Shareholders are about $50 billion worse off for having put money into non-traded real estate investment trusts rather than exchange-traded versions, a legal consultant for investors said on Tuesday.
The figure represents the difference between the performance of more than 80 non-traded REITs and the performance of a diversified portfolio of traded REITs over two decades, said Craig McCann, principal of Securities Litigation & Consulting Group, speaking in New York on Tuesday at the 2015 Reuters Wealth Management Summit.
He said upfront fees help explain the difference, and called the illiquid products hard to analyze. "If you're selling a high-cost product, typically you make it opaque," McCann said.
McCann's firm in Fairfax, Virginia works as a consultant for investors involved in arbitration disputes with providers of non-traded REITs, and for claimants in cases filed against brokerages.
Non-traded REITs are largely sold by independent broker-dealers such as LPL Financial Holdings (LPLA.O) and Cetera Financial Group, who sell products and services through brokers who are not direct employees.
REITs invest in a wide range of real estate from apartments to hotels to strip malls. Non-traded REITs often have higher fees for investors than publicly-traded REITs and can be harder to cash in.
The Financial Industry Regulatory Authority has cautioned brokerage firms about the way they market non-traded REITs after a review by the Wall Street watchdog revealed problems, according to a regulatory notice.
McCann said his calculation of a roughly $50 billion "wealth loss" to investors from non-traded REITs is fleshed out in a paper he co-wrote. It is expected to be published in coming months by Investments & Wealth Monitor, a trade journal of the InvestmentManagement Consultants Association, which offers credentials to brokers and financial planners.
McCann said in the paper that it is difficult to amass data to study the non-traded REITs, which he called troubling since they have taken in about $116 billion from investors over the past 25 years.
The paper analyzes returns for more than 80 non-traded REITs and compared their performance with a diversified portfolio of traded REITs.
While some non-traded REITs have done well, that can be explained by factors such as a focus on hot real estate markets like New York, he said.
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(Reporting by Ross Kerber and Suzanne Barlyn. Additional reporting by Jed Horowitz; Editing by Nick Zieminski)
