Does your current advisor use these investments?

What if I told you full-commission sales for nongraded REITs were down 70.5 percent from last year; that overall sales for these REITs are projected to be 25 percent lower than 2013; that commission revenues for an industry leader’s alternative investment division were down 86.7 percent from 2015? 

Sales for these products have declined, but the ‘why’ in this case is in need of some explanation as it is more disturbing. 

Nontraded investment REITs are sold by financial advisors who clear through broker-dealers. For decades, these investment vehicles provided large payouts to the advisors. Typically an advisor is paid a 7% commission on the sale and the broker-dealer receives 3%. Someone who has saved his or her income meets with an advisor and puts $100,000 in a nontraded REIT. Immediately, $7,000 of that sum goes to the advisor, who benefits regardless of the investment’s performance. The broker-dealer receives $3,000, as well. The client will often not know this because the investment, net of commissions, is not reflected on investment statements. Instead, the client receives a statement that shows their investment worth $100,000. 

Why aren’t nontraded REITs being sold like they used to? 

Simply put, the federal government is forcing advisors and broker-dealers to be more transparent about the investments. Beginning in the first quarter of 2017, advisors must disclose the true asset value of investors’ accounts up front. Statements will no longer list the position before commissions. Instead, the client mentioned above would receive a statement that will show an $88,000 investment after fees and commissions. 

In addition, earlier this year the Department of Labor passed a new rule requiring anyone dealing with retirement accounts to act as a fiduciary. This means that every advisor managing retirement accounts must do what is in their clients best interest. Some advisors may be able to justify the sale of nontraded REITs, however, many see the rule as a harbinger for a stricter standard. Instead of staying with the status quo, they are quickly moving toward more transparent and lower cost products. 

If client-first rules are decreasing the sales of nontraded REITs, does that mean advisors have been acting outside of their client’s best interest?

Unfortunately, it does.

Midwestern Financial Group in an independent Registered Investment Advisor, always acting in our client’s best interest. No product sales, thus no commissions.