When I dropped my Series 7 and strangled it on the banks of a river in the dead of night, I left behind a world of conflict and horrendously incentivized brokers.[ I also left behind the atrocious products that no one would ever recommend to a customer if all fees were equal.
But all fees are NOT equal and Brown’s Law of Broker Compensation is that the worse a product is, the more brokers get paid to sell it.
We’ve mentioned non-traded REITs here before as one of the all-time dumbest, most disgraceful categories of schlock ever pushed on the investing public (see: The Essence of Retail Brokerage). Here’s a great description of one of the worst I’ve ever seen…
Via Ben Strubel at ValueWalk:
A client owned a Wells Capital REIT that was so bad that Chief Investment Officer of Yale University, David Swenson used it in his book Unconventional Success: A Fundamental Approach to Personal Investment as an example of how bad public non-traded REITs are for investors. Wells charged investors these fees: sales commissions of 7%; dealer management fees of 2.5%; and offering expenses of 3%. That means, for every $100 my client had invested only $87.50 actually made it into the fund. Every investor lost 12.5% of their money, right off the bat! But the largesse didn’t stop there. To buy the actual property, Wells charged another 3% for “review and evaluation of potential real property acquisitions” and another .5% as reimbursement for acquisition expenses. Once Wells actually purchased the buildings, investors’ wallets were 16% lighter.
You would think that 16% of your money would be enough to satiate the greed of Wells and its brokers. If you own this REIT, then you probably think that at least you will have all the income the properties generate. But you’d be wrong.
Each year Wells helped itself to another 4.5% of revenues and another separate 3% fee for leasing newly constructed property. By now you probably can’t wait to be out of this investment. Surely, that is the end of the fees. Nope. When Wells exited the portfolio, it was entitled to take 10% of the potential profit after a certain minimum hurdle had been reached.
I’ve covered the subject of broker-sold private investments quite a bit here on TRB and in my book, but this one is a real beauty.
Dumb Investment of the Week: Public Non-Traded REITs (ValueWalk)
The Essence of Retail Brokerage (TRB)
Venture, Angel or Private Placement? (TRB)
A Guide to Private Placement Due Diligence for Stockbrokers (TRB)
Backstage Wall Street: An Insider’s Guide to Knowing Who to Trust, Who to Run From, and How to Maximize Your Investments
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