CFP

AAA

Characteristics, Uses and Taxation of Investments - Limited Partnerships



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Limited Partnerships - more commonly known as a direct participation program, this is a tax structure to hold certain types of investments, such as interests in oil and gas projects, land and real estate. The benefit to the investor is that s/he is able to participate directly in the economic (mis)fortunes of a business, receiving a share of the income, gains, losses, deductions and tax credits of the entity which is structured as a limited partnership or subchapter S corporation. Partnerships have a limited life and limited transferability of share interests. Questions for candidates would consider risk factors and tax benefits of the most common strategies involved.

i. Privately Managed Accounts (Separately Managed Accounts, Managed Accounts, Separate Account Managers) - a clarification in terminology is warranted. The term is used to refer to individualized long strategies of money managers as well as to the subaccounts in variable annuities which are essentially mutual funds with an insurance wrapper. These are separate and distinct products. Our discussion will focus on the former. Developed in the major broker/dealer firms in the 1960s, managed accounts are individual investment accounts managed by independent money managers using an asset-based fee structure. A typical investment program combines several services in a customized solution to investing. These services include investment planning, policy development, manager search and selection, portfolio management, performance measurement and trade execution. All of these valuable services are wrapped together into a comprehensive investment program. Rather than paying separately for these services, investors using a managed account pay a single fee.

  1. Advantages
    1. Access to professional investment management - portfolio managers run a bespoke portfolio for the client who has direct access to the managers to discuss philosophy and process
    2. Portfolio customization - investors can have certain securities removed from the portfolio to be consistent with his or her objectives.
    3. Simplified withdrawal access.
    4. Customized performance reporting.
    5. Securities directly held - the investor holds the underlying individual securities as opposed to an undivided interest in a mutual fund.
    6. Avoidance of unrealized gains - the individual investor has a cost basis established at the time the account is established.
    7. Tax liability manageable.
    8. Ease of gain/loss distribution.
    9. Cost efficient.
    10. Quarterly performance reporting.
  2. Disadvantages
    1. Higher account minimums - $50,000-$100,000 or more is not uncommon, making these vehicles typically suitable for higher net worth individuals with a portfolio of several million dollars.
    2. Regular way trade settlement - because the investor holds individual securities, they settle in three business days as opposed to one.
    3. Somewhat less liquidity.
Sub Accounts
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