I’ve received some good questions over the past year from my investors that I wanted to share here in this blog. Questions such as: What exactly is a broker-dealer? How does it work when real estate investing through a broker-dealer? What are the benefits of investing through a broker-dealer?
What is a broker-dealer?
A broker-dealer (BD) is typically a firm who effects investment transactions (buy, sell) on behalf of its investors for a fee. A BD operates in a highly regulated field and must be registered with the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC). FINRA is under the auspices of the Securities and Exchange Commission (SEC) and was formed as a result of the Great Depression in the early 1930s and the need to ensure investors had adequate publicly available information to evaluate potential investments. With these organizations, a system is in place to oversee BDs and to minimize fraud thereby protecting investors. So, this is all a good thing and in place for a darn good reason.
How does it work when real estate investing through a broker-dealer?
Registered representatives (also called placement agents) are individuals who work under the oversight of a BD firm. This is similar to how real estate agents work for a brokerage firm (broker). With regard to direct real estate investments, a registered rep of the BD firm would present opportunities to an investor to purchase an interest (or shares) in a real estate asset (or a fund of assets). However, certain investor checks-and-balances must be met. The BD must verify the investment is suitable for the investor before allowing that investor to move forward with the investment.
What are the benefits of investing through a broker-dealer?
Investor Care. A BD is subjected to strict standards and oversight…again, to protect the investor. These standards include Know Your Customer (KYC) and Anti-Money Laundering (AML). BDs must verify the investment is suitable for the investor. It’s an extra step for the investor (albeit a very quick step), but hopefully shows that we treat each investor with the utmost care.
Due Diligence. Regarding due diligence, we only partner with operators who we’ve done business with in the past and know their track record. We know them personally. The onboarding of each operator group to our platform is very thorough. For all operators on our platform, we had face to face meetings with them and perform background checks on all principals in each group before onboarding them. One of our BD principals is required to visit each asset during the due diligence phase. Those visits are done together with the operating partner (also called sponsor). We also hire a third party analyst to review all deals. We go the extra mile. This is a nice layer of vetting before the opportunity is even presented to an investor!
Skin in the Game. Our BD group invests alongside our investors in every deal. This is important because it shows alignment of interest with our investors. We also have our reputation at stake and maintaining a strong track record and trust with our investors is crucial. We have a lot of skin in the game.
Fees. We do not charge any fees beyond our placement fee. The placement fee (typically 2 – 3%) is “baked into the deal” and is no different than investing directly with the operator. In other words, the net returns to the investor (i.e., returns after fees are paid) are no different by investing through a broker-dealer than investing directly with an operator. This is a critical fact.
We remain in the deal as the liaison to our investors and provide monthly updates on how the deal is doing (e.g., status of property improvements, rent rolls, financials, etc.). We do not charge an asset management fee or any other ongoing fees, yet we still provide an extra layer of due diligence throughout the investment timeline.
A Relationship-Driven Investor Experience. We are relationship-driven and do not consider our business to be merely transactional. We will provide monthly updates about each investment. We will provide quarterly financials. You can speak with us at any time if there are any questions that are not answered in the updates/financials. We also provide a portal that delivers a convenient, secure location for investors to see all investments, distributions and high-level return information for the investments made through us. We have close relationships with our operating partners and with our investors. These relationships are very important to us. For us, it’s not just a transaction, collecting a fee and then moving on.
