal bond market, possible downgrades and defaults of interest and/or principal. Interest income from closed-end municipal bond funds is generally exempt from federal income tax. However, certain distributions may be subject to federal income tax and/or subject to the alternative minimum tax. Discount fixed income UITs may realize gains when a municipal bond is sold, called or matures, and unit holders may incur a tax liability. Municipals and corporates each involve the individual credit risk of the municipal or corporate borrower and the general interest rate risk of lower security prices due to rising interest rates. The UITs are unmanaged, and their portfolios are not intended to change during the UITs’ lives except in limited circumstances.
Closed-end fund (CEF) UITs: A UIT’s net asset value will react in-line with the trust’s underlying assets. If you compare the costs of buying and selling at termination the same amount of CEFs individually, then the cost of purchasing a UIT may be comparable depending on the total size invested. If you believe that you can receive enough diversification by purchasing fewer CEFs directly, then you need to consider the costs associated with investing in a UIT of closed-end funds. Both alternatives include costs associated with managing the underlying CEFs. Individual closed-end funds are generally liquid; your financial advisor can place a trade for you throughout a trading day. The price for closed-end funds rises and falls in response to investor demand, and may be higher or lower than its NAV, or the actual per-share value of the fund's underlying investments. Closed-end funds are professionally managed and can be actively managed where the fund's manager buys and sells securities in an effort to outperform the fund's benchmark index, and this buying and selling could result in higher fees and increased taxes if you hold the fund in a taxable account.
Buffered UITS: Buffered UITs are a type of "Non-Traditional" UIT that employ the use of derivatives contracts to provide predetermined range of return outcomes based on the price performance of an underlying market at the trust termination. The trust’s ability to provide returns with a capped upside and partial downside protection is dependent on clients holding units until the trust’s termination date. Even when held until the termination date, there is no guarantee that the Buffered UIT will achieve its stated return objective. Buffered UITs invest directly in flexible exchange options, which may be less liquid than standard listed options, and can only be exercised at maturity. Illiquidity of the underlying holdings may adversely impact the value of the Buffered UIT. Performance of Buffered UIT will not always correspond directly to the price performance of the intended underlying market. Investors should carefully read the product prospectus, which is available through your financial advisor, in order to more fully understand the product's unique risks, tax consequences, structure, operations, fees, and expenses.
Diversification does not ensure a profit or protect against a loss. Past performance is not indicative of future results. Investing always involves risk and you may incur a profit or loss.
Investors should carefully consider the investment objectives, risks, charges and expenses of any UIT before investing. The prospectus contains this and other information about a UIT. The prospectus is available from your financial advisor and should be read carefully before investing.