Nontraded REITs -- the illiquid and scrutinized but potentially high-yielding real estate securities -- aren't for everybody, says Nicholas Schorsch, the executive chairman of RCS Capital. And, he claims, RCS' burgeoning empire of advisors and brokers will face "no pressure" to sell the products to their mass affluent clients.
That pledge may come as a relief to the brokers and financial advisors from Cetera Financial Group and J.P. Turner, two independent broker-dealers that RCS agreed to buy last month. Because Schorsch is also chairman and CEO of American Realty Capital, the country's largest sponsor of nontraded REITs, it was hardly surprising that those advisors were concerned that they might be compelled to sell nontraded REITs to their clients.
Not going to happen, maintains Schorsch, who sat down for an exclusive interview with editors of Financial Planning. "There will be absolutely no pressure to sell any of our products," Schorsch declares. "If you want to sell them, sell them, if you don't want to sell them, don't."
INAPPROPRIATE FOR 'MANY'
American Realty Capital sells its products through, among other distributors, independent B-Ds owned by RCS -- a list that already includes First Allied Holdings, Investors Capital Holdings and Summit Financial Services.
Schorsch acknowledges that, in "many" cases, nontraded REITs are not appropriate investments for RCS' target market of mass affluent investors -- a group he defines as having as little as $300,000 in investable assets.
He says about 25% of advisors "across all platforms" sell nontraded REITs, he estimates.
Schorsch says he is "very supportive" of FINRA's recently proposed new guidelines for calculating the value of nontraded REITs, taking fees and commissions into account.
"Transparency is transformational," he says; "the more information we can give the investor the better."
BOOST FOR SALES?
The new FINRA guidelines, if approved by the SEC, may reduce nontraded REIT sales by 10% to 20% in the first five months after implementation, Schorsch estimates.
But once the new valuations are understood, the new rules may actually boost sales, he argues.
"People will know exactly what the NAV is, they'll know exactly what the commission is," Schorsch says. "If they choose to pay it, then they're fully aware. If they don't choose to pay it, they can buy the same product without a load."
"We don't really care how [nontraded REITs] are sold," he continues. "What we care about it is that the investor understands what he is buying. If the product is better, it will do better business. We want to see this industry grow from $20 billion a year, which it was last year, to $50 billion a year."
What's more, Schorsch says he thinks FINRA's proposed guidelines for nontraded REITs will help improve the reputation of the companies that sell them.
"Most of [American Realty's] nontraded REITs already comply," he says. "But we can't do it alone. There are still companies that charge all kinds of loads and fees and don't disclose them. Let's fix that."
- FINRA to Examine REIT Fees
- Schorsch's Expanding Empire to Target Mass Affluent
- Exclusive: What's on Nicholas Schorsch's Shopping List?
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