“Following a recommendation by our due diligence committee, and with the best interests of advisors in mind, we have temporarily suspended sales in three Cole products with the expectation there will be more clarity in the coming weeks,” the IBD said in a statement Thursday shared with ThinkAdvisor.
Cambridge has some 2,500 affiliated independent reps.
On Wednesday, Cetera Financial Group — part of RCS Capital, of which Nicholas Schorsch is chairman — asked its affiliated advisors to suspend sales of three Cole nontraded REITs. Other IBDs that have suspended these and other ARCP product sales include LPL Financial (LPLA), AIG-owned Advisor Group, Ladenburg Thalmann (LTS)-owned Securities America and National Planning Holdings.
Last week, ARCP revealed that it had overstated adjusted funds from operations — a measure of REIT cash flow — and understated a net loss for both the first quarter and first half of the year. American Realty says it will reduce its adjusted FFO by $12 million for the first quarter and $10.9 million for the three months ended in June.
Following that news, RCS Capital (RCAP) called off plans to purchase part of Cole Capital from its sister organization. (RCAP’s operations include the distribution of alternative investments such as those made by privately held AR Capital, while ARCP’s focus is on the creation and management of Cole nontraded REITs and other products.)
“Independent broker dealers have become insecure about due diligence on REITs and alternative investments because of the problems that resulted from said products between 2009 and 2012,” explained Jon Henschen, head of the recruiting group Henschen & Associates. “Broker-dealers want to appear tough on products they approve, so this was their opportunity to do so.”
In addition to ARCP’s accounting troubles and its failed Cole deal with RCAP, other factors could be at play, Henschen believes.
“Part of this quick reaction could also be a result of resentment toward the RCAP fast growth curve of broker-dealer[acquisitions] resulting in competing broker-dealers feeling threatened,” he said.
Plus, Henschen notes, there are plenty “of politics when you distribute products to broker-dealers and at the same time own your own broker-dealers. Insurance companies have walked this tight rope for years now with some stepping on toes along the way.”