Do you know that no wealth manager has ever called me about getting his clients into apartment deals?
I’m not saying I’m famous or anything, but this blog does come up fairly high in the Google results if you start looking for information on apartment investing in Los Angeles. There are literally thousands of people in LA whose job it is to manage money for rich people. So, if apartments are such a good investment, why aren’t they calling me?
One possibility is that apartments are a bad investment. But I don’t think this is what’s going on, because it’s not like there are tons of tax efficient investments out there offering 5-10% per year cash yields with relatively low downside. So, what gives?
It turns out that most wealth management types are compensated based on how much product they can push to their clients. For example: Say a big bank with a wealth management division agrees to buy a block of stock in a company pre-IPO in order to win the company’s investment banking business (happens all the time). The bank doesn’t want to hold the stock because it doesn’t want to take that much risk. What does it do?
It gets on the phone to the wealth management team and says this: I’ll compensate you X% for laying this stock off on your wealth management clients. So what happens? Rich people all over get calls from their wealth managers touting the amazing growth prospects of this new, pre-IPO company.
Is buying the company’s shares in the clients’ best interest? Who knows? Do you know whose interest it is in? The bank’s! And the wealth managers’!
As usual, it all comes down to fees. Wealth managers aren’t pushing their clients into apartment deals because there aren’t any fees in it for them. As long as that’s the case, rich people are going to keep getting pushed into weird structured finance products and crappy pre-IPO shares, because that’s how the wealth management guys get paid.