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Home > Blog > For Some BDs, Non-Traded REIT Sales Mean Huge Payday

For Some BDs, Non-Traded REIT Sales Mean Huge Payday

Non-traded real estate investment trusts (REITs) are proving to be a cash bonanza for some independent broker/dealers in 2013, with the alternative investments bringing in a ton of money via commissions and fees. As reported recently in a story by Investment News, registered reps funneled a “mountain of client cash into non-traded REITs this year – an expected record $20 billion in sales.”

According to the Nov. 30 article, one of those BDs was LPL Financial, which reported a huge increase in commissions in the third quarter for sales of non-traded REITs and other alternative investments of160%, or $81.2 million.

Non-traded REITs and other private-placement alternative investments have not been without controversy over the past couple of years as several big-name sponsors – i.e. Medical Capital Holdings and Provident Royalties – turned out to be frauds. Countless broker/dealer firms that sold their clients on the products later shuttered their business, while others faced – and continue to face – a bevy of investor lawsuits and scrutiny from regulators.

Some firms, however, are apparently thriving in the alternative investment arena. Case in point: Capital Financial Services. Last month, the firm’s parent company, Capital Financial Holdings, noted a surge in income in its third-quarter earnings report – income that was tied to alternative investment sales.

“Interest and other income for the nine-month period ended Sept. 30, 2013, was $430,534, an increase of 149% from $172,632 during the same period in 2012,” Capital Financial Holdings reported. “The increases were due to an increase in the marketing income received related to alternative investment products.”

Capital Financial Services track record with alternative investments has been a rocky one. It was one of the top sellers of Provident Royalties LLC preferred shares, which later were accused by the Securities and Exchange Commission (SEC) of being fraudulent. In August 2011, Capital Financial and the Financial Industry Regulatory Authority (FINRA) reached a $200,000 settlement over Provident’s failed private placements.

Another firm with ties to failed private placements but whose bottom line is apparently on the upswing now because of new deals is Ladenburg Thalmann Financial Services. Ladenburg is the parent firm of three independent broker/dealers; last month it reported a 20% boost in commission revenue for the nine-month period ending in September due, in part, to alternative investment sales.

“The increase in commission revenue resulted primarily from increased sales of alternative investments, mutual funds and variable annuities in the 2013 period as compared to the 2012 period,” the company reported.

As reported in the Nov. 30 Investment News article, Securities America is one of Ladenburg Thalmann’s broker/dealer firms. Securities America also was the leading seller of Medical Capital private placements, with almost $700 million in sales. Like Provident Royalties, Medical Capital was charged with fraud by the SEC in 2009. The former owner of Securities America, Amerprise Financial, as well as Securities America itself, announced two settlements with Medical Capital in 2011 totaling $150 million.

Non-traded REITs and private placements are different products yet share several structure similarities, including high commissions and fees. They also are typically complex investments and, in some instances, tend to provide little disclosure information to brokers and investors alike.

In the aftermath of the Medical Capital and Provident Royalties fiasco, however, many broker/dealers have taken steps to improve the transparency polices and issues surrounding alternative investments like non-traded REITs. Some are working with regulators to create better valuation standards for more accurate account statement reporting. That’s good news for investors. Let’s hope it stays that way.

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