You have a wealthy new client with a large portfolio built around a mix of stocks and bonds. She left her last advisor because the plan he drew up wasn’t delivering enough income.
Problem is she isn’t keen on the alternative investment strategies that can generate the cash flow she’s looking for. How do you convince her a little risk can be beneficial?
There are two pieces to this dilemma:
- Choose what to add so the portfolio meets her objectives.
- Package your advice so she’ll want to take it.
Dan Hallett, vice president and director of asset management at HighView Financial in Oakville, Ont., suggests private REITs for clients looking to pull in more income.
“They offer a healthy, regular cash flow, and provide additional portfolio diversification,” he says.
Private REITs typically pay distributions of about 8% yearly. So a client investing $100,000 can expect monthly income of $650 to $700.
“Publicly traded REITs aren’t paying anything near that amount,” Hallett says, though he notes this doesn’t mean private REITs are always better. Publicly traded REITs “have better governance and far more regulation and disclosure. They also have better liquidity,” he explains.
When the financial crisis arrived four years ago, publicly traded REITs were hit harder because “they are affected by short- to medium-term stock market noise,” Hallett notes. When the market plunges, a part of that drop is due to irrational investor panic—private offerings are less susceptible.
But do good research when looking to add REITs. “Read the offering document front to back. No skimming, no scanning, no jumping around,” Hallett says, adding advisors should take a “guilty-until-proven-innocent” approach to due diligence.
“In their marketing material they’re going to give you all the good stuff up front. If there’s anything in the offering you won’t like, you’ll have to roll up your sleeves and find it.”
Investors should be alert to potential conflicts of interest. Are the day-to-day operations of the REIT’s property holdings handled by a management firm owned by one of the REIT’s principals?
“It’s one thing to outsource tasks through a competitive bidding process. But it’s a different matter when you have ownership on both ends,” Hallett says.
One offering document Hallett examined provided no information on valuation. “I would expect to see something telling prospective investors how the REIT units are valued to make sure pricing is as fair as possible for both buyers and sellers,” he writes in an article on private REITs for The Wealth Steward.
How to deliver
Some clients settle into a comfort zone and develop an aversion to changing their portfolio structures. Their objectives require it, the investment’s appropriate, but they can’t let go of old standbys despite consistent underperformance.
To help clients make the right choice:
- Sit down with her and review goals, time frames, and the level of risk she’s willing to take on.
Instead of proposing a single plan, compare and contrast. Show her two portfolios—one that includes the private REIT, one that doesn’t.
Explain why the components of the plan lacking the REIT simply won’t add up to the income she wants. Then explain how the portfolio that includes the private REIT helps meet her objective.
- This clarifies the decision she has to make: either change her investment objectives to fit her conservative portfolio mix— the wrong choice—or opt for strategies that improve her chances of reaching her goals.
“Don’t expect it to happen all in one meeting,” Hallett says.There’s a lot to take in, so patiently deliver your advice in manageable doses.
Originally published in Advisor's Edge