Exempt Market Products: Do You Understand Exactly What You Are Getting Into?
My usual morning routine involves a quick glance at Twitter, LinkedIn, and Facebook feeds, to see if anything interesting is going on. This morning I noticed a LinkedIn article describing the exempt markets. Right away, my internal BS detector started to sound off, so I felt compelled to write. Do you ever get the feeling that you are simply being sold something, that all of the good points about an investment or asset class are being promoted, but the risks are simply ignored? Perhaps you don’t notice because this is the way the vast majority of investments are promoted today. Benefits in bold print, risks buried somewhere that you hopefully won’t notice, which is so commonplace that we have become immune to it.
It is my strong contention that you and your hard-earned money, which forms an important basis for your financial standard of living and future, deserve more than that. As a consumer, you have a right to be informed of all risks, not just the good stuff. The financial services industry, across the board (insurance, mutual funds, brokerage, exempt markets), needs to hold itself to a much higher standard than it does today. Many times advisors can actually contribute to investing mistakes.
Here Are the Exempt Market Risks You Need to Know
- These products are generally illiquid, meaning that there is no secondary market created to buy and sell the assets purchased. The risk is that your fund may buy an asset and may never be able to sell it. Be prepared for this with any exempt market product you buy.
- Exempt market products should only be considered for the portion of your portfolio that can be locked-in for a long period of time. Sometimes the suggested time to exit is extended, or worse, never occurs. Funds that have provisions for you to redeem your principle cannot guarantee liquidity. Many also have clauses that allow the fund to suspend redemptions to preserve the integrity of the fund. Be aware that this is a possibility, and factor it into your decision.
- Regulators view the entire category as high risk. Individually each product must be treated as such.
- You must be prepared for the possibility of total loss in any individual exempt market product you purchase.
- A fee or commission of 10% could come right off the top of your investment. This means that 90 cents of every dollar goes to work instead of the whole dollar. With 10% commission you start day 1 with a loss of 10%. Actual commission can be more or less than this depending on the product.
- There are general business, economic, geographic, key person, specific project, commodity, and other risks which must be factored into decision making.
The best thing that you can do for yourself is to become informed of all exempt market risks before purchasing any product. This will help you avoid costly mistakes.
I sincerely believe that there are a growing number of financial product consumers who are growing weary of all the product promotion and slick sales language that takes place in our industry today. As a financial professional for the past 21 years, having been beaten over the head with pressure to sell more product to more people, I know that I have grown tired of this industry façade.
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