FINRA Series 7Investment Information and Suitable RecommendationsMedium
A retired client with a moderate risk tolerance and a need for current income is considering a non-traded REIT recommended by her representative. Which of the following risks is MOST important for the representative to disclose regarding this investment?
- ANon-traded REITs are guaranteed to return principal at maturity
- BNon-traded REITs are subject to interest rate risk in the same way as bonds
- CNon-traded REITs typically have limited liquidity and no active secondary market
- DNon-traded REITs cannot pay distributions from sources other than net income
Show answer & explanationAnswer & explanation
Correct answer: C. Non-traded REITs typically have limited liquidity and no active secondary market
Unlike publicly traded REITs, non-traded REITs are not listed on an exchange, so investors face significant liquidity risk, often with limited or costly redemption programs and no guarantee of being able to sell shares quickly.
Why the other options are wrong
- A. Non-traded REITs have no maturity date and no guarantee of principal return.
- B. While interest rate risk exists, it is not the defining suitability concern unique to non-traded REITs.
- D. Non-traded REITs can and sometimes do pay distributions from offering proceeds or borrowings, which is itself a risk, but liquidity is the primary concern.
Non-Traded REIT Liquidity Risk
Non-traded REITs are not listed on an exchange, resulting in limited liquidity, infrequent valuations, and restricted redemption options for investors.
- No secondary market/exchange listing
- Redemption programs often limited or suspended
- High upfront fees and commissions common
Memory trick: 'Non-traded means no trading — your money's locked in the building.'