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Financial Products- What’s Best?

Jason Labrum opens the show with a story about a new prospective client who at the end of 2019 had 2.9M in investable assets drop to 900k within nearly nine months. After looking into what the portfolio was comprised of, is was apparent that the client had been working with a broker dealer who had sold them two highly commissionable products. The products were BDCs (Business Development Corporations) and Non-Traded REITS. A commission to the broker upwards of 15%.

Alex Klingensmith adds that at a one-million-dollar investment the commission would be paid to the broker dealer first and the client would start with 850k investment. In addition, and unfortunately for this client, these products did not experience the rebound that the market experienced during that nine-month period.

Jason and Alex continue the topic of, Investment Products, a discussion that will help their listeners think about, what is being sold to them and who is selling it. Jason adds that you need to be very wary when buying an upfront commissionable product and ask yourself, “How come there needs to be an upfront commission to sell these products”.

The two products that are highlighted in this show are BDCs (Business Development Corporations) and Non-Traded REITS. These two products seem to continue to be associated with lawsuits and bad press.

Jason begins the discussion on BDCs with a broad overview of the investment product. Alex adds some personal experiences on BDC products that have been brought to the firm by clients and the unfortunate outcomes (small business loans, liquor licenses, and taxicab licenses).

The show continues with Jason and Alex opening a deeper discussion in to BDCs.

Alex shares some history on BDCs and a look into The Investment Act of 1940 and the amendments that were made in the 1980s to allow for BDCs. Jason and Alex discuss further the lack of rules around BDCs.

Jason shares how broker dealers can up sell clients on all the bells and whistles that become available to the BDC investor, like access to private markets and venture capitalists.

Alex adds that catch phrases like, “Private Markets and Venture Capitalist” sound cool to the investor and can make them more interested in buying into the product, making a small investor feel like he can invest like “rich people”.

Jason closes with what BDCs typically invest in and the speculative nature of the investment.

Jason and Alex bring the discussion back to asking, “Why”. Why can this product advertise potential yields of 8% to 10% when traditional bonds are yielding 2% or 3% maybe 4%? You must go back to one of the fundamental principles of investing. Risk and return are related.

Jason and Alex segway into Non-Traded REITS stating that these products are popular and that there are a lot of Non-Traded REITS currently being offered.

Jason shares that there is a big well-known San Diego advisor whose whole book of business was built on Non-Traded REITS.

Jason goes into describing the mechanics of Non-Traded REITS and the similarities to BDCs. He further describes the difference between buying these products from a Registered Investment Adviser (RIA) and a Broker Dealer. Outlining the commission structures associated with broker dealers, calling this “toxic”.

Alex adds the question; Why would you buy a Non-Traded REIT over a Traded REIT?

Jason and Alex further discuss the argument for either.

Jason sums up the topic of BDCs and Non-Traded REITS with specific reasons to avoid these products. For example, hidden commissions, lack of regulation and no requirement to disclose financials.

Jason and Alex close the show with some straightforward advice, “Do not buy a Non-Traded REIT or BDC from anyone other than a Registered Investment Adviser (RIA)”.

In this show you will learn about:

– Business Development Corporations (BDC) as a commissioned product

– Pros and Cons of BDCs

– Non-Traded REITS a commissioned product

– Reasons to avoid Non-Traded REITS

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