“Picking up pennies in front of a steamroller” is a quote from the weekend edition of the Wall Street Journal. It refers to the phenomena of investors chasing high yielding (and overpriced) REITs. We have long written about the dangers of REITs, particularly when they are thinly traded or illiquid.
Many industry experts expect to see REIT values tumble. For the last several years, they were one of the hottest investments around. Between 2009 and 2012, one REIT index pegged their average annual returns at 20.3%. Try to match that in a savings account or CD.
Like all bubbles, REIT returns can’t sustain that level for very long.
Unfortunately, many investment advisers and stockbrokers heavily pushed these investments on their clients. Investors, tired of meager returns from bank accounts, seized at the opportunity to earn high rates. Many brokers touted these real estate backed investments as “safe” and “conservative.” Unfortunately, they were neither.
Adding to the problem, many REITs – short for Real Estate Investment Trust – are illiquid meaning there is no secondary market. Once you invest, you are stuck for the ride which could mean years. Retirees and those needing access to their capital soon learned they couldn’t sell certain REITs when they needed cash.
With a crash probable in the near term future for some REITs, the recipe has been created for a perfect storm. In 2013, the S&P 500 index has returned 30%. REITs? Less than 2% according to the Wall Street Journal.
Regulators, of course, have been sounding the alarm for the last year. Many stockbrokers didn’t listen, however.
Although some investors made unsolicited REIT purchases, most had help from brokers and financial professionals. Not fully understanding their clients’ needs and risk tolerance and recommending unsuitable investments means many investors are saddled with both unsuitable and illiquid REIT investments.
There will always be bad brokers out there. We have seen many questionable recommendations made by otherwise smart brokers. REIT fraud, however, is a much bigger problem. Why? Because the commissions offered by REITs are typically much higher than industry norms. That means brokers have a much bigger temptation to recommend REITs to customers, even if they are not suitable investments.
REITs themselves aren’t the problem, of course. It’s the brokers and advisers marketing them in hopes of a fat commission check. For that reason, we still see people pouring in billions of dollars into REITs right up until very recently; investors picking up pennies in front of a steamroller.
Customers who find themselves improperly holding REITs in their portfolio may be able to recover their money from the firms that sold these investments. Several major brokerage firms have sold these products. Unlike penny stocks that are often sold by shady “boiler room” operations, REITs are sold by major firms such as Ameriprise, Royal Alliance Associates, LPL Financial, Securities America, Commonwealth Financial and Lincoln Financial Advisors.
If you feel like you are a victim of REIT fraud, call us. Brokers have a duty to fully explain the risks of investments they recommend to you and must insure that their recommendations are suitable for you. If they fail, they could be liable for your losses.Our stockbroker fraud and securities lawyers can help you get your money back, often with no upfront legal fees to you. Contact attorney Brian Mahany at (414)704-6731 (direct) or by email at Services are provided anywhere in the U.S.
Post by Brian Mahany, Esq.