Because, we work as an Adviser, not a Broker.
Investment Adviser vs. Broker
Although those professionals working in the DST placement sector may seem similar to an outsider, a few providers of DST solutions are Investment Advisers and all the others are Brokers. They each perform very different roles in financial services, as some work for a commission (Broker), others a flat fee (Investment Adviser).
Investment Advisers like us are paid a flat fee or percentage of AUM to advise clients on DSTs, securities and/or manage portfolios. However, Brokers are paid commissions based on the size of the transaction. In return, Brokers will end up charging a much higher commission vs an Investment Adviser, which in a DST transaction which will affect how much of a client’s capital gets actually invested in the DST transaction.
Investment advisers, on the other hand, work on a fee-based system of dispensing investment advice catered towards individual DST client needs and often, provide others advisory services.
A Higher Fiduciary Standard
Investment advisers are also held to a higher legal standard than brokers. In the United States, investment advisers must adhere to the Investment Advisers Act of 1940, which calls on advisers to perform fiduciary duties in regard to their clients’ accounts. Fiduciary duty, which is legally enforceable under the Advisers Act Sections 206 (1)/(2), prohibits advisers from “employ[ing] any device, scheme or artifice to defraud any client or prospective client.”
The standard also imposes upon the adviser the “affirmative duty of ‘utmost good faith’ and full and fair disclosure of material facts” as part of the adviser’s duty to exercise loyalty and care. This includes “an obligation not to subordinate the clients’ interests to its own.” Due to the importance of this fiduciary conduct, most investment advisers can make investment decisions for their clients without first getting the client’s permission.
Brokers, as defined broadly by the SEC as “any person engaged in the business of effecting transactions in securities for the account of others” (which may also include investment advisers), must register with the SEC and a self-regulatory organization. The most well-known broker self-regulatory organization is the Financial Industry Regulatory Authority (FINRA).
Example, assuming a $500,000 DST investment: What does the Client Pay? (What is the cost or fee deducted from the Client’s Capital?)
- Broker (7%) $35,000
- Investment Adviser $15,000
Result: Using a Broker cost the Client $20,000 more in fees just in one small transaction.
At DST Investments, our maximum flat fee for 1031 Exchanges is capped, which for larger 1031 transactions, will save the investor more than a tidy sum. For more information, contact us.