For retirees, distributions from master limited partnerships have obvious appeal.
Thanks to rules set by Congress intending to attract long-term investors -- rather than speculators -- to pay for finding new sources of energy exploration and production, MLPs have the advantage that they don’t pay corporate income tax. As such, they act as “pass-through” entities, passing profits to investors in quarterly distributions.
But Judith McGee, who serves as chairwoman and chief executive of McGee Wealth Management, in Portland, Ore., an affiliate of Raymond James Financial Services, and other financial advisors dislike energy MLPs because of their illiquidity. “I’ve seen people really get stuck with these,” says McGee.
Tax considerations make holding energy MLPs investments for a long period of time usually a requisite to support the cost-benefit analysis of making the investment in the first place. To have the investments perform at their highest rate of possible return and tax advantages, clients typically have to commit to keeping their stake in the MLPs for decades.
If her clients want a piece of the booming gas and oil discovery market, McGee prefers other energy investments, if those don’t pay the quarterly dividends. “There is a better way to play this. There are so many other options,” McGee says. She suggests some of the mutual funds that focus on natural gas pipeline investments or publicly traded energy companies. “Anytime one of my retired clients gets into something they can’t get out of quickly, I get worried,” she says.
Bob Lamse, the president of Talis Advisory Services in Plano, Texas, agrees about avoiding energy MLPs. But his reasoning differs.
“We steer clear of them 100%,” Lamse says about energy MLPs. Why? Many of his highest net-worth clients achieved their wealth as independent oil men or wildcatters. The advice those clients gave Lamse: “Any deals you see out there in the retail sectors are deals we (knowledgeable energy executives) passed up.”
Evan Welch, the chief investment officer at Boxborough, Massachusetts-based Antaeus Wealth Advisors, says he too prefers larger vehicles for energy investments such as mutual funds invested in pipeline companies. “I don’t think there is a liquidity problem with some of those larger vehicles,” Welch says.
Miriam Rozen, a Financial Planning contributing writer, is a staff reporter at Texas Lawyer in Dallas.