Wall Street v. Main Street Podcast – Episode 1 – REITs with Guest Nicholas L. Bruce, Esq.

In this episode, Mr. White discusses the issues of non-traded REITs and answers your questions on what a REIT is, the different types of REITs and what issues there may be with them.

Mr. White will also discuss how to use FINRA BrokerCheck (and why you should look into your broker) in addition to what is going on in Puerto Rico and how this could affect you, and also how you can go about filing a claim.

Mr. White’s guest this week is Nick Bruce, and in talking with him we will be getting an estate planning lawyer’s perspective.

Episode Transcript

Haley: Welcome to Wall Street versus Main Street; A different take on the investment show. With our host, Dax White. Dax White is the managing partner of the White Law Group, a national securities, fraud securities, arbitration, and investor protection law firm. With offices in Chicago Illinois, and Vero Beach Florida. The White Law group has represented hundreds of investors in the FINRA arbitration claims against their brokerage firms, and through this show, Mr. White will shine a light on some of the tricks of the brokerage industry, and provide valuable information to investors on how to successfully navigate the investor financial advisor relationship.

Mr. White: Welcome everyone, thank you for joining us, my name is Dax White, you’re with us on Wall Street vs. Main Street; a different take on investor show. In this show you’re not getting any investment advice, I’m actually not a licensed professional in any way. I am a securities attorney who represents investors and claims against their brokerage firm, and the goal the show is to sort of provide information to investors that I’ve picked up over the years of doing this with the hopes of making that relationship between an investor and their broker a more productive one. We see the same types of claims over and over again, and frankly there’s a lot of information I wish investors had it would better protect them and even the playing field a little bit between investors and brokerage firms. So the goal here is to sort of pull back the curtain on Wall Street and shine a light on some of the tricks and tactics that they use to maximize profits at the expense of investors.

We’re going to do that through a couple different ways; we’ll take some questions, I like to have like a topic of the week each week were all discuss what I think is really important at the time, we’ll do some news; something that’s relevant to what’s going on in the markets right now, and where I think maybe some bad financial advisors may try to take advantage of news that, to give you an example year ago or whenever it was that Facebook a mounded their IPO, it was pretty predictable, at least for professional securities attorney to see that you have advisers that would take advantage of that frenzy everyone wanted to buy Facebook, and it was predictable you would see scams related to that.

So we’ll touch on things that are happening in the markets right now, and can give some advice on where we think maybe, you know, that there might be some scammers targeting people based on that news, and then we’ll bring on a guest each week, hopefully to talk about various aspects of the brokerage industry, just to provide more information for investors. So without further ado let’s jump right into some questions.

For now since this is actually our first show these are to be questions that I’ve come up with, things that I think might be relevant to some investors, but certainly do if there are listeners out there who have questions please go to our website Wall Street versus Main Street.com, and you can send a question through that. Haley, why don’t you give us that first question?

Haley: Alright, my first question is: my broker recommended that I invest in a REIT, but I don’t know what that is or whether it’s a good idea.

Mr. White: Okay, thank you. The investment she’s talking about is a REIT, R-E-I-T: real estate investment trust, and what a REIT is, it’s similar to a mutual fund and in one meaningful way, it has a lot of differences, but that the main similarity is that it’s like a basket of investments. So if you buy mutual fund, you’ve got a fund manager who is providing you with a variety of investments that they vetted to give you, in theory, less risk because instead of buying just one investment now you’re buying stock in a variety of companies, and so that’s the objective of mutual funds, and REITs operate in a similar way in that when you’re buying a REIT, you are buying into multiple real estate properties so that the diversification, or at least the theory behind what makes a REIT less risky than just buying real estate in your own is, as opposed to buying a rental property or an office building or something like that, you’re buying a REIT; you’re actually buying an investment company that has already bought a number of real estate projects, and so in theory you’re reducing your risk in that way by having it spread out.

Unfortunately it doesn’t always operate that way, but that’s sort of what a REIT is. It’s a basket of real estate investments. There’s two main types; there’s a traded REIT, and then there’s a nontraded REIT. The nontraded REITs are the ones that we see, because of some problems in the way that the investment is structured a traded REIT is bought and sold on the exchanges- they have ticker symbols not unlike a mutual fund or a stock company- and so from a risk standpoint, if you bought a traded REIT, if you’re recommended to buy traded REIT, you think it’s a very safe investment based on the representations of your advisor, if you see a huge price decline there, which triggers to you in your mind my goodness this isn’t what I was expecting, you can go and sell that.

And so I, from my standpoint, we don’t see a lot of problems with traded REITs because generally speaking clients would have a duty to mitigate their own damages, and so again if your argument is my broker misrepresented the risks of the investment, then my first question is, in an intake is why didn’t you sell it when you saw that it was declining in value?

A nontraded REIT is very different, and the reason that we see problems with nontraded REITs is that they are completely illiquid. They are put together by a real state sponsor who puts together the investment, sold through brokerage firms, and the objective of the investments is to go public at some point but, in the initial offering period, which can last anywhere between 3 to 5 years is the typical hope, but unfortunately doesn’t work out that way in every case, but in the initial offering period, you can’t sell it, and so in those situations the big difference is, you know, is again the representation that we often hear is the broker told me this is a safe investment. The problem is as even when you discover that’s not the case, there’s nothing you can do about it. You can’t sell it, you’re stuck with it, and so you watch these things right to the ground certainly like we’ve seen enough from 2008 to 14, we have one of the worst market corrections since the Great Depression, and that impacted all areas of the market including real state, and unfortunately what you had happen with these REITs, nontraded REITs, is that they would reprice over time and investors, while that might have triggered to my goodness this isn’t the safe investment that I thought it was, the reality is there is nothing that you could do and so we’ve seen a number of cases involving REITs over the last couple of years, and liquidity is a big component of that.

The other thing has to do with frankly the risk; while it shouldn’t be any riskier than buying just real estate generally the problem has to do with the way these investments are structured they’re very high commission products, that’s what incentivizes financial advisors to sell them.

They typically pay between seven and 10% commission to the broker, there is also due diligence fees that are there wrapped in there, and so what happens is on the garden-variety nontraded REIT, maybe 15% of your money is taken off the top to the payout professionals, whether it’s marketing, financial advisor, due diligence etc., and if you’re buying a property that’s leveraged with a mortgage, and let’s say it’s typically 80% leveraged, if you take 15% of the remaining equity off the table you don’t have a lot of equity left in it, and so in the market corrects, as it did, what ends up happening is the equity get sucked away and many of these nontraded REITs have declined substantially in value, and while this is a sort of post fact from 2008, what we’ve seen is that these investments continue to be sold, and I don’t know what the representations a broker might be making right now would be but certainly my question if I was advising an investor, what I would hope they would be asking a financial advisor is tell me about track record of these investments. Because the reality in my experience with brokerage firms as if it pays a 7 to 10% commission, they’re going to find a way to sell it, and they’re going to gloss over the risks and they’re going to focus on the pros, and the pros for these investments just so you know, it is generally income. Most of our clients who have bought these things are people who were either retired or nearing retirement; they were looking for retirement income, and REITs typically will pay between six and 7% interest.

That’s the draw, and it plays out then that’s the benefit and the menu potentially have some upside growth of the real state goes up in value but unfortunately what we’ve seen is that a lot of brokers will overlook the risks and focus on the pros, and then you have people who are buying it who have no idea what they’re really buying and so that that’s what that’s what a REIT is obviously I can’t speak as to whether not a good idea or a bad idea for someone to buy one, but the questions would certainly be what are you getting paid; what is the risk profile; what are the chances that I could lose all this money, and what’s interesting about these investments is that it’s often buried in that fine print, where it says that.

But our clients are typically relying on the oral representation of a financial advisor and even if a prospectuses, which is what comes with a REIT, is provided to the client, a lot of time I’ve heard statements like, oh don’t worry about that, that’s just legalese you don’t have to worry about that, they’re required to say that but trust me these investments are safe. And those disclosures are in there for a reason. Certainly that’s information that investors should read, and if there’s questions you need ask your financial advisor make sure you understand exactly what it’s saying. Haley, what’s our second question?

Haley: The second question is: I bought Behringer Harvard seven years ago. My broker said it would be illiquid for 3 to 5 years and then I could sell it. What do you think is going on?

Mr. White: Thanks Haley. That investment is Behringer Harvard. That’s one of the REIT sponsors that we see in a lot of these cases that we’ve got going on right now. There’s others, KBS REIT is another one, the Behringer Harvard one we see as is typically the opportunity REIT. We also have Fines REIT, cases Wells REIT cases, but these are investment sponsors that sold these investments, but with respect to the direct question; yet again the way these things are often sold is the broker will say, okay you buy for 3 to 5 years it’s illiquid initially, and then it’s going to go public, and in the case of Behringer Harvard that hasn’t happened.

There is a Behringer Harvard one that is supposedly going public soon, but we’ll see what this the public market actually thinks of it in terms of its value. But the reason they hold off is, they don’t go to market until they think it’s actually going to be a good move. So if you bought it $10 per share and now it’s worth, in the case of at least Behringer Harvard opportunity fund, I think it’s worth a dollar to dollar or two per share, obviously it’s a huge decline, you’re not going to go to market to have this thing get beat up. And so they’ll sit on it, and the reality is buried again in that fine print is language that says that the sponsor can do that, it’s a very universal unilateral our relationship, it’s what we call law school a contract of adhesion with a new sign that you buy it, and they basically dictate the terms and they tell you this is how it’s going to unravel, but the reality is that they can change those terms whenever they want, however they want, and that’s what happened with Behringer Harvard Law and all these other REITs is that they’ve decided to hold off on going public, because frankly there’s no market for it, and so what you thought was an investment that would go liquid in 3 to 5 years, here we are 7 to 8 years after you bought, and you’re still stuck with it you can’t sell it. And the only place you can sell it, there are actually secondary markets that are popped up, one of them is LPsales.com the other is CT auctions, so there is the opportunity sell those investments, but unfortunately the only buyers out there are very sophisticated venture capital firms hedge funds who will only buy it if they get a sweetheart deal, and so that that’s a challenge for a lot of our clients, is they’re retired, they need liquidity, and the only way they can get it is to sell it, and it’s not gone public yet, so the only place they can sell is the secondary market, to get beat up. You know, we obviously we can’t advise clients on whether or not they should or shouldn’t do it, but I do tell clients you’re not going to get full value, you may never get full value, if it never goes public you may never get full value, but on the secondary market you’re going to get beat up. What’s that last question Haley?

Haley: The last question says; I recently bought a non-traded REIT. When I asked my broker about the commission he said not to worry about it, that I’m paid by the company. Should I be suspicious?

Mr. White: Yeah, I hear that statement all the time, and the answer is yes you should absolutely be suspicious. These are like I said very high commission products, and I do hear that representation all the time, “don’t worry you don’t have to pay me, the sponsor pays me”. Yes that’s true, but they pay you with your money. If you invest $100, and the commission is 7 to 10%, the sponsor’s writing that check, but it’s coming off the top. So now instead of investing a hundred dollars in real estate, you’re really investing $90 in real estate, and again when you pay that much in commission, it’s real hard to outperform the market and that’s part of the reason these are such high-risk investments, because the only way for them to perform is to be aggressive, because they’ve already gone below…your investments already down 10% just from the start, so there’s a few questions on REITs, if you have questions please visit our website You can also find us on our twitter page, send in questions and we’ll be happy to answer them.

Mr. White: Welcome back to Wall Street versus Main Street. I’m your host, Dax White. This is an investment show where we try to shine light on some of the tricks of the brokerage industry, and arm investors with some information so that they’ll be better equipped to deal with their financial advisor. Each week I’m going to hit on a part called the topic of the week; something I think is really important, that I wish more investors knew about, and this week’s; I might do this one every week, that’s how important this is, and it has to do with what’s called FINRA broker check.

FINRA broker check is an online database where you can go and look up every registered financial advisor, and I wish clients knew about this, because it’s got all the information that you would want so that you can vet a financial advisor. It gives you how they did on their licensing exams, where they been employed, if they ever declared bankruptcy, there’s any liens against them, any criminal charges, have they ever been sued.

All this information is critically important when you’re deciding who you want to hire as your financial advisor, and it’s baffling to me, it’s frankly on FINRA that they don’t get this information out there, although they are right now advertising that it is available, but unfortunately so few investors are aware of it. I can’t tell you how many times we get a call, and an intake, and we first question who is your broker and were you on the FINRA website looking them up, and they tell us, you know, all you “I invested with this person,” we say is he registered here? “Yeah.” How do know that, is this his office address? “Yeah.” How do you know that? And they think we’re like Houdini. Meanwhile all we’re doing is reading off their broker check, it’s an online available report, you can get it at FINRA.org which is FINRA.org, and again it’s got all the critical information that you would want before you’re vetting or you hire a financial visor. Frankly if you already have one, these will make sure you got the right one. That’s where you go, and I and I think it’s critically important for investors, and in finding a financial advisor.

So that’s my topic of the week, now to bring on a guest who’s going to give his take on the brokerage industry, and sort of how he tangentially deals with it, and his name is Nicholas Bruce. He’s the member of the Collins Brown’s trust and estate group’s practices focused on probate and trust administration, probate litigation tax and estate planning, and business and real estate transactions. Mr. Bruce represents individuals in structuring their estate plans to reduce tax liability and increase asset protection. He also represents individuals in financial institutions with fiduciary administration matters. Nick thank you for joining us.

Mr. Bruce: Thank you for having me Dax.

Mr. White: So overall view here, you’re somebody who deals with some estate planning issues. Certainly you have then some involvement with financial advisors, right?

Mr. Bruce: That’s correct, I would say they’re one of the critical pieces of an estate plan. They’re the people that the clients are probably meeting with the most often, most frequently, that tend to have as much detail about a person’s life financial situation, family situation, as anybody else involved in making sure this person’s affairs are in order,

Mr. White: Sure, and I don’t want the tone of the show to be let’s beat up on financial advisors, I want to disclose that the brokerage industry is like any other. There’s good ones and there’s bad ones, it’s just like lawyers, there’s good lawyers and there’s bad lawyers, so I’m sure Nick you deal with great financial advisors, and that is absolutely; if you’ve got a good one stay with them. That’s critically important, but in terms of the advisors you deal with and the clients that you have, what are you telling clients about the financial advisor? What information do you want them to have when they are dealing with their advisor?

Mr. Bruce: The single most critical piece of information I think that they can have about this financial advisor is their education, their background, what they’re doing, what they’re doing to stay abreast of the industry. I think they need to listen to what a broker is telling them, and listen to it critically. If a broker seems to be pushing some particular product of a particular segment, whatever it is, sector, really hard, I think they need to ask questions about that. Clients too often, whether it’s the legal side, or the financial management side, they tend to not ask the questions, not get educated enough as to what it is that is put in front of them.

Mr. White: Sure you get a referral, that’s your guy.

Mr. Bruce: That’s right.

Mr. White: We see that as well, and certainly that’s a challenge for us, because we’re typically the first professional that people hire after they been burned by their last one, so it’s amazing now they’re asking lots of questions, and you’re going I wish you’d asked those questions before. But I see it all the time. Something else we see Nick has to do with elderly fraud, and certainly you know that the spectrum of our clients are generally retired people partly because you know that they’re the ones who need the safest portfolios, and maybe get taken advantage of, but also because you have a diminished capacity to a certain point. And I would think that would segue into what your you’re doing in the estate planning part, so what are you trying to have your clients do to help protect them particularly, the elderly clients in that brokerage relationship?

Mr. Bruce: So certainly every client’s different, every client’s family dynamic or family situation is unique, but I think particularly elderly clients need to have someone they trust, that they trust implicitly, that they can have look over their shoulder. Maybe take a second look at the clients estate planning documents, make sure the will does what they know their elderly parent grandparent, aunt, uncle, friend whatever it is wants to have happen. Same thing on the financial management side. Make sure that someone’s reviewing the statements particularly as you get older or say you never had an interest in it, maybe your husband always took care of it, and now you’re widowed, bring someone into the situation, into scenario that can take a look and help out and make sure the broker is doing what the broker says.

Dax: Perfect, thanks Nick, and any parting shots or practice tips for people who were thinking about getting some estate planning?

Mr. Bruce: Make sure you have one, make sure you talk to a lawyer that knows with they’re talking about, that does this every day, that can make sure that you have the plan in place, because unfortunately this is one situation where once it’s too late, the person’s passed away, we can’t go back in and undo it.

Mr. White: Right, thanks Nick. Again you’re listening to Wall Street versus Main Street where we try to shine the light on the brokerage industry each week, arming people with information that they might think is relevant in that relationship.