Is your CFP doing right by you?

Q. I am married, we’re both 58 and closing in on retirement. I hired a CFP to invest my IRA in “alternative investments.” The first few years, we did very well with these “alternative investments” — non-tradable REITs or business developments. We want to reinvest as they become liquid, but our CFP said New Jersey restricts this kind of investment — with RIN: 1210-AB32 — to 10 percent of the total account value. Is there really a law restricting our “alternative investments” or are we getting hoodwinked by our CFP?
— Unsure

A. You’re not getting hoodwinked.

RIN: 1210-AB32 has to do with the Department of Labor’s proposal to amend the definition of the term “fiduciary,” said Charles Pawlik, a certified financial planner with Lassus Wheerley in New Providence.

“This rule aims to reduce conflicts of interest as it relates to investment advice provided to employee benefit plan officials and participants, as well as to IRA account owners,” Pawlik said. “An advisor acting in a fiduciary capacity is required to act in your best interests and avoid conflicts of interest when providing investment advice.”

This rule would to amend the definition of fiduciary to more broadly define the term to include advisors that provide investment advice to employee benefit plans, as well as to IRA account owners, Pawlik said.

He said the rule would expand the type of investment advice relationships that would require that the investment adviser act in a fiduciary capacity.

“It is always important to understand whether or not the advisor you work with has a fiduciary duty to act in your best interests, and how the advisor is compensated for the products or services they provide,” he said. “If you aren’t sure, you should ask.”

Many states, including New Jersey, have established investor suitability and concentration standards which put minimum liquid net worth and/or gross income standards in place, Pawlik said.

“These standards may include limitations in terms of the portion of an investor’s liquid net worth that can be invested in alternative investments such as non-traded REITs (Real Estate Investment Trusts) and business development companies,” Pawlik said.

It’s limited to 10 percent of the investor’s liquid net worth in New Jersey, he said. Your liquid net worth would include assets such as cash and readily marketable securities, less your total debts, but would not include the value of your home or car, for example.

Pawlik said if some of the non-tradable REITs you initially invested in have not gone public or don’t plan to provide a public market for their shares in the near future, there may not be a readily available way to sell these investments without being subject to a significant loss of value.

He said each non-tradable REIT has different rules in terms of allowable redemptions. Some only allow for redemptions of your investment in the event of death or disability. Some allow for redemptions based on how long the investment has been held, and potentially result in you receiving less than the estimated fair market value of the investment at redemption. Still others have mandates to provide a public market for their shares or liquidate assets and distribute proceeds to investors by a certain time-frame.

“If there is no public market for the shares, it can be a difficult proposition to liquidate without incurring a sizeable loss on your investment,” Pawlik said. “It is important to understand the characteristics of each of the investment opportunities that are being offered to you, in order to ensure they are appropriate for your situation and meet your objectives.”

You need to consider your overall goals and objectives, risk tolerance and liquidity needs when determining how much of your portfolio to invest in alternatives and other asset classes/investments.

But it’s all subject to any investor suitability and concentration standards.

So nope, you’re not getting hoodwinked.

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