Alternative Investments: Buyer Beware!


Alternative Investments, so-called, are usually "products" put together, "packaged", and marketed by large investment banking firms to those customers identified as "qualified investors".

The classification of qualified investor usually means someone whose annual income was at least $200,000 per year for the past two years and expects at least that amount for the current year or has a net worth of at least $1,000,000 not counting their home.

Whenever the term qualified investor appears, "alarm bells" should be going off in your head because the term usually means large amounts of money involved in very risky non-liquid investments. In other words, you can expect your money to be tied up for a long time!

They are also "loaded" with fees and commissions for the firms "pushing" them. In fact, that is the primary reason they are created.

You may have noticed, many of the recent scandals in the financial services industry involved alternative investments.

In this age of on-line discount brokerage firms, the days of making big money in stock brokerage commissions are long gone and never coming back.

Today, commission income has given way to fee income. Many securities salesmen have given up their NASD series 7 securities licenses and become registered investment advisors (RIA) thus enabling them to be compensated through so-called "wrap" accounts which charge a hefty percentage of assets under management (usually 3%). A registered investment advisory firm, not affiliated with a brokerage firm, usually charges 1 1/2%. Quite a difference, wouldn't you say? Whom would you prefer to manage your money?

However, there are forms of alternative investments that do not require a large capital expenditure. They would be more aptly described as direct participation in a business activity. Because they qualify as a business activity, there are significant tax advantages present. Due to the low capital investment required and high profit margin, the potential return on ones' time and investment can be considerable.

Donald Trump, the real estate magnate, while appearing on a television show, was asked what he would do if he suddenly lost all his wealth. He said that he would get involved with a good networking company. The audience burst out laughing but Donald Trump said, "Go ahead and laugh, but that's why you're out there and I'm up here!"

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