What to do in a time of low-yielding investments? One
answer is non-traded securities with holdings in real
estate, private equity and other assets. They might
pay out in the mid- to high-single digits, far more than
almost anything else.
The downside (and it is a big one): selling them, should
you need to raise cash, is hard.
Low interest rates continue to frustrate investors as
they watch gas, food and other prices rise. For most
of 2020, the benchmark 10-year Treasury note rate
was below 1.00% and the 30-year Treasury was
hovering below 2%. The FDIC reported a national
average of 0.07% APY on money market accounts
with deposits under $100,000.
Adjusted for inflation and taxation, low yields on
conventional savings offer a negative return and add
little luster to one’s golden years.
Income-producing alternative investments
Consequently, a host of income-producing alternative
investments are popular. These may include nontraded
investments in real estate investment trusts
(REITs), business development companies (BDCs) or
“incubator” closed-end mutual funds.
REITs own collections of properties (or sometimes
mortgages), and must pass along 90% of their taxable
income in dividends to investors. BDCs are funds that
invest in debt or equity of privately held companies.
Closed-end funds that are launched may invest in real
estate or business assets including debt instruments.
While these investments are public offerings, they do
not trade on a stock exchange or trade daily like an
open-end mutual fund. In other words, they are not
immediately liquid. These investment vehicles may
have publically traded counterparts, but because
those are liquid, the yields generally are lower than
A liquid investment is either cash or something you
can convert to cash in a short period. Stocks and
bonds may be brought to cash after a defined
A non-liquid investment is not immediately converted
to cash. Examples are your house, land, other real
estate, a closely held business and investment
vehicles often called “direct” or “private placements.”
Some people do not understand the “liquidity
premium.” If you can’t easily convert an investment to
cash at a fair market value, a buyer may pay less for it
or demand a higher yield than a liquid investment
fetches. For instance, a non-traded REIT may pay a
higher yield than a similar REIT that trades every
business day on an exchange. It is that potentially
higher yield that attracts investors in today’s low-yield
The regulators are watching
Regulatory authorities want to make sure that
investors have ample levels of liquidity, as well as
sophistication and knowledge, prior to purchasing
For example, before investors can purchase an
interest in a non-traded REIT or a non-traded BDC,
they must usually demonstrate a net worth of $1m
exclusive of home, car and personal effects. Some
states, and some investments, require higher levels of
income and net worth. Some states also limit the
amount of non-traded, non-liquid investments to 10%
of an investor’s net worth.
Prudent financial advisors must be aware of clients’
liquidity needs, and their clients’ ability to judge the
risks and rewards of a particular investment. You may
not need to sell new non-traded REIT and BDC
offerings for a number of years. While many will
redeem some shares periodically at a discount to a
stated value, their advisor should ensure that the
client understands the liquidity restrictions and is
content to hold the investment for the income stream.
The chicken and the egg model
A widow was interested in a higher yielding
investment but hesitated when her advisor explained
its lack of immediate liquidity. She had other assets
that were very liquid and more than met suitability
requirements. She lived in a rural area, so the advisor
asked her if she ever kept chickens.
When she said, “yes” the advisor asked why?
“For the eggs,” she replied.
Inquired the advisor, “Well, then, did you ever
liquidate or kill a chicken for dinner?”
“No,” she said, “because then I wouldn’t get the
Suddenly the tradeoff between liquidity and income
stream became clear. She understood.
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