This week, we saw yet another large brokerage get hit with an enormous fine for alleged misconduct related to the alternative investments known as non-traded REITS (real estate investment trusts). This time, it was LPL Financial. The firm was ordered by FINRA (the Financial Industry Regulatory Authority) to pay around $950,000 in fines for allegedly failing to adequately supervise sales of non-traded REITs and other alternative investment products.
In the past few years, non-traded REITs have become increasingly popular. Last year, around $20 billion of these complex financial products were sold to investors, up from just over $10 billion in 2012. That’s a huge jump. And more REIT shares than ever before are expected to be sold this year.
The problem is, while the popularity of REITs has obviously grown very rapidly, we have not seen a corresponding increase in the level of knowledge and familiarity with these products on behalf of both brokers and investors. In other words, people are selling and buying more and more of a product they still don’t know much about. That’s a recipe for investing disaster.
Non-traded REITs have more in common with private placements and other more exotic investment products than they do with traditional investments like stocks, bonds, and mutual funds. As the name itself suggests, non-traded REITs are not publicly traded and are, therefore, notoriously illiquid. In many cases, the money you invest in a REIT may not be available for a three-to-five year period. Plus, the value of your investment in a REIT may actually at times be lower than reflected on your account statements. Brokers need to be aware of these features of non-traded REITs, and of course they absolutely must have a candid discussion with their customers about them, too. Too often, as we’ve seen in cases of our own, brokers eager to collect the elevated fees or commissions associated with alternative investments like REITs fail to communicate with customers about clear illiquidity issues, a common form of negligence.
Fortunately, FINRA has caught on to the trend and has issued a number of warnings and guidelines for investors interested in better understanding these REITs. Click here for more info.
If you or anyone you know has been the victim of broker misconduct or investment fraud involving REITS, alternative investments, or traditional financial products, please contact us immediately for a free consultation at 1-877-462-3330 or via email by clicking here.