Nontraded REITs Attempt to Bounce Back From Declining Sales
From the Desk of Jim Eccleston at Eccleston Law LLC:
The nontraded REIT market has suffered over the past few years with sales down from $20 billion in 2013 to $10 billion this year. The impact has been felt in revenue streams at IBDs and the commissions paid to their advisers. Intense state regulatory scrutiny, a new fiduciary standard proposed by the DOL, and new pricing rules enforced by FINRA are all in part responsible for the decreased sales.
In a recent settlement, LPL Financial agreed to pay $750,000 for selling unsuitable and unlawful REITs, showing the severity of regulators’ effect on the industry. The increasing regulation can have a negative effect on the REIT industry as they are sold predominately by advisors at IBDs.
LPL CEO Mark Casady also has to worry about the new DOL fiduciary standard that, as it is written now, restricts the sale of certain alternative investments such as REITs. He fears that this restriction might lead to failure and consolidation in the IBD industry.
In an effort to bring the REIT market to a more stable point, FINRA has decided to restructure REIT accounts to reflect the true value of the investment instead of the par value system previously used. While this transparency might have had a negative impact on sales, IBDs are responding with a new REIT share class called “T class”. This class will cut the upfront commission paid to brokers and compensate them with an annual trailing commission. The focus thus shifts to performance driven compensation, and more of the money goes directly into the real estate to generate higher returns.
According to FINRA’s Joseph Price, the need to invest in products that are not tied to the volatile stock market is still present. With the new pricing transparency and product offerings, investors are better off and expected to slowly begin to re-enter the REIT market.
The attorneys of Eccleston Law LLC represent investors and advisers nationwide in securities and employment matters. Our attorneys draw on a combined experience of nearly 65 years in delivering the highest quality legal services.
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