Our financial adviser put $300K into a REIT. That money is likely lost.


Question: Ten years ago our financial adviser put about $300,000 of our money into a non-traded REIT. In the prospectus, the REIT indicated that in six or less years it was going public. It didn’t take very long and the REIT stopped paying dividends. We are now getting stock to compensate for cash. Our feeling is that we will never recoup our money. We also have reason to believe that our financial advisor got a hefty origination fee that we believe was in excess of $25K. Does this seem ethical? What should we do? (Looking for a new financial adviser? This free tool can match you to a fiduciary adviser who might meet your needs.)

Answer:  Losing money is never fun, but it doesn’t mean your adviser was necessarily unethical — though they could have been. “Getting paid for recommending an investment is not unethical. Knowingly placing an investor in a bad investment for the betterment of the adviser would be unethical. You would have to know that the adviser did not believe that the investment would be beneficial to the investor, and that is often impossible to know or prove,” says certified financial planner Anthony Ferreira at WorthPointe Wealth Management. 

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That said, it appears you’re asking the correct questions. “I would ask for a full accounting of the performance since the REIT was initially purchased. How much have you received in dividends and stock since the initial purchase date? Was there any appreciation in the stock price? The performance across various sectors, including real estate, has been favorable since 2013, so it’s surprising to see you’re down on your initial investment,” says certified financial planner Ryan Haiss at Flynn Zito Capital Management. 

If you do the math, $25,000 on $300,000 is 8.3% which is significantly higher than a traditional 1% fee for assets under management — but it’s actually lower than the front end fees and sales commissions on a REIT, which are commonly in the 9% to 10% range. 

Moving forward, you should gather all of your documentation, like sales materials or a prospectus you received when you first bought the investment. “Look for any new account forms you may have signed and consider contacting an attorney who specializes in securities arbitration. Based on the fact pattern, they might advise you to seek arbitration and try to recover some or all of your losses,” says Jim Hemphill, certified financial planner at TGS Financial. 

Indeed, if your adviser is a commissioned broker who works for a big investment firm, you may have a cause for action against them. “Even if your adviser isn’t or wasn’t a fiduciary, they still must follow a standard of suitability and their manager has a duty of supervision. If your adviser is a fiduciary, like a Registered Investment Adviser or a CFP, they may be subject to more stringent rules,” says Hemphill. 

Why REITs?

You may be wondering why the adviser would recommend a REIT at all — and that is a good question. Ten years ago, “in many cases, the non-traded REITs were producing larger tax efficient income yields than bonds and it could have appeared to be a good non-correlated investment at the time,” says certified financial planner James Daniel at The Advisory Firm. 

Know, too, that market conditions change often and the outlook on a REIT or public company can change very quickly. “Companies often have stock as a compensation component and if the company does well, the compensation is greater. Obviously the opposite can be true and it is incumbent on advisers to explain the risks to investors and for investors to understand what they are investing in,” says Ferreira. 

Did your adviser clearly explain the ins and outs of REITs to you?

No matter what the rationale for choosing a REIT, your adviser should have explained it all to you: “Did the adviser fully disclose the risks of the non-traded REIT? Was it a reasonable percentage of your investment portfolio that was allocated?” says Daniel. (Looking for a new financial adviser? This free tool can match you to a fiduciary adviser who might meet your needs.)

While investors often see closed-end funds or non-traded REITs as unique and exclusive opportunities that promise big profits, they can end up being mechanisms to hide high commissions where the game’s rules are not clear, says certified financial planner Alonso Rodriguez Segarra at Advise Financial.

There are also some red flags to address. “Unless your total portfolio is $2 million or more, this is too much money to put into one non-liquid investment,” says Hemphill.

Will you get your money back?

“Your guess that you won’t get your money back is probably right as a real estate stock that pays no income isn’t likely to be worth much,” says Hemphill. “Based on your information about the dividends not being paid, you’re correct that you may not recoup your investment,” adds Daniel.

As for taking the next steps, certified financial planner Bruce Primeau at Summit Wealth Advocates, says, “What you need now is to ask what type of restriction you may have on selling the stock or shares you’re receiving in exchange for your original investment. Hopefully there isn’t a restriction and you can begin diversifying it.”

What to look for in a new adviser

If you’re reading this and thinking “I need a new adviser,” there are things to consider. Look for an adviser who clearly explains things to you and seek one who is a fee-only fiduciary to help ensure that they’re only being paid by you (the client) and are putting your best interests ahead of their own.

“When looking to start a relationship with a financial planner, it’s important to define what your long-term expectations are as well as addressing your short-term needs. Interviewing  at least three planners is a good idea and if you can get a referral from a trusted friend, colleague or family member, all the better,” says certified financial planner Jim Jacobucci at Financial Finesse.

Have an issue with your financial adviser or looking for a new one? Email picks@marketwatch.com.


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