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Risk Meets Real Estate in New Advisor Pilot

Should independent financial advisors help clients invest directly in real estate? RealCrowd's REAllocate is on the cusp of launching an advisor-centric platform to help them do just that.

Outside of considering REITs, some financial advisors are nervous about putting clients into real estate investments. Financial incentives don’t always line up for advisors, as investing in real property doesn't always align with a fee-based advice model or a commission-based business. Then there’s comfort and familiarity; if an investment goes poorly (and it can) the advisor could be in bad shape with his or her client with no easy way out.

As in other areas of financial services, technology is stepping in to fill a perceived need. Following the Jobs Act, an updated version of which is being considered by the Senate Committee on Banking, Housing, and Urban Affairs, companies like real estate crowdfunding site RealCrowd have begun soliciting investments. RealCrowd’s latest tool, REAllocate, matches accredited investors with opportunities to invest in real property, by evaluating the risk profiles of both the investor and the investment. REAllocate Pro is the version of the tool intended for financial advisors.

REAllocate Pro is currently running a test-pilot program for advisors. The firm says it will help advisors differentiate their investment offers to clients and attract assets, which they can charge under their assets under management business model. It's also looking at providing advisors compensation based on the fees the company charges to investors, according to CEO Adam Hooper.

Adam HooperThe tool works by taking the risk profile of investors, either through an in-house risk questionnaire or pulling client information from an integration with Riskalyze. Real estate investments, a “historically opaque asset class,” are, on the platform, quantified and measured across market, manager, capitalization and partnership structure, said Hooper. The firm performs due diligence on the investments to round out advisors’ fiduciary duties, he added. Once a match is made, the platform will facilitate the transaction. 

But despite the technology and convenience, REAllocate Pro faces an uphill battle among some advisors. “It is really difficult—impossible in many markets—to find deals that cash flow well under reasonable assumptions,” noted Ali Barghelame, an advisor at Denver-based Barghelame Wealth Advisors, Inc. He’s had clients ask him about direct real estate investments and found that many investors end up chasing deals to their own detriment. Even new technology might not be the appropriate solution, he added. “Technology can’t fix numbers that don’t work; however, some technology may be able to streamline expenses and/or help identify properties that do work,” he explained.

For advisor Jared Paul, owner of Capable Wealth, LLC in Albany, N.Y., and an advocate of direct real estate investing for clients, a truer alignment of incentives would help bring more advisors into considering the opportunities, more so than the educational podcasts that REAllocate is planning to produce for advisors. “Incentives drive action,” he said. “It’s not just about knowledge and understanding and opportunity; it’s about can [advisors] even do it? Is it set up at their firm? Will they actually get paid on it?”

Even with financial incentives, however, many investors and advisors find real estate to be too time-consuming to understand, especially when vehicles like REITs are an easy way to get exposure to the asset class, say some advisors. The complexity of advising around it led financial consultant Brent Sutherland, founder of Pittsburgh-based Ntellivest, to drop his registered investment advisor designation in 2017 to focus on real estate opportunities exclusively. “I wanted to talk to people about real estate, and I wasn’t managing money anymore,” he explained. “Most advisors just aren’t educated on how to evaluate an investment property.”

“There’s a huge hole right now in the industry, because real estate is such a big portion of a lot of people’s investments, and advisors just don’t talk about it or don’t really address it,” he added. “To me it seems kind of silly, but it’s something that’s needed.”

RealCrowd has six years of experience in real estate and has completed more than $5 billion in deals, according to the company. So sourcing opportunities from commercial real estate companies to put on the platform is not the challenge. But there are still uncertainties to be settled with REAllocate Pro, Hooper noted. He's hoping to better understand how to evaluate the risk profile of the end-investor, whether via the advisor as an intermediary or directly with the client, and if advisors with discretionary or nondiscretionary capital are best suited for the tool.

“There’s a need and there’s an opportunity to try to figure out how to create a standardized risk language for this asset class: direct real estate investments,” he said. “We’re really trying to give advisors a platform and a tool where they can understand on a risk-first basis how this asset class works, how it overlays with their client portfolios and then deliver those investment recommendations based off a risk-based methodology.”

He envisions minimum investments of at least $25,000 on the platform, but for now, Hooper’s hoping to fine-tune the product with a handful of test advisors, sweetening the deal with pricing incentives and an opportunity for early adopters to help iterate the tool. He hopes REAllocate will be available to the full market by midyear or early in the third quarter of 2019.

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