We have long warned investors about the hazards of investing in Real Estate Investment Trusts. Use our blog search function and you will find many REIT investment articles. Our biggest peeve is with illiquid, non-traded REITs. These investments are especially bad because the unwary investor could find himself having to wait a decade before being able to sell.
The latest brokerage firm finding itself in hot water of these investments is FSC Securities. Today they are facing 13 new claims from investors who claim brokers there made unsuitable investment recommendations that included nontraded REITs. These investors were allegedly retirees.
FSC is headquartered in Atlanta Georgia. The company claims to have 1000 advisors making it one of the largest independent broker dealers in the United States. The company has been in business since 1958. They have $34.6 billion in assets under administration.
Until now, they claim to only have received 16 formal arbitration complaints. (Claims against stockbrokers and their employers are handled by arbitration through FINRA – the Financial Industry Regulatory Authority.) With the 13 new complaints, their complaint history will nearly double.
Suitability and Know Your Customer
Stockbrokers are required to know their customers. The industry has strict rules to ensure that brokers know the risk tolerance, financial needs, financial sophistication and relative wealth of every customer.
Suitability rules require that brokers only make recommendations to customers that are suitable for them.
The suitability and “KYC” (Know Your Customers) go hand in hand. One can’t make suitable recommendations without first knowing the financial picture of his or her client.
For example, a retiree living on fixed income probably needs ready access to his investment funds. Illiquid investments such as nontraded REITs are not generally suitable for older customers living on fixed income. That’s because a nontrded REIT could take years to sell.
If you have GM stock, in just a few seconds you can make a quick phone call and unload your shares. Own a nontraded REIT, however, and it might take years to sell. That is because there is no ready market in many of these products. Selling only works if there is someone willing to buy.
Brokerage firms have a duty to supervise their financial professionals. That job is hard enough when they all work in the same office. But many independent brokerage firms operate through satellite offices. Some “offices” might just have one broker. That is convenient for customers but a nightmare for compliance staff.
FSC Fined for Suitability Violations
In July 2018, FSC was censured and agreed to pay a $200,000 fine for failing to supervise brokers selling variable annuities. Although this case didn’t involve REITs, the behavior is still troubling, failure to supervise.
In February of 2018, the Montana Commissioner of Securities and Insurance fined FSC Securities $100,000 for similar behavior. The state said the company failed to supervise a particular broker, Barry Hartman, and allowed him to sell unsuitable, illiquid investments.
In December of 2017, FINRA fined the brokerage firm $100,000 for overcharging customers. The SEC levied a whopping $7.5 million fine for the same type of behavior in 2016. Although not specifically a suitability violation, all these violations have one thing in common. Brokers at FSC are more interested in making money and high commissions instead of protecting the financial health of their customers.
It’s not just regulators who have been complaining. Several customers filed formal arbitration claims against FSC Securities. The company has already paid millions of dollars on these claims.
Brokers Love Nontraded REITs
Brokers love non traded REITs. Unlike many investment companies that just charge a few bucks on individual trades, FSC Securities brokers can earn huge commissions of up to 7%. That money comes right out of the investor’s pocket. Worse you might be stuck waiting several years before you can sell.
2019 Customer Complaints Against FSC Securities
Let’s fast forward to the present. As noted above, FSC Securities was just hit with 13 arbitration complaints. Those investors say that they were told to buy illiquid non-traded REITs. We know some of the customer were elderly.
According to one complaint, “Due to the notable percentage of [clients’] portfolios that was put into high- commission products, [investors] believe these recommendations were clear commission grabs by” FSC’s brokers. “The recommendations do not make sense unless viewed with their commissions in mind.”
We know that some of the REITs placed in client accounts included nontraded REITs managed by Cole, Behringer Harvard, American Finance Trust, and Phillips Edison. We also know that the current complaints all appear to stem from the FSC office in Metairie, Louisiana. [We have had plenty to say about Behringer REITs.]
At least one broker in that office, Frank Briseno III, was mentioned but not named in a complaint.
Our Thoughts on Nontraded REITS
Nontraded REITs are suitable for institutional investors and individuals with a high risk tolerance and no immediate need to access their funds. They generally would not be suitable for retirees or elderly investors.
We have no idea if the current allegations against FSC Securities are true. Given their poor recent track record for supervising their brokers, the allegations are especially concerning. And in our experience, where there is smoke, there is fire meaning a likelihood of many other investors who were burned.
If you lost money through illiquid investments, nontraded REITs or through FSC Securities, we certainly want to speak with you.
Claims against stockbrokers or their employers are handled by arbitration. Typically, a 3 person panel hears the cases but don’t worry, FINRA has public arbitrators. The panel is not stacked with industry folks.
Most cases can be resolved in 14 months, less time if the case settles.
To learn more, contact attorney Brian Mahany online, by email or by phone at 202-800-9791. The consultation is free and confidential. And we handle our cases on a success fee basis meaning you don’t pay us unless we collect money for you.