Cetera announced it is “pausing” sales of non-traded REIT investments while the market absorbs the shock of the Covid-19 shutdown. This includes Cetera Advisors, Cetera Advisor Networks, Cetera Advisors, First Allied Securities, Summit Brokerage Services. While the firms likely believe this temporary halt of sales is not a repeat of past mistakes like the ongoing sales that took place for many during the 2008-2009 financial crisis, the criticism here is that this is all just window-dressing as it is too little being done too late. Some of the explanation is that the Covid-19 issues are causing difficulties in real estate valuations, but that may be the tip of the iceberg here. The lack of transparent pricing has not stopped the financial advisors from selling billions of dollars of these securities, often in the firm of non-traded REITs to investors. In some instances, those sales are unsuitable, the products and underlying investments are misrepresented, and investors (some retired or elderly) find themselves with illiquid, risky investments they cannot even understand.
Many investors are down 40-50% or more in these investments. Still, other investors are surprised to find decreases in their distribution income streams, as well as a large concentrated illiquid investment holding that is decreasing in value.
Cetera Financial Group is comprised of a network with some 8,000 representatives and financial advisors nationwide operating through:
- 1 Cetera Advisors LLC
- 2 Cetera Advisor Networks LLC
- 3 First Allied Securities
- 4 Summit Brokerage Services, Inc. (now part of Cetera Advisor Networks LLC)
- 5 Problems With Non-Traded REITs
- 6 Potential FINRA Customer Claims
- 7 What Can You Do? – Seek Compensation for Your Investment Losses!
Cetera Advisors LLC
- Cetera Advisors LLC according to FINRA Brokercheck has 19 separate disclosures (11 of them regulatory disclosures).
Cetera Advisor Networks LLC
- Cetera Advisor Networks LLC according to FINRA Brokercheck has 31 separate disclosures (14 of them regulatory disclosures)
First Allied Securities
- First Allied Securities, Inc. according to FINRA Brokercheck has 33 separate disclosures (18 of them regulatory disclosures)
Summit Brokerage Services, Inc. (now part of Cetera Advisor Networks LLC)
- Summit Brokerage Services, Inc. according to FINRA Brokercheck has 21 separate disclosures (16 of them regulatory disclosures)
Problems With Non-Traded REITs
Non-traded Real Estate Investment Trust (REIT) are generally considered “high-risk” investments and recommendations of these investments to retirees and seniors can be problematic for financial advisors.
- Hines Global Income Trust
- Black Creek Industrial REIT
- Griffin Institutional Access Real Estate Fund
- Northstar REIT
- Blackstone REIT
- Starwood REIT
- Jones Lang Lasalle Income Property Trust
- New York City REIT
- Bluerock Total Income + Real Estate Fund
- CIM Income NAV REIT
- RREEF Property Trust
- Resource Real Estate Diversified Income Fund
- Nuveen Global Cities REIT
According to FINRA, the prospectuses and Subscription Agreements for many of the investments indicates they were/are not suitable investments for investors who required immediate liquidity, guaranteed income or short-term investments, and they were only appropriate for those investors who can afford a complete loss of their investment. Despite being speculative, high-risk investments, they are often marketed by financial advisors as retirement savings vehicles or relatively conservative income-producing investments. Investors are often none-the-wiser until they find out the investments are illiquid, the income streams are not like interest or dividends on stocks or bonds, and their investment capital appears to be evaporating.
Potential FINRA Customer Claims
FINRA claims involving these investment products often include allegations related to several regulatory rule violations as well as negligence, negligent supervision, unsuitability, and misrepresentation. Alleged violations of FINRA Rules 2111 and FINRA Rule 2010 are not uncommon. FINRA Rule 2111 requires the firm or associated person have a reasonable basis to believe a recommended transaction or investment strategy is suitable for the customer based on the information obtained via reasonable diligence on the part of the firm or associated person to ascertain the customer’s investment profile.
These alternative investments are sometimes recommended or sold based upon the promised income stream, or based upon incomplete, inaccurate (and sometimes non-existent) risk disclosures to investors. The explanation is often under the guise of providing more income, adding more yield, or providing additional diversification – so it seems innocent enough on the surface, especially when equity valuations appear high and interest rates appear low by comparison, but everything is not always as it seems with these investments. Worse yet, some investors who purchased these investments based on income needs, did not realize the risks involved, or the possibility that their distributions could be stopped.
Selling the Income Stream
What appear to be attractive distributions are investments not listed on any national exchange, just private placements of unregistered securities that are generally considered risky, complex, and illiquid – not exactly what any elderly, retired, or near-retired investor is looking to add to their account. What is often driving this market for securities that appear to often be unsuitable for many retail investors? It’s simple. Financial advisors and broker-dealer firms are looking to sell more high-commission, high revenue producing products to investor clients!
The investments are often complex, and some financial advisors may not fully comprehend the intricacies, the conflicts, the product and investment risks. Where it’s not negligence or a flat out mistake, this market segment can be a magnet for an unscrupulous financial advisor looking to generate higher fees and commissions, and where better to find those opportunities than with retirees and older investors who trust their financial advisors to make recommendations that are in their best interests.
Issues Raised by Regulators
Last year, unregistered securities were a top source of regulator enforcement actions involving senior investors according to the North American Securities Administrators Association (NASAA, an organization that includes the individual state securities regulators). In addition, the Financial Regulatory Authority (FINRA) has identified these types of investment products and transactions as part of its annual regulatory priorities.
From the beginning, the deck appears stacked against the retail investor in most of these investments. There are conflicts of interest, high commissions, high distribution rates, and in order to overcome those hurdles, it could require a 10-15-20% return just for the investor to get back to even. All the while, the only pricing available is coming from the sponsor itself, as there are no national exchanges providing pricing transparency, never mind consistent liquidity for investors.
For investors seeking to liquidate, there may be a repurchase window available. For financial advisors, they may reference that repurchase opportunity as though it is a source of consistent liquidity for investors. In reality, those repurchase opportunities are typically very small windows available only quarterly and with very limited real opportunity for investors. If investor circumstances change, or a market dislocation leads to immediate needs for liquidity, investors may find they have very limited options available. Unfortunately, the limitations are only discovered around the same time that investors are realizing that distribution levels are being reduced or suspended (temporarily or permanently) which only adds to their dissatisfaction.
Lack of Transparency
The lack of transparency often translates to both the pricing and valuation issues that are noted by the firms above in the current market, but also go to the average investor’s ability (or even the financial advisor’s ability in some cases) to be able to fully understand and appreciate the risks of the underlying business itself. Some investors are surprised to find out later that the underlying investment strategy or business strategy is much riskier than what had been initially represented at the time of the recommendation and sale. They also learn that the business or strategy involves leverage or borrowed funds, and when unsuccessful, it can serve to accelerate losses. More often than not, investors learn later that the financial advisor recommendation of these products was severely flawed. Whether it is a non-traded REIT (or similar non-traded BDCs) or similar investment, there were lower cost, non-conflicted, publicly-traded options available that not only allowed for liquidity, but also better opportunities for diversification, if in fact the investor truly was interested in exposure to a particular market or sector.
The end result for most investors is that they are left holding the bag as a result of a combination of poor disclosure, complexity, and unscrupulous sales practices.
What Can You Do? – Seek Compensation for Your Investment Losses!
If you are an investor that purchased non-traded REITs or non-traded BDCs and you have incurred losses (or if you are aware of a retired or senior investor who did the same) you should consider your potential options for recovering your investment losses.
At least one option for some investors includes a Financial Regulatory Authority (FINRA) customer arbitration dispute. The customer dispute process at FINRA is private, and quicker and more efficient that traditional court litigation. In addition, there are typically no depositions, as it is almost entirely paper-based discovery. You should contact experienced attorneys who might be able to assist you with these types of disputes.
About Haselkorn & Thibaut, P.A.
Haselkorn and Thibaut, P.A. is a nationwide law firm specializing in handling investment fraud and securities arbitration cases. The law firm has offices in Palm Beach, Florida, on Park Avenue in New York, as well as Phoenix, Arizona, Houston, Texas, and Cary, North Carolina. The two founding partners have nearly 45 years of legal experience.
Haselkorn & Thibaut, P.A. has filed numerous (private arbitration) customer disputes with the Financial Industry Regulatory Association (FINRA) for customers who suffered investment losses relating to issues similar to those matters mentioned above. There are typically no depositions involved, and those cases are typically handled on contingency with no recovery, no fee terms.
Experienced attorneys at Haselkorn & Thibaut, P.A. are available for a free consultation as a public service. Call today for more information at 1 888-628-5590 or visit our website and email us from there at www.investmentfraudlawyers.com.