Are The Proposed Fiduciary Rules Good For Investors?

The additional liability on investment advisors would provide greater transparency for investors and more information to help them make the right decisions, KBS’s Chuck Schreiber tells GlobeSt.com.
Schreiber: “The more people know, the better off we all are, I think.”
The additional liability on investment advisors that the DOL’s Fiduciary Rule would create would provide greater transparency for investors and more information to help them make the right decisions, KBS’s CEO Chuck Schreiber tells GlobeSt.com.
The rule has been the source of much anxiety and debate since its initial proposal in April 2015. While some pundits are eager to embrace the new “no load” era for real estate investors (removing hidden investment fees and other surprises), others are wondering if financial organizations will be able to survive without their current fee-based model.
Although the fiduciary rule is not officially set to launch until 18 months from now, some real estate investment firms have already started to prepare by aligning themselves with the rule now—giving a major benefit to investors that could drive an uptick in real estate investing. In fact, KBS recently launched a new platform, KBSDirect.com, for accredited investors and advisors to invest in KBS Growth & Income REIT, a professionally managed portfolio of institutional-quality commercial real estate properties, with no load or upfront fees to investors. To date, the REIT already has three equity properties valued at approximately $150.4 million.
We spoke with Schreiber about the rule, its impact in CRE and the pros and cons of aligning with the “no load” portion of the rule now instead of waiting.
GlobeSt.com: How would you define the new fiduciary rules and their impact on real estate deals?
Schreiber: My perspective on this rule is that it was scheduled to be effective, and then it was not effective, and then it was delayed, so if it is ever going to be law is a question mark. People will be impacted by this rule in both a positive and negative way, so they may take a different perspective. My thought is that it will place more responsibility on financial advisors for real estate-related investments or products in which that advisor is receiving a commission. In the terminology being used, advisors may be responsible for justifying that the investment is the appropriate investment for their clients. This creates some liability for the advisor. I’m not suggesting that the advisor would have any different perspective—that may be necessary from a documentation standpoint—but that this liability may modify the perspective of individual advisors as well as broker/dealers who specialize in commissioned products. There are financial advisors who as far back as two years ago modified the structure of their organization, group or firm and reps affiliated with that firm in their interaction in managing their relationship with their clients.
GlobeSt.com: What are the previously existing challenges that are driving the new fiduciary rules?
Schreiber: It really started with FINRA, which enacted different rules for the disclosure of valuation for investments that have been made in the past. The 1502 FINRA rule provides for a clear disclosure of the net asset value of an investor’s position and holdings. The net asset value would net out any loads or commissions. The perspective was to confirm full disclosure of the upfront costs of the commissions that were paid related to the investment. That’s what really started this discussion.
FINRA began analyzing this 10 years ago, questioning what was the appropriate commission to be paid. As a sponsor, as long as investors were aware of the commission a financial advisor was receiving, we were happy with that. We applauded this disclosure and thought it was clearly appropriate. But when the DOL got involved, it raised a whole new issue. Whether this law and the rules are enacted as written today or even modified—and it may be modified—it already changed the discussion about commissioned products. It’s a great discussion. Just as anybody who hires an attorney should be asking about fees, this rule broadens the discussion to the investment manager, which is a very good thing.
GlobeSt.com: How have organizations that already align with the “no load” portion of the rule prior to it passing in 2019 done this, and why?
Schreiber: At KBS, we have a non-traded REIT, and so there are some questions about the rules and liabilities that are impacting decisions for broker/dealers and their advisors in those companies. Peter Bren and I decided to declare the net value of the asset we owned and agreed to pay all upfront costs and not pay a commission out of upfront dollars. There is no commission or acquisition fee, with the intent to have 100% of the dollars an investor is committing into the fund go into the product. I don’t know of any other fund that has this. We’re excited about this and are marketing this directly to online investors and through registered investment advisors, who are actively reviewing this for their clients. Comparing this to other non-traded REITs, some firms are closer to a 15% load, so how long does it take to get back to the original asset value? In our situation, any appreciation is recognized above the $100,000 mark, which makes it a great investment for investors. We’re simply charging our asset-management fees, but no acquisition fee and no commission no reimbursement per cost. Since there is no commission, it complies with the rule.
GlobeSt.com: What are the benefits of the rules to real estate investors, and what are your predictions on what lies ahead?
Schreiber: Transparency. I think investors are much more knowledgeable about the opportunities, whether they’re investing through their 401k plan or whatever. With the potential new tax bill, there may be a reduction in corporate taxes, so the question I ask is, who is this going to impact? I saw an analysis that said 52% of working Americans have some investment in securities, so people are knowledgeable about investment, and the topic of fees is the first item that’s reviewed—but also, the track record of the sponsors of the investment and the investment strategies for the investment. The more people know, the better off we all are, I think. They should go to an investment advisor and set up a relationship with them to determine what is an appropriate real estate investment for them. The real estate business is a fairly simple business—there are a lot of details, but it’s fairly simple. You can learn in an hour how an investment works in real estate.
By: Carrie Rossenfeld (GlobeSt)
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