Investment Education – 119 Why Direct Reinvestment and Auto-Investing Could Be Dangerous to Your Wealth?

Introduction

Automatic reinvestment programs sound like a dream come true for busy investors. Put your money to work, let the returns compound automatically, and watch your investment grow without lifting a finger. But according to seasoned investment professional Troy W. Eckard, these convenient programs—known as DRIPs (Direct Reinvestment Programs)—can actually be major red flags that signal serious trouble ahead.

The Convenient Trap

We’re naturally drawn to convenience. We want auto pay for bills, direct deposit for paychecks, and automatic reinvestment for our returns. When investment sponsors offer to reinvest your distributions automatically—promising higher compound returns without the hassle of managing checks—it sounds perfect.

Here’s the typical pitch: You invest $100,000 in a note paying 12% annually. Instead of receiving $12,000 in distributions, you let them reinvest it automatically. Your note grows to $112,000, then compounds further. Easy money, right?

But Troy W. Eckard, with four decades of investment experience, has noticed a disturbing pattern. There’s a high correlation between sponsors who enthusiastically promote automatic reinvestment and those who can’t actually afford to pay their investors.

The Ugly Truth

The question that cuts through all the marketing spin is simple: “What if they don’t have the money?”

Think about it from the sponsor’s perspective. If they can convince 50%, 70%, or 75% of their investors to automatically reinvest rather than take distributions, they never actually have to send money out. This creates perfect cover for operations that are struggling or outright fraudulent.

Maybe their multifamily properties have negative cash flow. Maybe their oil wells aren’t producing. Maybe their self-storage facilities are empty. Maybe their notes aren’t performing as advertised. Rather than admit these problems, they convince investors that the returns are so good, everyone should want more exposure.

“The way we hide that or the way we run a ponzi scheme is we convince everybody it’s such a great deal. You should want more of it,” Troy W. Eckard explains. “So just keep reinvesting your dividends and your cash flow.”

Meanwhile, they might pay the 20% of investors who demand their money, but they can’t pay everyone. The DRIP program masks this cash flow problem while making their books look healthier than they actually are.

The Smart Investor’s Response

The advice is refreshingly direct: “If you owe me money, give it to me. I’ll decide if I’ll give it back to you.”

This isn’t about being difficult—it’s about verification. When you insist on receiving your distributions, you force the sponsor to prove they actually have the cash flow they claim. You become part of that crucial 20% who can expose whether the emperor has clothes.

“I want to see that money clear your bank and clear my bank on time every time,” Troy W. Eckard says. “So I know the process is working.”

Beyond Fraud Detection

Receiving actual distributions does more than prevent fraud—it provides transparency into your investment’s real performance. When you see regular payments, you can verify that:

• Oil wells are actually producing and selling
• Rental properties have paying tenants
• Self-storage facilities are generating income
• Note investments are receiving payments

Without these cash flows, you’re flying blind, trusting sponsor reports that may be pure fiction.

When DRIPs Work

Eckard isn’t against all automatic reinvestment. He participates in Exxon’s DRIP program. The difference? “It’s Exxon. It’s not Johnny Joe.”

Established public companies with regulatory oversight, transparent financials, and long track records are fundamentally different from private alternative investment sponsors. What works for blue-chip stocks can be dangerous with alternative investments.

The Bottom Line

In alternative investments, convenience often comes at a hidden cost. Those slick automatic reinvestment programs might seem sophisticated, but they can mask fundamental problems or enable outright fraud.

The solution isn’t avoiding alternative investments—it’s maintaining healthy skepticism about overly convenient programs. Make sponsors prove their investments work by demanding your distributions in actual cash, in your actual bank account, on schedule.

Sometimes the most prudent choice is making things less convenient for yourself and more transparent for everyone involved.