2.3 – Say No to Financial Planners & REITs

Passive Investor Accelerator eCourse #2 – Seeing The Matrix 2.3 – Say No to Financial Planners & REITs

Financial Planners

Please review the article about our view of Financial Planners. But basically we don’t really like them because:

That being said you, your spouse, or your family members still want to have a financial planner to keep things less awkward if you don’t see eye-to-eye on finances.

The financial world is full of an alphabet soup of designations. Here are some of the most common distinctions:

Certified Financial Planner (CFP®)

This is a professional designation given to professionals who have met certain rigorous requirements of competency in all areas of financial planning. This does not mean people with this designation are more qualified than others, it just means that they have obtained the knowledge to have a full understanding of financial planning as a service. This is a challenging designation to obtain in both time and effort to prepare and take the required test. While this is a valuable designation for a financial advisory professional to have, it is not limited to financial advisory professionals. Anyone can gain this designation if they qualify. Attorneys, insurance agents, accountants, and other related professions can obtain this designation, so it does not define the type of work the person does, just that they have qualified with the Certified Financial Planner Board of Standards Inc. While the person with this designation should be more than qualified to provide financial planning services, make sure you understand what their qualifications or licenses are for the services which they provide.
Chartered Financial Analyst (CFA)

This is a professional designation given to professionals who have met certain rigorous requirements of competency in all areas of accounting, ethical and professional standards, economics, portfolio management, and securities analysis. This is one of the most difficult designations to obtain. It takes a minimum of 3 years and 900 hours of study to pass three separate tests. Passing these tests and earning the CFA designation would be the equivalent of having a knowledge base of a doctorate in finance. This designation is rarely seen in professionals who are not portfolio managers, hedge fund managers, or securities analysts. While this designation is becoming much more common in the finance industry, always check to verify that the financial advisory professional has the designation he or she portrays to have.
Chartered Financial Consultant (ChFC)

This designation is similar to the CFP in that it denotes a proficiency in advanced financial planning including income tax, insurance, investment, and estate planning. Earning the designation requires a minimum of 3 years in the financial services industry.
Certified Fund Specialist (CFS)

This designation demonstrates the proficiency with mutual funds, ETFs, REITs, CEFs and similar investments. I have never met anyone with this designation, but it has been around for 24 years, so there must be a number of designations in existence.
Certified Investment Management Analyst (CIMA)

This designation has a focus on risk management, due diligence, investment policy and asset allocation. This designation is typically used for people who research fund managers for their clients or institutions. This is not commonly used for financial planning or financial advisory professionals.
Chartered Market Technician (CMT)

This designation is achieved by passing three exams offered by the Market Technicians Association (MTA). People with this designation have proven to be experts in technical analysis. This is a rigorous set of tests to pass. A financial advisory professional with this designation will be an expert in technical analysis given this thorough testing period. This is a newer designation which is not as highly respected as the CFA, but it can be equally challenging to pass and is gaining notoriety in the merits of holding it as a designation. This is not as commonly seen with financial advisory professionals. This designation is more commonly seen in traders or portfolio managers.
Certified Public Accountant (CPA)

This designation is earned by passing a rigorous exam in accounting and tax preparation. This designation does not denote an expertise in financial planning or investments, only accounting and tax. Investors typically have a high level of trust with their CPA or tax preparer, however, they should understand the difference between tax and investments. Most CPAs do not provide investment advice to their clients. This is not commonly seen with financial advisory professionals.
Hybrid

This is not a title or designation but rather my description. There are many financial advisors who are both Registered Representatives (RR) with a broker-dealer and Investment Advisor Representatives(IAR) with a RIA at the same time. This is not a conflict for the client. However, you as the client should be aware of it since this allows the advisor to be compensated via commissions, 12b1 fees, and other forms of compensation which are not always directly visible or transparent to the client. The ability to be paid via commissions (RR) vs fee-only(IAR) is a conflict in this way. If the financial advisor is a hybrid then you should assume that they can be paid via commissions even if they are being paid a fee based on AUM.

At the end of the day these credentials just means that the individual has passed a certification test and therefore are able to sell securities or other investments in the heavily regulated world.

REITs

Real estate investment trusts, REITs, are a convenient way for inexperienced investors to gain exposure to real estate investing, especially for the first time. Modeled after mutual funds, publicly traded REITs purchase, own and manages real estate properties. REITs give individual investors the opportunity to invest in a portfolio of income-producing real estate. Investors do not need a large amount of time or resources to invest in REITs but for the smart, savvy investor, REITs should never be an option.

REIT Vulnerability

REITs are highly vulnerable to recessions on two fronts:

Correlation to the Stock Market

Because publicly traded REITs are highly correlated to the stock market, recessions always lead to an associated drop in REIT prices. In fact, since 2008 REITs have actually proven more volatile than the broader market. This is because the balance sheets of REITs are very susceptible to external shocks. It is caused by REITs’ inability to retain significant amounts of cash flow. Without cash to ride out downturns, they are forced to liquidate assets at bargain prices. During the 2008 financial crisis, as stock prices fell, equity volatility for REITs increased. Yuichiro Kawaguchi, J. Sa-Aadu, and James D. Shilling, (December, 2012) REIT Stock Price Volatility during the Financial Crisis, biz.iowa.edu.

Accordingly, not only are REIT share prices susceptible to recessions and downturns but they are hypersensitive to market shocks compared to the broader market. We saw this in 2020’s Coronavirus pandemic where real estate REITs plummeted with the stock market where commercial real estate prices remained a solid place to preserve your wealth in the tough times.

Rents

Economic downturns not only affect REIT share prices, but with the associated reduction in rents, REIT profitability and dividends also suffer as a result.

Limited Benefits of REITs

A variety of factors limit the upside benefits of investing in REITs:

Highly Leveraged

One of the main downsides of REITs is because they’re highly leveraged, an increase in interest rates and therefore the borrowing rate directly impacts the cost of acquisitions and refinancing. “Besides, higher interest rates will eventually slow down economic growth and hurt occupancy rates, rents and income payout rates.” Panos Mourdoukoutas, (August 10, 2017), Good, Bad And Ugly REITs, forbes.com. In the current environment, with historically low interest rates, the only way is up. Increases in interest rates will result in downward pressure on the bottom line of REITs, therefore limiting upside potential.

Lack of Diversification

Another factor limiting the upside benefits of REIT investment is the lack of diversification and competition. Most REITs specialize in a single property type, and a weakness in that particular segment of real estate could limit returns. This can currently be seen in the residential market. Because residential REITs have grabbed investor attention in recent years and been flush with investor cash, this has resulted in a glut of supply. Usually higher supply curtails the landlord’s ability to demand higher rents and leads to lesser absorption. These may keep the growth momentum of rent at check.

Pre-Established Term

A REITs pre-established term can also limit the upside of it’s investment. Because REITs typically have a fixed maturity of 5-10 years, at some point, the properties must be sold regardless of market conditions. That means if the REIT matures at time when property prices are down, a drop in your investment will be unavoidable.

Re-Investment Cap

Finally, because REITs can only reinvest a maximum of 10% of their annual profits back into their core business lines each year, this limits their growth and upside potential as well.

Investors often align their investment philosophy with that of the management who head the companies that they seek to invest in. As with most public companies, access to the management team of REITs is prohibitive. This limits an investor’s ability to analyze a team’s competence and vision going forward.

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Passive Investor Accelerator eCourse

2.3 – Say No to Financial Planners & REITs

Financial Planners

Certified Financial Planner (CFP®)

Chartered Financial Analyst (CFA)

Chartered Financial Consultant (ChFC)

Certified Fund Specialist (CFS)

Certified Investment Management Analyst (CIMA)

Chartered Market Technician (CMT)

Certified Public Accountant (CPA)

Hybrid