Stuck in frozen funds
ARPS seemed like a safe investment, but will they hold their value in a credit crunch - and can I get my money out?
(Money Magazine) -- Question: I've been parking cash in auction-rate preferred shares of the MFS Investment Grade Municipal Trust. Now I'm reading about failed auctions. Are ARPS as safe as I thought they were? - David Schempf, Spearfish, S.D.
Answer: Imagine that your money is locked in a bank vault and no one has the key. It's safe, all right. The catch is, you can't get at it. Well, that's sort of the situation you're in.
Issued by closed-end mutual funds to raise cash for investing, auction-rate preferreds pay dividends at a rate set at weekly or monthly auctions.
While not as easy to sell as money-market funds, these securities have been used (and marketed) as substitutes for them. That's because until recently shareholders have been able to cash out at will by selling at auction.
Problem is, the credit crisis has frozen the ARPS market, leading to failed auctions since sellers now outnumber buyers. Investors looking for an exit have been trapped - and could continue to be for months.
On the bright side, the muni bonds in the fund that issued your ARPS still have real value. At last notice your fund had $3 of assets for every $1 in preferreds.
It's not totally risk-free, "but it's safe," says Cecilia Gondor, research chief at Thomas J. Herzfeld Advisors.
If you can, sit tight and wait for the market to unfreeze or for issuers to find ways to cash out shareholders. But if you need the cash immediately, consider a loan from your broker using the preferred stock as collateral.
Question: My investment adviser and some colleagues left their firm to set up a new one. I'd like to move with them. What questions should I ask? - Amy Jones, Chesapeake, Va.
Answer: The most important question is one worth revisiting: Is your adviser one of the good guys?
He may very well be. But who knows why he's leaving his old firm? What's more, you don't know what his colleagues are like. So contact your state securities regulator (go to nasaa.org for a directory) to see if any of them have disciplinary actions on their records.
You can also try brokercheck.finra.org for an abridged version of an adviser's disciplinary and employment record. In addition, make sure the new firm is registered with state authorities or the SEC (see adviserinfo.sec.gov).
Another litmus test for your protection: Ask which brokerage company will serve as custodian of this new firm's assets. Make sure it's a company you've heard of and that you'll be able to get statements (or online account information) directly from that firm. An obscure custodian or a spreadsheet printed out by your adviser is a red flag.
Finally, make sure your relationship won't change. What services and investments will he be offering at this firm? How will he get paid? You shouldn't assume the rules will be the same as they were at his old firm, says New York City wealth manager Karen Altfest. "If that's going to change, you want to be aware." 
