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  • Illegal for financial advisors offer advice on investments for accredited investors?

    EDIT: Meant for my title to say "accredited investors", but maybe it got cut off. Any way to edit my thread's subject?

    My parents work with two fee-based (% of assets under management, AUM) financial advisors underneath the umbrella of a megabank.

    One of their advisors was kind enough to review my portfolio over lunch and answer some questions I had about my own.

    One question that came up during the conversation were investments open only to accredited investors (i.e. private real estate investments).

    My parent's advisor said that he does occasionally have clients approach him about private placements, private real estate investments etc.

    He said that he is not allowed to give advice about such types of investments, but that he will take a cursory look over a prospectus and say yay or nay on whether or not it looks like a legit. Other than that, he can't get into specifics about how good the investment looks for a total return.

    For reference, the advisors charge my parents a commission to buy or sell stocks through brokerage platform offered by the megabank they use of $20/transaction. He said that since clients are the ones soliciting to buy/sell such individual securities, he does not include those assets in their calculation of their annual percentage fee. He and his partner do charge my parents an AUM fee based on the mutual funds selected for my parents.

    Is my parents' advisor unwilling to offer advice about private real estate deals like the types WCI discusses on his podcasts because these assets are outside of what he can control and charge AUM fees on? WCI conducted an interview with the founder of Aptus Financial, Sarah Gutierez, which is on the website's list of best financial advisors. She claims that typical AUM advisors, unlike hourly advisors, don't want to discuss private real estate syndications or funds because they can't charge AUM fees off of those...

    So is my parents' financial advisor telling me the truth when he claims that whatever licensing he has for financial advice bars him from discussing private investments?
    Last edited by index2max; 01-03-2022, 05:17 PM.

  • #2
    Originally posted by index2max View Post
    EDIT: Meant for my title to say "accredited investors", but maybe it got cut off. Any way to edit my thread's subject?

    My parents work with two fee-based (% of assets under management, AUM) financial advisors underneath the umbrella of a megabank.

    One of their advisors was kind enough to review my portfolio over lunch and answer some questions I had about my own.

    One question that came up during the conversation were investments open only to accredited investors (i.e. private real estate investments).

    My parent's advisor said that he does occasionally have clients approach him about private placements, private real estate investments etc.

    He said that he is not allowed to give advice about such types of investments, but that he will take a cursory look over a prospectus and say yay or nay on whether or not it looks like a legit. Other than that, he can't get into specifics about how good the investment looks for a total return.

    For reference, the advisors charge my parents a commission to buy or sell stocks through brokerage platform offered by the megabank they use of $20/transaction. He said that since clients are the ones soliciting to buy/sell such individual securities, he does not include those assets in their calculation of their annual percentage fee. He and his partner do charge my parents an AUM fee based on the mutual funds selected for my parents.

    Is my parents' advisor unwilling to offer advice about private real estate deals like the types WCI discusses on his podcasts because these assets are outside of what he can control and charge AUM fees on? WCI conducted an interview with the founder of Aptus Financial, Sarah Gutierez, which is on the website's list of best financial advisors. She claims that typical AUM advisors, unlike hourly advisors, don't want to discuss private real estate syndications or funds because they can't charge AUM fees off of those...

    So is my parents' financial advisor telling me the truth when he claims that whatever licensing he has for financial advice bars him from discussing private investments?
    This might be more of an internal bank rule governing advisers who work for it than a general rule, these advisers might be registered as brokers (so they have a set of rules they have to abide by, written by the bank), but a true RIA (registered investment adviser) will not have such limitations. Sure, if they can't bill for it, some might make it a policy not to provide advice on it. If an AUM adviser is already getting paid for advice, nothing can stop them from offering an extra service, so this is not true that AUM advisers won't provide advice on such topics in general. But of course they have a conflict of interest here because this might diminish their AUM. Good AUM (or any) advisers should be able to provide advice on many topics. The same goes for fixed fee advice as well - often things are way outside of their usual suite of services, and not everyone has the capacity or interest to advise on private placements. Imagine a scenario where adviser says go for it, and something really bad happens and the client loses money. Who's to blame here? The client will naturally blame the adviser. That's why the answer from some might always be 'no', or they might simply decline to provide advice. A good adviser should give pros and cons without saying yes or no, and it would be up to the client to make the final call based on all of the available information.
    Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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    • #3
      This is a topic I am very interested in. I think there are a lot of good private commercial real estate syndications, funds, and real estate debt funds out there. For a while I was looking at a lot of them to diversify my investments. But it was all just too overwhelming for me. For example, I would look at say a investment in a 500 unit apartment building in Atlanta or medical office building in Nashville, review the proforma, listen to a webinar describing the deal, etc.... But how am I supposed to tell if this is a good deal or bad deal? And going though the fee structure and returns structure can be complicated. I think there would be a big demand for an advisor who specialized in knowing about the deal flow out there and being able to recommend investments with trusted sponsors. Maybe an advisor could have a commercial real estate specialist on their team.

      With me it was "a confused mind says no". I liked a lot of the deals and I know others that have done well in this area or private commercial syndications, but I could never quite get comfortable with my ability to do proper due diligence and know what my downside was, etc.... Very time consuming and I never thought I had any "edge" in deciding a good investment from an average investment. Time consuming to look though lots of investments to put $50k-$100k in a pop.

      Thoughts anyone?

      Comment


      • #4
        The question is not really legal prohibitions. Every megabank has an investment banking operation. Their purpose is to "raise capital". Actually, there are rules for a separation between investment banking and the financial advisors side. (Sell side vs buy side). Stick to the prospectus. Between the top competing side, the offerings can be public or private.
        Your buy side FA may or may not be qualified and the internal rules may prohibit evaluation of any private equiry offer. In a megabank, the FA often does not do the actual evaluation of even publicly traded offerings. The analysts feed the network of research provided to the FA's.

        As an accredited investor, you are responsible for vetting. Probably barking up the wrong tree in expecting those services from an megabank FA (regardless of the compensation, that is not a skill set although you might be assuming it is present). The skill set would be on the investment banking side, not on the brokerage side.
        https://corporatefinanceinstitute.co...-vs-sell-side/
        You can run into some megabank and some state regulations. Even if one is qualified, they may not have the expertise nor support structure. FA's in organizations are client interfaces. Even if qualified, it is not in their best interest. The sell side will pitch private investments all day long. Evaluate it yourself. They have a vested interest in presenting good deals. Repeat business.
        Different roles.

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        • #5
          This is one I’ll have to say I disagree with Sarah on and, if what you said above is 100% correct, I would go so far as to say I’m disappointed. However, I’d like to leave room for this being your interpretation rather than what she said. I know there are many financial advisors who are ethical and honorable and simply have a different billing structure than she or I do. We don’t all have to agree and I don’t like mixing all advisors into the batter of who should advise what on which investment and how they should charge fees to belong in the “good guys club”. That’s just not right.

          First of all, to be clear, most FEE-ONLY advisors, including those in NAPFA, are AUM. I used to be AUM - it was a lot less work for a lot more money and that was what clients preferred and expected. I changed to flat fee for 2 reasons:
          1. I knew that wouldn’t fly with the WCI crowd (this was in 2016, when the forum started), and
          2. Clients under the AUM model were not incentivized to undergo financial planning. Financial planning before investment planning makes 100% sense to me and it’s what I wanted to encourage clients to do. But AUM clients really didn’t want to put in the work and didn’t see the benefits.
          I love being flat fee, but I’m not going to beat up on the guys who are still AUM. There are many excellent AUM advisors out there - some who I’m sure I couldn’t hold a candle to and some days I get really weary of them being the punching bag for flat fee advisors and the WCI crowd.

          I’ve been asked many times to review these investments for this “special club” of accredited investors. I will look over them but I will not make a recommendation. They are opaque, they are not subject to SEC scrutiny the way mutual funds, ETFs and publicly-traded stocks are, and they are filled with fluff and sales pitches. That goes 100% against the grain for me. I don’t know why any financial planner or investment advisor would give so-called informed opinions on these things as there is nothing to gain for them and a lot of liability exposure. YOU ARE PLACING A BET.

          There are plenty of areas in which advisors can put their self-interest first and give an opinion or refuse to do so. But I certainly don’t believe this one qualifies. So, no, I won’t make additional money by analyzing these “products”. And, if I did otherwise, I would feel as if I were selling my soul.
          Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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          • #6
            On the dramatic side Johanna, no? Selling your soul? Really? Remember private investments include imaging centers, dialysis centers, urgent care centers, practice real estate, rental property, surgical centers, small businesses, and more. There are many doctors (including me) who will tell you that these are the best investments they ever made.

            That said, remember that these investments are for accredited investors only. While there are (IMHO inadequate) specific legal definitions of what that is, in my opinion, accredited investors are people who:

            # 1 Are wealthy enough that they can afford to lose the entire investment without it affecting their financial life and
            # 2 Are sophisticated enough to be able to decide whether this investment is a good idea or not on theirown.

            If either of those is not true, you really aren't an accredited investor even if you make $200K a year and you shouldn't be investing in those investments. If you need someone else to tell you if it is a good idea or not, you're not an accredited investor. If you need a financial advisor to tell you what to invest in and what not to invest in, frankly, you're not an accredited investor. So, since accredited investors don't need financial advisors, why would financial advisors have any experience giving advice about accredited investor investments? They wouldn't.

            Financial advisors also have a fiduciary duty to clients. They carry E&O insurance and it occasionally gets used. But nobody is ever going to be able to successfully sue them for putting clients into a handful of the best index funds on the planet. There's essentially zero risk there for them if they stick with those investments. But if they start recommending surgical centers and urgent cares and real estate syndications, they (and their insurance company) may be on the hook if those investments go bad. It's all downside for them to even look at those investments much less make a recommendation about them. Why bring on that business risk when you're going to make the same flat fee, the same hourly rate, or a more difficult to calculate AUM fee? I don't see a reason. Besides, it's a ton more work. For the same reason many of us don't hire an asset manager (because index fund investing is so darn easy to do) financial advisors don't want to deal with anything else. I don't blame them.

            But I agree it would be a huge value add if one of them did. Would people really pay a lot more for it? Probably not. Certainly not enough to justify the extra work and risk.
            Helping those who wear the white coat get a fair shake on Wall Street since 2011

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            • #7
              Originally posted by The White Coat Investor View Post
              On the dramatic side Johanna, no? Selling your soul? Really? Remember private investments include imaging centers, dialysis centers, urgent care centers, practice real estate, rental property, surgical centers, small businesses, and more. There are many doctors (including me) who will tell you that these are the best investments they ever made.

              That said, remember that these investments are for accredited investors only. While there are (IMHO inadequate) specific legal definitions of what that is, in my opinion, accredited investors are people who:

              # 1 Are wealthy enough that they can afford to lose the entire investment without it affecting their financial life and
              # 2 Are sophisticated enough to be able to decide whether this investment is a good idea or not on theirown.

              If either of those is not true, you really aren't an accredited investor even if you make $200K a year and you shouldn't be investing in those investments. If you need someone else to tell you if it is a good idea or not, you're not an accredited investor. If you need a financial advisor to tell you what to invest in and what not to invest in, frankly, you're not an accredited investor. So, since accredited investors don't need financial advisors, why would financial advisors have any experience giving advice about accredited investor investments? They wouldn't.

              Financial advisors also have a fiduciary duty to clients. They carry E&O insurance and it occasionally gets used. But nobody is ever going to be able to successfully sue them for putting clients into a handful of the best index funds on the planet. There's essentially zero risk there for them if they stick with those investments. But if they start recommending surgical centers and urgent cares and real estate syndications, they (and their insurance company) may be on the hook if those investments go bad. It's all downside for them to even look at those investments much less make a recommendation about them. Why bring on that business risk when you're going to make the same flat fee, the same hourly rate, or a more difficult to calculate AUM fee? I don't see a reason. Besides, it's a ton more work. For the same reason many of us don't hire an asset manager (because index fund investing is so darn easy to do) financial advisors don't want to deal with anything else. I don't blame them.

              But I agree it would be a huge value add if one of them did. Would people really pay a lot more for it? Probably not. Certainly not enough to justify the extra work and risk.
              Guilty as charged - I prefer dramatic to defensive or deflecting.

              Anyone who wants an analysis of buying into a surgical center or other direct real estate deals without a lot of layers to muddle through should see their CPA, real estate agent, and real estate attorney. Actually, I advise on those transparent deals and assets rather frequently but I believe the CPAs carry the most value in that area. A lot of value can be had for those who can understand what they are buying and therefore analyze cash flow in a straightforward manner.

              I’ll continue to limit my comments to “opaque” investments with lots of middlemen as per my original comments and you can slide the convo into easily appraisable hard assets such as real estate.
              Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

              Comment


              • #8
                I don't see CPA's, attorney's or real estate agents adding a lot of value in analyzing passive commercial real estate investments to help you understand if the opportunity is a sound investment or not. Maybe a very experienced commercial real estate agent who has also been an investor could help. But even they would know little about a distant market. Private passive commercial real estate syndications and funds are just very complicated. I honestly believe it just comes down to "trusting the sponsor" who is putting the deal together and their track record..

                There is just no way no matter how many hours an investor stares at the proforma and numbers of a passive commercial real estate opportunity they are going to have any type of "edge" in investing in the opportunity or a confident feel this is a good deal and understanding the downsides. All you are doing is looking at the sponsors assumptions and projections.

                My dream financial advisor would have someone on staff who is a commercial real estate specialist and spends all day building a list of opportunities to recommend so I don't have to spend the hours pouring through everything and give myself brain damage But it will probably never happen if they can't make it worth their while.


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                • #9
                  Originally posted by jfoxcpacfp View Post
                  I’ve been asked many times to review these investments for this “special club” of accredited investors. I will look over them but I will not make a recommendation. They are opaque, they are not subject to SEC scrutiny the way mutual funds, ETFs and publicly-traded stocks are, and they are filled with fluff and sales pitches. That goes 100% against the grain for me. I don’t know why any financial planner or investment advisor would give so-called informed opinions on these things as there is nothing to gain for them and a lot of liability exposure. YOU ARE PLACING A BET.

                  There are plenty of areas in which advisors can put their self-interest first and give an opinion or refuse to do so. But I certainly don’t believe this one qualifies. So, no, I won’t make additional money by analyzing these “products”. And, if I did otherwise, I would feel as if I were selling my soul.
                  I think passively investing in sound private commercial real estate properties can be some of the best investments out there since the market is "less efficient" than publicly traded markets, and less subject to swings in sentiment, psychology and irrationality. There can be some fantastic yields and margins of safety in private CRE that you can't get in the public markets. And there is nothing in public markets to match the tax advantages in non tax deferred accounts.

                  In some ways you are no more "placing a bet" on a commercial RE opportunity than you are buying say the Nasdaq or any publicly traded stock. The Nasdaq fell by 80% in 2000-2002. You would have been wiped out in vehicle that is "subject to SEC scrutiny". Peleton was "subject to SEC scrutiny" and it just went to near zero and investors got wiped out (and there are thousands more like that over the years). Enron went to zero and it was "subject to SEC scrutiny".

                  I guess the answer to my question on getting help on private CRE investments is we smaller accredited investors are mostly on our own (and networking with like minded investors in places like WCI) when it comes to deciding which CRE opportunities to invest in. Extremely wealthy people can have family offices do this for them. But mainstream financial advisors are just not set up for this and do not have the expertise on staff. Oh well.

                  Comment


                  • #10
                    Originally posted by BobbyC View Post

                    I think passively investing in sound private commercial real estate properties can be some of the best investments out there since the market is "less efficient" than publicly traded markets, and less subject to swings in sentiment, psychology and irrationality. There can be some fantastic yields and margins of safety in private CRE that you can't get in the public markets. And there is nothing in public markets to match the tax advantages in non tax deferred accounts.

                    In some ways you are no more "placing a bet" on a commercial RE opportunity than you are buying say the Nasdaq or any publicly traded stock. The Nasdaq fell by 80% in 2000-2002. You would have been wiped out in vehicle that is "subject to SEC scrutiny". Peleton was "subject to SEC scrutiny" and it just went to near zero and investors got wiped out (and there are thousands more like that over the years). Enron went to zero and it was "subject to SEC scrutiny".

                    I guess the answer to my question on getting help on private CRE investments is we smaller accredited investors are mostly on our own (and networking with like minded investors in places like WCI) when it comes to deciding which CRE opportunities to invest in. Extremely wealthy people can have family offices do this for them. But mainstream financial advisors are just not set up for this and do not have the expertise on staff. Oh well.
                    The is a huge difference between private and public investments , be it debt or equity in terms of risk. Family office and REIT’s are not the only way to do it. PE firms as well as specialty firms. The problem is the overhead cost to vet deals is huge, either way.
                    The crowd sourcing to accredited investors, places the burden on the investors.
                    Sarofin has a separate real estate entity. https://www.sarofim.com/direct-separate-accounts.html

                    These type of firms primarily serve institutional investors. Private is a $5m minimum. Banks also have investment banking divisions the handle private investments. The minimum there was $10m.
                    Size matters and you are correct about the integrity importance in any Private CRE deal.

                    Raising money for CRE is expensive. Barrier to entry is size of investment. Crowd funding allowed accredited investors with less funds. It has additional risks no doubt.
                    ThorEquities just sold an apartment building for $132m.
                    https://www.houstonchronicle.com/bus...y-16747016.php
                    CRE is a big business. Most physicians don’t have the capital or access to the professionals.
                    That is real risk.
                    Last edited by Tim; 01-21-2022, 07:24 AM.

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                    • #11
                      Based on what I am reading here, looks like the ones receiving advice on private real estate investments are individuals rich enough to hire an army of analysts or be a big financial institution.

                      I think if someone teaches themselves accounting, investing and is willing to spend time reading on the subject, finds private real estate guys who have years of experience with good reputations, they can do well for themselves.

                      I'm not in that position yet, but curious how docs like WCI pull it off. Naturally he's spent a lot of time teaching himself, so it's gotta start there no matter what to become savvy enough.

                      Thanks all

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                      • #12
                        I happen to be heavily invested in PP deals/ syndications (my overall portfolio would probably make a lot of people here super anxious haha), and yeah, it was absolutely a ton of work to find and vet my current curated list of sponsors. My wife did not appreciate it. All solo learning, no handy army of analysts. Internet search, bigger pockets forum lurking, reaching out individually to all potential candidates, having phone/Skype conversations, looking at their history/deals/performance...in my opinion though, that was the most important but also time consuming thing, to vet the sponsors. Now, do I look at the current PPMs and run the numbers to make sure everything checks out? Yeah, most times I do (Brian Burke's hands off investor is an excellent read for that), but not always. If there are any questions, I call the sponsor and have a conversation. This is a relatively small niche. A lot of sponsors have a reputation that they do not want to lose. A lot of sponsors want to do right by their clients, because they feel responsible for handling somebody else's money. The relationships tend to be more personalized. In the end, for me this a gestalt thing, making a decision to invest in a particular deal, akin to how we sometimes make our clinical gestalt diagnoses.
                        I know, maybe I'm too naive, haha. I don't have much data to know if it's worth it, only 2 out of 5 deals have gone full (but shortened, exited in only~2-3yrs) circle, with pretty impressive results so far. I'll keep everybody updated.

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