According to a recent report by a financial consulting firm, investors with money tied up in 81 non-traded REITS lost at least $45.5 billion dollars.
The Securities Litigation and Consulting Group’s report, “Fiduciary Duty and Non-Traded REITs,” is a stark reminder of just how dangerous complex products can be for unsophisticated investors (and how lucrative they can be for the broker-dealers who sell them to those investors).
Non-traded REITs (Real Estate Investment Trusts) are securities registered with the SEC. Unlike conventional REITs, non-traded REITs typically do not trade on a secondary market, making them notoriously illiquid and difficult to value. (For more information on REITs, view our page on the subject by clicking here). Remarkably, over the past 25 years, as non-traded REITs became a hot product - thanks in part at least to the extraordinarily high commissions they generated for the financial advisors who sell them - they found their way into investors’ portfolios to the tune of more than $116 billion.
High Fees Make Non-Traded REITs a Dubious Investment for Retail Investors
It’s not exactly news that non-traded REITs are illiquid investments that are typically unsuitable for the retail investors who end up holding them. What is news however is the fact that, as the report shows, “more than half of the (81) non-traded REITs’ underperformance results from $15-billion in up-front fees charged to investors in the offerings.” The fees largely go to compensating brokers for finding retail investors to purchase them; other fees find their way into the pockets of the REITs’ managers. Either way, that’s money invested by investors that will never be invested - it gets gobbled up by financial professionals before it ever gets to the REIT.
SLCG’s report suggests that the imbalance of interests which encourages brokers to steer investors into non-traded REITs simply because they command greater fees is an example of a breach of brokers’ fiduciary duty to their clients. According to the report, the imbalance is so great and problematic that:
Non-traded REITs are so inferior to traded REITs that no advisor taking due care could develop a reasonable basis for recommending a non-traded REIT. Advisors recommending non-traded REITs are succumbing to the corrupting influence of the extraordinary commissions sponsors pay brokers and investment advisors for recommending non-traded REITs.
In other words, if your financial advisor recommended you to invest in non-traded REITs and you ultimately lost money, these losses were almost definitely avoidable and unnecessary.
Securities Litigation Law Firm
If you or someone you know has suffered financial injury as a result of non-traded REITs or any other complex product, please contact our securities attorneys immediately for a free consultation at 1-855-462-3330 (toll-free) or by using our online contact form.