A recent Financial Industry Regulatory Authority (FINRA) Letter of Acceptance, Waiver and Consent (AWC) (No. 2012032353201) entered into with FINRA by John Towers of VSR Financial Services, Inc. in Plano, Texas, sheds light on some problems associated with investments in REITs. Towers entered into the AWC with FINRA to resolve allegations made by FINRA that Towers sold more than 80 separate high-risk private placements and REITs to a married couple that were his clients. FINRA’s allegations state that the investments which totaled more than $6,250,000 represented approximately 72% of the client’s investments purchased through VSR. According to FINRA, Towers made these recommendations to the married couple even though their investment tolerance was moderate and they were to have no more than 10% of their portfolio in such high-risk products.
The unsuitable investment advice that Towers gave his clients involved the use of too much high-risk private placements and REITS. This is not designed to single out Mr. Towers as there are certainly many other advisors who do the same. It just so happens that Mr. Towers recently was suspended from associating with any FINRA member firm for a period of three (3) months and fined $25,000 for his actions. The moral of this story is that even if a particular REIT or private placement investment may be suitable and appropriate for a client for any number of reasons, there can be too much of a “good” thing. It is certainly true that many REITs both traded and nontraded are flawed and not good investments for clients to own. But it is important to note that even when a REIT is not flawed, too great of a proportion of one’s investment portfolio concentrated in one section (ie. real estate) is problematic and may be grounds for investor claims in FINRA arbitration. Add to the overconcentration worry that many REITs are nontraded and the problem only compounds as the investor has not only sector overconcentration risk but also a lack of liquidity. That combination can be lethal to an investor and something that routinely forms the basis for arbitration claims on behalf of the investor against the brokerage firm.