LPL Financial Fined Over REIT Sales

REIT loss recovery has become a hot topic for regulators and investors alike. Last week, the Financial Industry Regulatory Authority – FINRA – fined the nation’s largest independent brokerage firm, LPL Financial, almost $1 million over bad alternative investments sales. Most notable among those alternatives were nontraded REITs.

As we have noted before, Real Estate Investment Trusts represent a great way for ordinary investors to invest in large real estate projects. Like many investment vehicles, however, not all REITs are created equally.

Stockbrokers like pushing non-traded REITs. These investments pay big commissions to the broker but are fraught with risk and are usually very illiquid. By their very name, nontraded, these investments can’t be readily sold if an investor needs access to his or her capital. Some they must be held for a decade before they can be sold. That makes these investments especially unsuitable for most retirees and elderly investors.

Earlier this month, FINRA ruled that LPL Financial failed to properly supervise the sales of nontraded REITs along with oil and gas partnerships and managed futures.  LPL also was accused of not enforcing concentration limits.

Because these investments are so risky, brokerage firms often limit the percentage of one’s portfolio that can contain private or non traded REITs. These limits become meaningless if not enforced, however.

LPL Financial agreed to pay the fine but was not required to admit any wrongdoing.

This isn’t the first time the brokerage firm giant has been hot water over REIT losses. In December of 2012, the state of Massachusetts sued LPL over its REIT sale practices. Ultimately the company agreed to pay $4.8 million to reimburse clients for their REIT losses.

Massachusetts limits non-traded REIT portfolio concentrations unless a sale was unsolicited. Brokers recommending REITs to investors in that state face strict limits.

Will LPL Financial finally clean up its act? Probably not. Unfortunately, a $950,000 fine really isn’t all that much for such a large broker – dealer. Last year the company recorded gross revenues in excess of $4 billion.

If you are a victim of REIT fraud or suffered a REIT loss caused by either the REIT itself or the broker recommending the REIT, there is hope. Thousands of people suffer REIT losses each year. The good news is that both stockbrokers and the firms that employ them can be held responsible for unsuitable REIT investment recommendations.

Most REIT fraud cases can be pursued through binding arbitration and on a contingent fee basis meaning no legal fees unless there is a recovery.

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