New Finra pricing rules for illiquid investments shaking up IBD industry

Firms need to be proactive in conveying information to their advisers

Jan 26, 2016 @ 4:08 pm

By Bruce Kelly

The Financial Industry Regulatory Authority Inc.'s new pricing rule for illiquid investment products is shaking up both the sponsors that create and issue products such as nontraded real estate investment trusts as well as the broker-dealers and advisers who sell them.

Broker-dealers have to be more proactive with their advisers who sell such investments. And product sponsors should watch out for greater opportunities to change products and reach new advisers to sell them due to the intense changes facing illiquid alternative investments.

Those were two of the conclusions reached by an industry panel Tuesday in Orlando, Fla., at the annual conference of the Financial Services Institute, an industry trade group for independent broker-dealers.

The goal of the new pricing rule, which takes effect in April, is to bring greater transparency to the pricing of nontraded REITs and other illiquid products as well as potentially bring down the costs, which currently typically include a generous 7% commission to advisers.

(More: IBDs trumped by Obama on DOL fiduciary, but vow to fight on)


Broker-dealers must be pro-active with their registered reps and clients in discussing the impact of the rule change on clients' account statements, said Derek Anderson, a partner with Winget Spadafora & Schwartzberg.

His concern is whether broker-dealers are having those conversations, he said. Some firms are currently not acting in a pro-active manner about the rule change, and others are unsure of what their reps are doing, said Mr. Anderson.

“The field needs to understand the product when selling this,” he said, in discussing the potential different share classes that nontraded REITs will employ in the future.

Currently, the A share, which has an upfront load, is the most common share class of nontraded REITs. Many in the industry believe that a “T” share, which has less of a load but pays the rep over time with a trailing commission, will be the industry norm.

Meanwhile, the market is seeing any number of opportunities for nontraded REITs and other illiquid alternative investments to evolve, said Patrick Miller, president of SC Distributors. Will products raise smaller amounts of money and work over shorter time periods, Mr. Miller asked. Can the nontraded REIT industry use these changes to grow the industry and reach advisers who currently do not sell such products?

And with scale and size becoming more important in a time of many changes for nontraded REITs, will the industry see a consolidation of product sponsors over time, Mr. Miller asked.

“If the industry gets this right, there is an opportunity for this market,” he said.


What do you think?

View comments

Recommended for you

Sponsored financial news

Featured video


Top questions surrounding future of DOL fiduciary rule

Reporter Greg Iacurci and managing editor Christina Nelson discuss the biggest uncertainties springing from the Fifth Circuit Court of Appeals' decision to vacate the regulation.

Latest news & opinion

What the next market downturn means for small RIAs

Firms that have enjoyed AUM growth because of the runup in stocks may find it hard to adjust to declining revenues if the market suffers a major correction.

DOL fiduciary rule likely to live on despite appeals court loss

Future developments will hinge on whether the Labor Department continues the fight to remake the regulation its own way.

DOL fiduciary rule: Industry reacts to Fifth Circuit ruling

Groups on both sides of the fiduciary debate had plenty to say.

Fifth Circuit Court of Appeals vacates DOL fiduciary rule

In split decision, judges say agency exceeded authority.

UBS, after dumping the broker protocol, continues to see brokers come and go

The wirehouse has seen 14 individuals or teams leave and five join for a net loss of $2.4 billion in AUM


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print