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)

NEW OPPORTUNITIES

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.

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