If there was still any doubt that brokers have been selling clients products that aren't in their best interest, this should put it to bed. An article in Financial Advisor magazine reported the following:
Through August, sales of non-traded REITs were $3.15 billion, down 55 percent from the same period a year ago, according to the Robert A. Stanger & Co., which tracks the industry.
Sales of BDCs through August were $1.07 billion, down 62 percent.
Non-traded REITs, the bigger category, should reach around $5 billion this year — about half of last year — said Keith Allaire, managing director at Stanger.
What are non-traded REITs and BDC's you ask? These are products with high commissions and fees (sometimes over 15%) with countless examples of massive blowups. In this day and age with Google, it is hard to believe they still exist in their current form. Just google "non-traded REIT scam" you'll find over 17,000 hits with the first few links being stern warnings from the SEC and FINRA. The old adage that these products are "never bought but sold" is entirely correct. You almost exclusively see these products sold by brokers. So, what is the reason for the massive drop-off in sales? The article states it pretty clearly:
"That's primarily due to the change from full front-load structure, to a trail commission structure," he said. "It's a matter of getting new products in the pipeline, and at B-Ds trying to figure what structure they want on the platform."
Translation: cut out the big commissions and brokers won't sell it anymore. This goes to show you that little concern was given to the quality of the product (anyone looking closely at these things knew that a long time ago) or the client. The appeal of these products was always about the huge upfront commissions. With the advent of the Fiduciary rule, requiring all brokers advising retirement accounts act in the client's best interest, it seems like some of these horrible products are seeing asset flows dwindle. That's a great thing for consumers.
If you are in the market for an advisor, I urge you to find one that always acts in your best interest (not just for retirement accounts) so you can avoid situations like this. The best way to find one is through the National Association of Personal Financial Advisors (www.napfa.org). While you aren't guaranteed to find a great advisor (you still need to vet them further), at least you will know that advisor is not incented by selling you products (NAPFA members cannot accept commissions or kickbacks in any form).
Full disclosure- Greenspring is a member of NAPFA.
Nearly one-hundred years ago one of the best (and worst) barters occurred in New York City. I read the entertaining story recently and found it fascinating. While it is a great tale of American history, the message is wholly relevant to investors today:
Described by The New York Times as "one of the finest" residences in the area, the Plants' New York City residence was on the corner of 52nd Street and Fifth Avenue. It was built in an Italian Renaissance style of limestone with marble accents.
When Maisie Plant fell in love with the natural, oriental pearl necklace, Pierre Cartier sensed an opportunity. Pierre, the savvy businessman, proposed the deal of a lifetime: He offered to trade the double-strand necklace of the rare pearls — and $100 — for the Plants' New York City home. The necklace was valued at $1 million, while the building was valued at $925,000, according to The New York Times.
The pearls were worth more than the Mansion at the time. Why were the pearls so costly? Cultured pearls had not fully entered the marketplace yet, which meant that each natural pearl had to be found by divers. It had therefore taken Cartier years to assemble the 128 graduated, perfectly matched pearls of Plant's necklace. Additionally, diamonds were becoming less valuable because of recent discoveries in Africa. Because of their rarity, natural pearls had become the symbol of the well-to-do socialite.
Maybe it's the way my brain works, but I wanted to find out who really made out in this deal, and to what extent. Below are the values of what the trades would be worth today. In doing some further digging and research, I found the following info:
- In 2004, a similar natural, double-strand pearl necklace sold at Christie’s for $3.1 million. This is a 1.1% annual return over time (much worse than inflation)
- The 5th Avenue mansion is listed in NYC tax assessments at $52 million (probably much less than what it is actually worth). This is represents a 4.2% return over this time period.
Sadly, Ms. Plant's heirs sold her necklace after her death at auction for a mere $170,000 in 1957 (a loss of 86% from her purchase price). So, Cartier was the winner in this trade. What is not even mentioned, is that for the past 97 years, the 5th Avenue building also was producing income (via rent) which makes its true value hard to even quantify over time. This is just another example of why we tend to shy away from commodity type investments like precious metals. They cannot grow, cannot produce income and your returns come from the hope that someone else will be willing to pay more than you did.
Just in case you were wondering, over the same time period, stocks would have turned the same investment into $271 million (without accounting for dividends)! Just another example of the power of investing in businesses and not just hard assets.
Real estate has been a great diversifier over time. For investors not wanting to invest directly in properties, real estate investment trusts (REITs) offer an ideal vehicle to gain exposure to real estate through the public equity markets. Unfortunately, over the past several decades a new product has found its way on the market. The non-traded private REIT has exploded in the retail investor market, primarily sold by stock brokers and financial advisors. Here is typically the key points of the sales pitch:
- No price fluctuation
- 6% yield
- Diversification through ownership of commercial real estate properties
What's not to like? Having heard this sales pitch from the product vendors myself, at first blush they can be compelling. Unfortunately, that is not the entire story. Let me point out some of the downsides of these products:
- Huge upfront costs- typically only 85-90% of an investor's principal actually gets invested
- No liquidity
- Big commissions to the broker
- Historical underperformance
Recently, a study was released that seems to back up our thoughts that these products have no place in client portfolios. The study found that over $116 billion has been invested in these products over the last 25 years. Their study also found that these investors are at least $45 billion worse off than had they just invested in publicly traded REIT's over the same period. Returns of publicly traded REITs have been 11.3% per year while non-traded REITs have averaged 4% over that same period. Here are some of the return statistics:
You may be asking yourself, "if these products are so bad, why do they still exist?" The simple answer is money. These products pay huge commissions and fees to the brokers selling them and the providers of the funds themselves. If you have ever purchased one of these products, I would seriously question the advice you are getting from your advisor. The next time someone pitches one of these products to you, please reference this study and ask why this investment is appropriate.
When it comes to investing, our worst enemy is without question ourselves. Our brains just aren’t hardwired to do it well. We are overconfident, tend to extrapolate the current situation well out into the future, become greedy after prices rise, and fearful after they fall. I almost fell over when I read this Gallup poll about what Americans think are the best long-term investments:
Real Estate? Does anyone bother to look and see how much real estate has gone up in value over the last couple hundred years. On average home prices have only kept pace with inflation according to Robert Shiller (the Yale professor who measures these prices). In addition, there is a major carrying cost associated with real estate (taxes, insurance, repairs, etc). If you want to take a look a little deeper at the data, I wrote about this here. Worst of all, according to Americans the second best long-term investment is gold. Up until a couple years ago, about 2 times as many people thought gold was a better long-term investment than stocks. Again, look at the data. Gold barely keeps up with inflation. Stocks have generated a return approximately 6% over inflation over time. Here is a graphic of how much $1 in different investments grew over a 100 year period:
It’s confirmed. We are our own worst enemies. How do we overcome this hurdle? Stop making emotional decisions and let logic and data drive our decision making process.
What is the best vehicle for accumulating long-term wealth? This is a question worth thinking about as an investor and a recent Gallup poll shows that only 37% of those surveyed believed that stocks were a good method for accumulating wealth. This isn’t surprising. Over the past 13 years we’ve lived through two stock market crashes of 50%+ with very little overall growth over that period. But let’s take a longer term view of this. From the Investors Friend blog, we see this chart comparing the returns of stocks, bonds, gold and the dollar. It is pretty clear who the winner is of these options:
So, are stocks the only game in town? No, other investments to consider would be real estate and private businesses. Active ownership of a private business is probably one of the riskiest and most effective methods for accumulating wealth. If you go through the list of the richest people on the planet, most acquired their wealth through this method. Realize that most private businesses fail, so for every successful entrepreneur out there, there are probably 20 or more that have either seen their business fail or have not generated significant wealth through this endeavor. Stocks are one of the better choices for most investors since they allow you to take a passive stake in a company versus some of the other options that require more active participation.
This chart is another example why every investor should have some portion of their portfolio allocated to stocks. They allow you to participate in the profits of some of the best and well managed companies in the world. In addition, the long-term results speak for themselves.
Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.