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Look out for High Commission Securities Products

  • Anytime you are being pitched an investment by a financial advisor you should be questioning how much he or she is being paid for selling that particular investment to you.  Stockbrokers are essentially salespeople and they often work for commissions. The commission’s stockbrokers earn varies between the types of securities products. In general, securities products that are more complex and high risk offer better commissions. Unfortunately, the high commissions stockbrokers earn may provide them with enough incentive to make unsuitable investment recommendations.  The following includes some of the highest commission earning securities products:


    Non-traded REITs are attractive to investors because they advertise a higher rate of return than their traded counterparts without the worries of stock market fluctuations. The catch is non-traded REITs also carry higher fees than traded REITs. The upfront load charge, split between the sponsor offering the product and paid to the management company for overseeing the properties, can range from 12-15%. The commission to the broker can range between 7-10% of the value of investor's ultimate purchase of shares. Assuming the high-end fee of 15%, the ultimate effect of these fees is that 1) only 85% of the investor's dollars end up actually purchasing shares, and 2) only 85% of the total pool of money invested in the REIT is put into buying and developing the real estate portfolio.

    Investments in non-traded REITs often lock shareholders into their purchase for the duration of the period the REIT will operate until it ultimately goes public on an exchange, liquidates its holdings, or merges with another REIT. This time period can be seven to ten years. During that time, the shares are illiquid and cannot be cashed out for full value if the investor needs access to the principal in the case of a financial emergency.



    Many investors that end up in TIC investments do not purchase the investment as a "security" but as a property interest in exchange for another real estate holding the investor already owns. This "like-kind" exchange of real estate properties allows an investor to sell off one real estate holding and move the proceeds into another, an exchange that nets deferment of taxes on the sale of the first property. Because the sale of TIC interests requires a formal offering memorandum in the vein of private placement investments, they are often classified as securities for sales purposes even if they qualify as real estate for IRS 1031 exchange purposes. Because of this, licensed brokers are needed to sell the TIC interests to investors.

    Brokers fees on the TIC investment are often around 7% on the transaction. Because brokers are required by regulation to conduct their own due diligence on the TIC investment, some TIC sales include an extra 1% on top of the commission to complete that "due diligence." The failure of some of these brokers to undertake this due diligence has led to regulatory scrutiny and litigation against the broker dealers offering these properties.



    Private placements, or private offerings, are securities issued by a corporation to investors outside the public markets. Most private placements are exempt from SEC registration, but the client putting up the capital must be an "accredited investor." An accredited investor must have a net worth of greater than $1mm or have a yearly income greater than $200,000 per year as an individual or income greater than $300,000 per year jointly with a spouse. These limitations exist because these types of investments are often highly risky and are illiquid; i.e., they are nearly impossible to resell to get the cash back out. Investors are often attracted to private placement investments due to the high rate of return on the investment; yet these returns, if they happen at all, can take years to pay out. If the company invested in fails during the period of the investment, the money is gone and the investor is out everything. Broker-dealer commissions on private placements are also quite high, providing ample incentive to pitch them to clients seeking income. Commission fees for brokers on the sale of private placements can be as high as 7-8%.


    A promissory note is note agreement for a direct loan made by an investor to a small corporation or other venture. Promissory notes may be pitched to potential investors in the same vein as a private placement or a bond. In this way the investment may seem as "safe" as more traditional investment opportunities but will tempt investors with double-digit rates of return. Broker commissions on promissory notes can be extremely high. Even on the most legitimate notes can carry fees of between 2% and 10%. Fees can be as high as 30% to 50% in less legitimate offerings, especially when the seller is not licensed to broker these types of securities or the broker is working outside the authority of the dealer firm to market notes intended for sale to institutional investors to individuals.


    Structured products are investment notes underwritten by banks or investment houses that makes a "bet" on the performance of some underlying equity or select group of equities. The "note" guarantees payment of a set amount by a particular date and is bought for some discounted price below that amount. Because the product is so complexly structured through the underwriter, the risk is not always directly linked to the underlying equity. Structured products do not trade on any public exchange so investors owning these products are usually locked in until the period for payment comes due. Brokers take about a 2% commission when selling the structured product but can take 3% or more when buying them back because of the severe illiquidity in the secondary market for structured products.


    A Unit Investment Trust ("UIT") is another type of investment similar to, yet distinct from, a mutual fund. Like a mutual fund, the UIT holds some group of underlying securities and then sells "units" to investors based on the net asset value of those underlying investments. Unlike a mutual fund, the UIT usually offers these units in a one-time-only sale and some are not offered on a public market. Though the sponsor of the UIT must buy back the units, there is no guarantee that the NAV paid will recoup the initial investment.

    The fee structures of UITs closely track those of mutual funds and a buyer must pay close attention to the fees associated with buying and selling the units. Unlike mutual funds with distinct "classes," the UITs may be subject to upfront and backend loads as well as ongoing expenses. However, because UITs are not actively managed, the ongoing operations expenses are generally lower than that of mutual funds. When UITs are a good buy, they are generally traded on a major exchange, have very low load charges, and clearly stated annual operating expenses.

    These are just a few high commission securities products that are often pushed on unsuspecting investors. If you were persuaded to purchase a high commissions securities product and have suffered losses as a result of your broker’s unsuitable investment recommendations, you should consult a securities attorney. For a free consultation with a securities attorney, please call 888-637-5510.

    For more information on high commission securities products, please see Beware of High Commission Products.

    The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Vero Beach, Florida.

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