Raymond Lucia and Non-Traded REITs

Nationally syndicated California radio talk-show host Raymond J. Lucia Sr. is garnering more than potential listeners these days; he’s apparently captured the attention of securities regulators. On Sept. 5, the Securities and Exchange Commission (SEC) ordered Lucia to “cease and desist” from including what the SEC says is “materially misleading information” at investment seminars hosted by Lucia. Among other things, the SEC claims Lucia misled investors by implying he had thoroughly investigated and backtested his “Buckets of Money” wealth management strategy.

Lucia and his company, formerly called Raymond J. Lucia Companies (RJL), allegedly presented lengthy slideshows at the seminars in which Lucia indicated extensive backtesting proved his Buckets of Money strategy would provide inflation-adjusted income to retirees while protecting – and even increasing – their retirement savings. The SEC, however, says that despite the public claims, Lucia and RJL performed scant, if any, actual backtesting of the Buckets of Money strategy.

“Lucia and RJL left their seminar attendees with a false sense of comfort about the Buckets of Money strategy,” said Michele Wein Layne, Regional Director of the SEC’s Los Angeles Regional Office. “The so-called backtests weren’t really backtests, and the strategy wasn’t proven as they claimed.”

As reported in a Sept. 14 article by the Wall Street Journal, Lucia also has apparently made assertions regarding other investment strategies – specifically one involving non-traded real-estate investment trusts (REITs). Among his characterizations, Lucia has referred to the products as “like a bond on steroids.”

Unlike publicly traded REITs, non-traded REITs do not trade daily on a stock exchange. They also have limited liquidity, oftentimes unreliable market valuations, and hefty upfront fees and commissions of up to 15%. Moreover, an investor’s money in a non-traded REIT can be tied up for substantial periods of time, usually up to seven years.

“The fact that you don’t see the price changing over time could give you the false impression that a non-traded REIT is behaving like a bond,” said Jay Hartzell, a finance professor at the Universityof Texas in Austin, in the WSJ article. “But although the capital gains – or losses – are delayed, you’ll still be exposed to the underlying performance of the properties,” he said.

And that can in many cases spell trouble for non-traded REIT investors. Take Connie Beyers, for example. After listening to Lucia’s radio show and attending one of his seminars, an RJL adviser urged the retired school teacher to invest 26% of her household financial assets in non-traded REITs.

According to the Wall Street Journal story, Beyers – who at the time in 2010 was 71 – put 14% of her assets in three non-traded REITs. One, Wells Real Estate Investment Trust II, marked its share value down last November from $10 to $7.47, an instant 25% drop.

“I don’t think the real risk of some of these things was put out there,” Beyers said in the WSJ story.