Nontraded REITs Must Survive on ‘Merit’ Under Fiduciary Rule

Some senior housing non-traded real estate investment trusts (REITs) may have won a regulatory victory. After much anticipation, worry and outcry from industry, the Department of Labor (DOL) released its finalized version of its new fiduciary rule, with major changes that spell good news for REITs.

The rule has long been touted by the Obama administration as part of a push to increase retirement savings, transparency and financial accountability for Americans.

One of the most maddening parts of the proposed rule for many in the industry was a list of asset types—including non-traded REITs—that would have been restricted from retirement accounts. Under the new version of the rule, which was revealed earlier this month, non-traded REITs will still be subject to the fiduciary rule, though the list of asset types that were initially restricted has been eliminated.


Many in the industry consider this change to be a big victory, but financial advisors must ensure these products are in the best interest of clients under the new standard.

“The final DOL rule eliminated its ‘restricted list of assets,’ and became more permissive in the final version,” Michael Kitces, director of planning research and partner at private wealth management firm Pinnacle Advisory Group, told Senior Housing News. “However, that merely means that the non-traded REIT isn’t barred from the account. To be actually used in the account, and not create legal liability for the advisor, the recommendation to use the non-traded REIT still has to meet the fiduciary standard.”

Advisors will have to ensure that everything, including the compensation, disclosures and the sales illustrations, meet the fiduciary standard if non-traded REITs are recommended. REITs have never been subject to this level of scrutiny in the past, according to Kitces.


Without the list of restricted assets, the final rule could be considered, in some ways, “a win,” according to Britton Costa, a director at Fitch Ratings within the U.S. REITs division. However, it may be too early to tell how the fiduciary standard will play out for non-traded REITs.

“It remains to be seen whether high-commission investments will be something that advisors recommend,” Costa told Senior Housing News.

Non-traded REITs offer financial advisors and brokers some of the highest commission rates, but the new standard will essentially end that incentive for financial advisors, as the advisors will have to recommend products that are in the best interest of their clients.

“Non-traded REITs will have to survive on their bona fide merits, not their sales incentives,” Kitces said.

The rule is likely to have little effect on the issue of transparency of these assets, according to Costa.

The industry was up in arms before the final version of the rule came out this month, and the initial proposal underwent a lengthy comment period marked by backlash. REITs within the space reacted differently in anticipation of the final outcome. AR Capital, one of the largest sponsors of non-traded REITs, went so far as to stop fundraising for new products in the wake of the speculation that the fiduciary rule could upset the industry, though the company did not take this action solely based on the pending rule. It also faced other significant issues that influenced this decision.

While the final rule offered a much less extreme scenario for non-traded REITs, the implementation of the fiduciary standard still leaves some questions.

“It’s too early to say what the flow-through of this will be to financial advisors and what investments they recommend,” says Costa.

Written by Amy Baxter

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