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There are many ways to invest in stocks, bonds, cash alternatives, real estate, and commodities. For example, you can buy individual stocks and bonds, apartment or office buildings, and commodity futures. However, unless you're able to afford a wide variety of individual securities or property, you may not be able to diversify sufficiently. Though diversification can't guarantee a profit or protect against the possibility of loss, it can help cushion the impact of a loss in a single security.

To achieve greater diversification than they might be able to manage on their own, many people choose to use an investment vehicle that offers the ability to put money into multiple securities with a single investment. Such investments also may offer other advantages, such as expertise in selecting specific securities, greater convenience, or lower costs than would be required to invest in the same assortment of securities individually. However, each type also involves its own type of risk apart from the risks involved with the individual securities it includes.

Depending on how a specific investment vehicle is structured, it may be classified as an investment company and regulated by the Securities and Exchange Commission (SEC). There are two major types of investment companies: management companies and unit investment trusts.

Caution: With all investment companies, you should carefully consider a prospective purchase's investment objectives, risks, fees, and expenses, which can be found in the prospectus available from the issuer. Read it carefully before investing. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

  • Management companies--Management companies are usually structured as a corporation or trust, typically with a separate investment advisor that takes care of the actual purchase and sale of securities. A management company may be an open-end company that continuously offers an unlimited number of shares that can be redeemed directly with the issuer; mutual funds are the most prominent example of open-end companies. By contrast, a closed-end company generally issues a fixed number of shares but does not directly redeem those shares from the public.
  • Unit investment trusts (UITs)--UITs generally invest in a relatively fixed selection of securities that are held for a specified period of time (often one to five years) and issue a fixed number of so-called units to the public when the trust is initially offered. There is typically little or no trading of securities within the UIT during the life of the trust, and therefore little active management. The market value of the trust fluctuates with market conditions and the value of the underlying securities. A UIT typically will redeem shares at the net asset value (NAV), though it depends on the policy of the trust.

Technical Note: A third type of Investment Company, known as a face-amount certificate company, issues debt securities that guarantee payment of a specific sum (the face amount) in the future. In exchange, the certificate's holder typically makes either a lump-sum initial payment or periodic payments to the face-amount certificate issuer. Only a few face-amount certificate companies are still in existence.

Some companies that would seem to be investment companies are actually excluded from the legal definition. Examples include private investment funds with no more than 100 investors or whose investors are considered qualified investors with substantial income and/or net worth, such as hedge funds. Investment vehicles are not the same thing as investment companies. They do not represent a security per se, but a particular method for holding securities, or a unique way of investing in certain asset classes.

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Exchange-Traded Funds

Like a mutual fund, an exchange-traded fund (ETF) is considered an investment company and is regulated under the Investment Company Act of 1940. However, an exchange-traded fund is priced and traded throughout the day and can be bought on margin or sold short--in other words, it's traded much as a stock is. Also, an ETF may be structured somewhat differently from a mutual fund in terms of how the fund buys and sells securities. Most ETFs are passively managed to try to replicate the performance of an index. An ETF may be structured as either an open-end fund or a unit investment trust.

Closed-End Funds

A closed-end fund has some of the characteristics of a management company, but also resembles a unit investment trust in some ways. Like many open-end mutual funds, it is professionally managed and can be either diversified or nondiversified. However, it is similar to a unit investment trust in that it is priced and traded throughout the day on market exchanges. Also, the number of shares is fixed, and shares are generally not redeemed by the company that issues them. Share price is determined by supply and demand.

Other Investment Vehicles

Separately Managed Accounts (SMAs)

A separately managed account is a personal investment account that is customized and managed for you by one or more professional money managers. In an SMA, your assets are not commingled with those of other investors. With a mutual fund, you buy and sell shares of the fund. Even though each fund share represents a proportionate ownership of individual securities within the fund, your share of each of those securities is tiny. By contrast, you are the sole owner of each security within your separately managed account. You also can place securities you already own in an SMA; with mutual funds, you can't. As a result, you and your financial professional have more control over management of specific investments in an SAM. An SMA typically focuses on one asset class--for example, equities.

Unified Managed Accounts (UMAs)

Unified managed accounts are an outgrowth of the separately managed account concept. They offer a more efficient way to manage the asset allocation process and integrate a variety of investment vehicles. A separately managed account typically has a single investment manager (or management firm), and often invests in only one type of asset. A unified managed account allows you (or your financial professional) to aggregate multiple asset managers and investment vehicles within one account, and make investment decisions in the context of a much broader view of your overall finances.

Wrap Accounts

A wrap account is a type of account that offers unlimited transactions within the account and charges a quarterly or annual fee (usually a percentage of the assets in the account) that covers all investing costs, including trading costs. It also may offer suggestions about how to invest those assets based on your investment objectives and risk tolerance. A mutual fund wrap account is typically made up of only mutual funds; a nondiscretionary advisory account is offered by brokerage houses and can hold a broader range of investments.



This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.


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The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at www.theretirementgroup.com.

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