We have been warning about the risks surrounding nontraded REITs for many months. These products are illiquid, tough to value and carry high commissions and fees. While they may have some value to institutional investors, they should never be included in the portfolio of retirees, those nearing retirement or those needing access to their funds.
Short for a Real Estate Investment Trust, a REIT is a method that allows individual investors to pool their funds and invest in large real estate projects. Authorized by Congress in 1960, REITs have become a popular investment vehicle.
Not all REITs are treated equally, however. Many REITs are publically traded meaning they can be bought and sold like a stock. If you need immediate access to your funds you simple sell some of your REIT shares.
A nontraded REIT, however, must often be held for years before they can be sold, sometimes a decade or longer. Unfortunately, some stockbrokers don’t tell clients about this before they invest.
Nontraded REITs are also not very transparent. High fees and commissions are the norm and they are also difficult to value. Is your investment worth $50,000 or $20,000? You can’t necessarily trust your statement since the reported share prices are often inaccurate.
Despite these many flaws and our warnings, stockbrokers and financial advisors continue to peddle these products. Finally, however, sales are declining.
Why? We believe nontraded REIT sales are down for several reasons.
Several states have enacted portfolio restrictions. A stockbroker selling to a client in one of these states can only recommend a portion of that client’s portfolio be in illiquid investments. Since a nontraded REIT is very illiquid, they become subject to the cap.
The Financial Industry Regulatory Authority – FINRA – has also been quite active in trying to regulate nontraded REIT sales to individual investors. FINRA’s newest efforts center on requiring greater fee transparency. When investors figure out how much of their investment goes to fees and costs, they become less interested in investing.
Finally, the Department of Labor is proposing that brokers can no longer earn fees and commissions by recommending non-traded REITs for individual retirement accounts. (Brokers love these products because many carry huge commissions.)
Brad Thomas, an industry analyst who goes by the name “The Intelligent REIT investor,” had this to say, “It’s unclear as to whether or not the industry will evaporate or not; however, I see no benefit for investing in a grossly conflictive investment product.”
If you lost money in a nontraded REIT or are stuck with one that you cannot sell, give us a call. Broker dealers and other financial professionals that market these products can be held liable if they failed to understand their customer’s needs or made unsuitable investment recommendations.
Most investment fraud recovery cases can be handled on a contingent or success fee basis meaning no legal fees unless you recover money.
About the author. Brian Mahany is an attorney and author. He frequently writes posts for this blog.