Even though sales of alternative investments, especially non-traded real estate investment trusts (REITs), are experiencing a major upswing this year, investors are wise to remember the dark days of the past before completely jumping on the alternative investment bandwagon.
Specifically, those days relate to some of the bad decisions made by a number of broker/dealer firms – many of which are now out of business or mired in legal issues and investor lawsuits – and the alternative financial products they sold to clients. Those products were tied to sponsor names like Medical Capital Holdings, Provident Royalties and DBSI Inc.
Medical Capital and Provident were charged with fraud by the Securities and Exchange Commission (SEC) in 2009, while DBSI, which raised $1 billion from investors by selling real estate investments via independent broker/dealers, filed for bankruptcy.
In the aftermath of those failed deals, some broker/dealers ramped up their due-diligence of alternative investments and began working with regulators to establish standards for valuation and account statement reporting. Their attempts to alter the public’s perception of such products may be working. As reported by Investment News, alternative investments like non-traded REITs are estimated to bring in $20 billion of capital flows by the end of this year. That is twice as much as 2012.
Still, investors may be wise to proceed with caution before totally singing the praises of alternative investments. After all, many of these products – including non-traded REITs – continue to have the same issues as before: illiquidity, unreliable distributions, complex redemption structure and pricey commissions and fees.
The bottom line: History can and often does repeat itself. It’s a lesson perhaps worth remembering.