Dangers Lurk in Real Estate Partnerships, Experts Agree
It may take investigators months to determine whether Hill Williams Development Corp.’s fund-raising partnerships were a premeditated scam or simply a business plan gone south.
Regardless, it should never have been recommended to retirees living on fixed incomes, experts say, because investments in a real estate limited partnership are inherently risky and cannot be liquidated quickly, so should be reserved for younger people who have an opportunity to recover from losses.
“It’s not enough for a brokerage merely to approve a product for sale,” said John Lawrence Allen, a securities attorney in Carlsbad and author of the recently published book, “Investor Beware.” “A brokerage has a duty to make suitable recommendations based on a customer’s specific circumstance.”
Broker commissions are usually based on the risk and complexity of the investment, as well as potential for a high rate of return.
For instance, brokers average a 2% to 4% commission for selling stock. A mutual fund, which is a diversified portfolio of securities, pays a 3% to 6% commission. At the top of the commission scale are real estate limited partnerships--one of the more speculative investments--with an 8% to 10% commission. Hill Williams salespeople earned 8%.
Last year, brokers at Titan Value Equities Group Inc. handled $758.9 million in transactions--which, after taking an average commission of 6.3%, resulted in company revenues of $48 million. That rate indicates that Titan specializes in selling higher-commission products, Allen said.
“The best thing we could do for the brokerage community would be to get brokers off transaction-based compensation and put them on salary,” says Florida State University professor Bill Jordan. “If I only make money by selling you something, I have an incentive not to tell the whole truth.”
But Frank L. King, co-founder and president of Titan, said that Titan brokers are kept in check by the company’s “safeguards.”
“Every order that a representative takes is reviewed by two principals before it is executed,” he said. “If we have any question about whether an investment is suitable for a client, we don’t execute it.”
King disagreed that real estate partnerships should be rejected out of hand for all retirees. “You have to look at the entire investment portfolio,” he said. “Of course, you wouldn’t put all of a retired person’s money into a limited partnership.”
King denies that Titan promoted Hill Williams with disproportionate eagerness. “Hill Williams only accounted for about 4% of our total sales,” he said. “It was just another program.”
