Income Trusts - Friend or Foe?

Ralph Goodale is receiving lots of criticism from the industry and from the unknowing.

Industry makes a ton of money from new issues and that includes income trusts. Brokerage fees, lawyers fees, selling commissions and all from selling products without history and asking investors to trust the industry and buy!

Considering how many investors have lost their shirt by trusting the industry, it's time for retail investors to take a hard look at how they are being conned.

Heating Oil Partners is reported as the first income trust to declare bankruptcy. That means investors have lost all their investment.

Many other investors are more fortunate. The investors in Atlas Cold Storage have only lost half their money and the investors in Clearwater Seafoods have only lost 60%. The young lady was right when she said income trusts are good because many people make a living selling them and besides they are not as bad as some equities.

Thank you. It does not sound like where I want to invest.

To be fair some income trusts have performed well. Those that were based upon mature companies with consistent cash flow that could be maintained year after year perform as promised. The idea is to pay out pre-tax dollars rather than after tax dollars in dividends. Depending upon the investors tax situation they could be attractive.

However it seems the industry is never content with a good product that is good for investors and good for the industry. It seems they want to milk it so the industry has maximum benefit regardless of the impact on investors.

With a rash of new income trusts flooding the market Ralph Goodale said they would no longer pre-approve conversions until the situation was reviewed. Suddenly income trusts started to lose value on speculation that the tax benefit might be reduced.

The industry blamed the reduced values on Ralph Goodale. However, critics have been warning for some time that many of the business income trusts are not viable but are operating like a Ponzi scheme. The distribution is greater than the earnings and therefore investors are being paid with either their own capital or borrowed money.

Clearwater Seafoods had suspended distribution earlier this year and by the time Goodale made the news Clearwater units had already lost almost half their value.

Unfortunately business income trusts are being sold to retail investors, many of them seniors and widows, who are afraid to invest in equities because they perceive them as risky. They are persuaded that income trusts will provide returns much higher than GICs and government bonds but they are not made aware of the risks associated with these products.

The industry knowingly is selling inappropriate products to seniors and widows. They are leaving themselves open to massive lawsuits which will surely follow their cavalier approach to selling unsuitable product to unknowing investors.

As more information becomes available the business trusts will collapse and retail investors will lose tons of money. This will create business for lawyers but Bay Street may see their bonuses reduced. Already the reduction in new issues is effecting anticipated bonuses.

Retail investors need to be aware of the risks associated with income trusts, particularly business income trusts.

Investors should get a second independent opinion and decide what action they should take. If they were sold income trusts on the basis they were a secure investment that would provide a secure income, and it is nor performing as portrayed, they should speak with a good securities lawyer as soon as possible.

Keep in mind that in some provinces you have only two years from the cause of action to submit a civil claim.