[Cornerstone] was a better investment with a better, reputable company, and it would pay dividends. He had a lot of paper spread out on the table. He had all the documents ready for me to sign, and I signed them.”
Kelly writes that she knew Mr. Potts and had worked for him, doing some bookkeeping for his firm, Signature Planning Inc., and was “impressed with his due diligence,” she said. During the real estate boom, such REITs were regularly touted as being stable, long-term investments because they invested in commercial real estate, which historically had performed well as an asset class. As some REITs’ values have plunged the opposite has proved true.
The REIT industry often puts the blame squarely on the real estate bubble rather than on any individual real estate investing strategy.
Additionally in Ms. Fox’s predicament, the REITs were part of her IRA, which in 2008 had $105,000 in it. The REITs accounted for $56,616 of the account, or almost 54%. Having such a large percentage of her IRA in illiquid investments alarmed Ms. Fox, and in July 2010, she told her broker to sell the investments. When he told her she was stuck, she began to complain.
“I purport that I was overallocated to nonliquid investments unsuitable for my short-time-horizon needs,” she wrote in a letter in July 2010 to Thomas Berthel, CEO and owner of Berthel Fisher & Co. Financial Services Inc., an independent broker-dealer that employed Mr. Potts.
In 2010, Ms. Fox also complained to the Financial Industry Regulatory Authority Inc., which looked into the matter but took no action.
Ms. Brady said the firm concluded that Mr. Potts acted appropriately and that there were no sales practice problems with Ms. Fox’s transactions. “We remain confident that the sales practices of our registered representative were appropriate,” Ms. Brady wrote.
One question from Ms. Fox’s dilemma is the appropriateness of investing in illiquid instruments in retirement accounts.
Kelly writes that the direct-participation-program industry, which includes nontraded REITs and other investments, is trying to make the REITs more palatable for investors, including those with retirement accounts, by creating products that have daily net asset values and increased liquidity, industry observers said. Most nontraded REITs are given a value only once a year, and that is after they finish their period of sales. Securities regulators recently have proposed rules that would tighten up the time for valuations.
“There’s confusion in people’s minds between the extent of an investment being liquid and safe,” said Tony Webb, a research economist with the Center for Retirement Research at Boston College. “A five-year [certificate of deposit] is not liquid but safe. A publicly traded share is liquid but not safe.”
“Clearly, in the face of the uncertainty of health care costs, households place a certain value on liquidity, but it’s not important that all the household’s wealth is liquid,” Mr. Webb said.
“This is one where the adviser should be faulted, not that the investment wasn’t liquid but that the level of risk wasn’t appropriate for the client,” he said. “I don’t know the client’s financial situation, but it strikes me, at first glance, of being an inappropriate investment.”
The InvestmentNews.com article says that while no figures are available for the overall percentage of illiquid investments in retirement accounts, industry executives said they are widely sold. At independent broker-dealers such as Berthel Fisher, two of the most popular types of illiquid investments are nontraded REITs and the more recently developed nontraded business development companies, or BDCs.
Such investments yield income, which is appealing for the long-term investor, said Kevin Hogan, president of The Investment Program Association, an industry association for the broker-dealers that market and sell such investments.
“Most IRA accounts run for 10 to 20 years, and that fits the long-term nature of nonlisted REITs,” he said. “I think you’ll see more nonlisted REITs in IRAs because of income and distribution potential.”
Securities Lawyer, Lars K. Soreide, of Soreide Law Group, PLLC, has represented clients nationwide. If you or a family member have sustained investment losses due to your stock broker or financial advisor’s recommendations, call for a free consultation on how to potentially recover your losses. To speak with an attorney call 888-760-6552, or visit our website at: www.securitieslawyer.com.
Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.