Call them unlikely optimists.
Sponsors of high-fee, high-commission investment products have been among the largest critics of a proposed fiduciary standard for all retirement plan advisors, but after the U.S. Department of Labor released final language for its fiduciary rule, the sponsors of two real estate investment trusts sounded a positive note on the regulation.
“The changes I see are mainly to how investors work with their advisors,” says Mark Goldberg, chairman of New York-based Carey Financial, W.P. Carey's broker-dealer subsidiary. W.P. Carey is a listed REIT that also sponsors non-traded REITs. “There’s going to be a transition period; once that’s behind us, financial advisors will continue to work with their clients albeit in a slightly different regulatory format, and we anticipate from our perspective as an issuer of these types of securities that it will be business as usual for us.”
At JLL Income Property Trust, a Chicago-based sponsor of a non-traded, daily NAV REIT, CEO and President Allan Swaringen agreed.
“We actually view the rule to have very little impact on our real estate offering right now,” Swaringen says. “I think what the DOL came back with is very reasonable.”
So much for doom and gloom.
When it originally proposed the rule last year, the DOL forbade certain asset classes from inclusion in retirement accounts, including products typically carrying high commissions like non-traded REITs, business development companies and variable annuities, limiting advisors to a narrow list of acceptable products.
“The earlier version of the rule definitely had the feel that it was targeting commission-based products, so naturally some of those industry groups became the staunchest critics of the rule,” Swaringen says. “I think those groups were successful; the rule now doesn’t forbid products sold with commissions from being brought into 401(k) accounts."
That list was eliminated from the final version of the fiduciary rule released Wednesday morning, clearing the way for advisors to use REITs in clients’ IRAs under the “best-interest contract exemption,” or BICE.
“It’s quite a big positive for the consumer because they now have a broader selection of investment choices, and certainly for the non-traded REIT industry because they’re now formally incorporated into this rule,” Goldberg says.
As regulators and industry participants debated the proposed rule over the past year, many REIT sponsors argued that the DOL was limiting investor’s options in their retirement account.
Goldberg took part in efforts to educate DOL officials about the investment industry.
“The DOL was intent on making improvements for retirement savers, and I approached them that way and had a productive dialogue with them,” Goldberg says. “They listened. At the end of the day, the difference between the rule now and as proposed nine months ago is night and day — it has been improved upon greatly.”
Goldberg took an unlikely path to the DOL’s offices, starting with a visit to Massachusetts Senator Elizabeth Warren when he was chairman of the Investment Product Association.
“I don’t think anyone would suggest that Sen. Warren is a friend to the industry, but if you have thoughtful dialogue with folks you never know where it might take you,” Goldberg says. “Today I woke up to find out that not only did the DOL listen to us, they made our changes. I’m encouraged that they took the time and effort to make those changes.”
In anticipation of the rule and to serve RIAs interested in offering REITs, JLL created share classes of its product with no upfront sales commissions.
“Historically, we’ve seen the business moving away from the commission-oriented model and towards an investment advice-type business where advisors are paid an AUM fee and have been somewhat agnostic towards the underlying products,” Swaringen says. “We wanted to build a product that anticipated the future growth of the industry.”
Amidst the low-interest rate, low-growth economic environment of the past few years, REITs are sometimes depicted as an effective income stream for retirees and near retirees in lieu of bonds or other income-generating investments.
Swaringen believes that the rule will lead to lower fees for REITs and for investment products in general.
“Advisors operating within the independent broker-dealer world are going to have to ramp up their compliance requirements, their due diligence, and they’re going to have to rationalize products with different fee structures,” Swaringen says. “They’re going to have to support their investment decisions and show why a higher commission REIT is in the best interest of their client, moreso than a lower commission product. It’s going to be hard for them to differentiate.”
That could eventually lead to additional consolidation within the non-traded REIT industry, Swaringen says.
“Eventually, I think you’re going to see stronger players take a larger market share, and then you’ll see investment managers from the institutional side of the business try to take market share from some of the legacy players,” Swaringen says.
In the context of the rule’s final language, both executives voiced support for the fiduciary standard.
“It’s a kinder, gentler rule as it now stands,” Swaringen says. “I think this is a good standard, one that should be applied more broadly.
REITs Relieved Over Fiduciary Rule Changes
April 7, 2016
Call them unlikely optimists.