'The prospectus looks impressive': My financial adviser wants me to invest $350,000 in a UAE data center. Is this risky?

By Quentin Fottrell

'I'm in my 60s, recently retired and living my best life'

"I like my life, but I also like the idea of a big return after years of putting money into my 401(k) and other stocks." (Photo subject is a model.)

Dear Quentin,

I'm in my early 60s, recently retired, living my best life and I've been with the same financial adviser for years. At my last review he threw something at me I didn't see coming - a private syndicate in the UAE that invests in data centers.

The minimum buy-in is $350,000. Even for me, that's real money. If it went to zero, my retirement would still be fine. I know you're not supposed to put money you can't afford to lose into speculative stuff.

He says it's a way to get in on data-center demand, with AI and cloud computing driving it. Fine, I follow that. Everybody's throwing money at anything AI right now. But this isn't buying stock in a public company. It's a private syndicate overseas.

He seems sure about it, and the prospectus looks impressive. I just can't tell if that's because he did his homework or because he figures it's a decent fit for someone with my level of funds. I know that being able to afford a loss does not mean it's a reason to take the risk.

So before I write a check this size, what should I be asking him? Why would an adviser bring this to a client in the first place? How do I tell whether the return is worth it? And is this really diversification, or am I just making a huge bet on a trendy theme?

I like my life, but I also like the idea of a big return after years of putting money into my 401(k) and other stocks. What if I look back in five years and think, 'Why didn't I invest in that? Why was I so cautious?' I am a pretty cautious person, overall.

Tempted Investor

You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com. The Moneyist regrets he cannot reply to questions individually.

Related: 'I feel like a loser': My stock portfolio is swinging wildly. Is it finally time to worry?

Don't let an impressive offer bedazzle you and stop you from doing your due diligence.

Dear Tempted,

Climb a mountain. Fly down a zipline. There are lots of ways to be adventurous.

If you're taking a big swing - and this is a big swing - you need to know you could lose the entire investment. Being able to afford a loss is absolutely a prerequisite for considering a speculative investment such as this, but it is certainly not a reason to make it.

You have taken the slow road to retirement, and avoided taking dirt tracks leading you to the Emerald City of AI. That strategy has worked. You have up until now, I presume, remained diversified in various stocks and bonds in both the U.S. and overseas.

The same investing philosophy that got you where you are today - with $350,000 to burn like a stick of incense at the altar of AI - is the one that you feel did not fully live up to your expectations. Take a bow at everything you have achieved because you now have choices.

The other - frankly, worrying - aspect of your story is the financial adviser himself. I wouldn't assume that being in your 60s automatically means you should avoid risk altogether, but what role is this $350,000 meant to play in the rest of your retirement plan?

Don't let a fancy offer document bedazzle you and deter your due diligence.

Is he receiving a commission? Ask, in writing, how he and his firm are compensated - commissions, placement or referral fees, management fees or carried interest. Is he acting as a fiduciary? Does he or his firm have any financial relationship with the sponsor?

What exactly are you buying for your $350,000? Is it an ownership stake in a fund, a special-purpose vehicle, a single data-center project, a group of facilities or something else? Where is this investment vehicle domiciled exactly? What protections do you have if something goes wrong?

How much debt does it have? What are the fees? Can additional capital be called from you at a later date? Some private investments do, in fact, make this part of the deal. How and when do you get your money back? (If you get your money back.) Who gets paid first if things go pear-shaped?

Don't let a fancy offer document bedazzle you and stop you from doing your due diligence. Hire an independent securities attorney, CPA, or fee-only adviser, and have them review the documents. Of course, the adviser who put this investment in your eyeline is telling you it's too good to miss.

Related: 'God works in mysterious ways': I became a Nvidia millionaire playing 'World of Warcraft.' Am I smart - or just lucky?

Diversification and data centers

But, look, I don't want you to feel that you can't invest in AI. It sounds like you were offered an "in" with a private equity or infrastructure fund. They can provide direct exposure to the AI boom, but they can also involve greater complexity, illiquidity and risk than publicly traded stocks or ETFs.

Data-center and digital-infrastructure ETFs, like VanEck Data Center Supply Chain RACK and Global X Data Center & Digital Infrastructure DTCR, arguably spread your exposure across operators, REITs and chip manufacturers, etc. (These are only examples NOT recommendations.)

Companies like Nvidia (NVDA) that provide AI chips or power and infrastructure management - including Vertiv (VRT) or Eaton (ETN) - are other options. (Again, these are NOT recommendations.) Power and energy-infrastructure investments are a more tangential way to invest.

The UAE is a big hub for data-center investment, but projects there have their own challenges, including reliable power, cooling, water availability, connectivity and building permits. It could be a decade or more before you see a return, if you see a return on investment.

Data-center and digital-infrastructure ETFs arguably offer more diversification.

A private investment may include projected returns and financial models, but those projections depend on assumptions that can go horribly wrong. What are the best and worst case scenarios? If the project is delayed by two years, what then? What if construction costs go up, as they often do?

Read the risk disclosures, projected returns, debt terms, assumptions, fees and conflicts of interest - and pay attention to how long your $350,000 is locked up. Adding a risky, concentrated private investment to your broader stock portfolio is not necessarily the best way to diversify.

Even if this $350,000 represents 10% of your portfolio, that 10% could still have a meaningful impact if the investment goes belly up. You say that you are worried that five years from now you might regret not making this investment. But what if in five years time you wish you had not invested?

Finally, your adviser came to you holding a "golden" prospectus, promising you returns, In a decade or less. AI may transform the data-center market, but that does not mean this is the project that will help do it. If your adviser welcomes scrutiny? That's great. Ask those questions.

If he pushes back? Not a good sign. If you feel under any pressure, it's time to hire a new financial adviser.

Related: Building U.S. data centers is getting so expensive that AI companies are moving overseas

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More columns from Quentin Fottrell:

'I don't want to die on the sales floor': I'm 67 and earn $19.50 an hour at a big-box store. When can I finally retire?

'I'm never selling': I'm 47 and buy bitcoin with every dollar I earn. Am I crazy?

'People in the U.S. need to wake up': As a mortgage loan officer, I rejected applications from wealthy couples. Here's why.

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-Quentin Fottrell

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