As was the case when I wrote about strategies that are overhyped to consumers, I received several suggestions for more strategies overhyped to financial planners. So this month, I’ll share a few with you.
As a reminder, for these purposes, my definition of “overhyped” is something that gets a lot of attention but probably doesn’t have as big a positive impact as is touted, is likely to have a negative impact, or for which there are very few advisors who can or will attempt to execute the strategy or use the product.
Qualified Opportunity Funds
These are a double whammy. Few people will use them and most that do won’t do well financially, at least among retail investors.
Qualified opportunity funds (QOF) are a wonderful idea. They give investors a way out of appreciated holdings without a big immediate tax bill and an incentive to invest in QOFs that will fund business and tangible property within “qualified opportunity zones.” These zones are low-income census tracts nominated by the state, district or U.S. territory in which they are located. These areas are in greater need for economic development.
Unfortunately, few people will utilize these funds.
First, the initial tax breaks are simply not that attractive. There is some deferral and some reduction of gains, but neither is big enough to be enticing. The tax benefits must be bigger than what Congress has put together to justify the risk on the back end.
Look at most articles touting these funds. There is an assumption that the investments the funds will make in the struggling areas will be profitable. I am highly skeptical about that being the case. I have no doubt some QOFs will work well for both investors and residents of these zones. That will be a beautiful thing.
However, the rush to put together funds, exacerbated by the short time frame for some of the tax breaks, makes me highly skeptical of most management groups and the investments they will make. Think about it. If you were going to start one of these funds and could show you were a good bet, you should be able to raise money from very wealthy families foundations, endowments and the like pretty easily. That would certainly be preferable to hiring salespeople to hound brokers and advisors for the relatively small amounts most of the solicitations I receive are requesting.
Further fueling my skepticism is the emphasis on the deferral of gains and basis increases. The crux of the pitch is all about tax breaks and there is little to nothing about what the management teams will do with my client’s funds. If the projects that my client’s funds are put in work out well, the future tax break can be significant, yet the results on the back end are not a big part of the pitch. If the projects are just OK or fail, the tax benefits could be paltry