The Delaware Statutory Trust “Dirty Little Secret”
If you’ve familiar with our book Financial Tales or any of our other writings on investing or real estate, you are aware that we sometimes issue a warning to the reader regarding what they are about to read. This is one of those times. We are clearly biased about the choice between Delaware Statutory Trust Fees and Delaware Statutory Trust Commissions and see no reason whatsoever under any circumstances why someone should work with a commission-based DST Broker vs a Fee-Based Consultant, a Buyer’s Agent or a Fiduciary. We apologize to all the commission-based brokers in advance and invite them to change their billing approach and value proposition.
If you are reading this, it’s likely that you are well beyond the discovery stage of the DST learning curve and are looking for “what’s it going to cost” answers. We will show you a typical contrast before you finish reading because this post is all about “what’s it going to cost” and we value transparency.
But let’s get back to the value proposition. Unfortunately, if you are a commission-driven DST salesperson, you aren’t going to like what you are about to read. You’re not going to like that fee-only consultants can typically provide their clients with
The Exact Same Investment for About Half the Cost
and that furthermore, their clients can get an added tax deduction, a higher terminal value, full transparency, ongoing customer service and lastly, their clients never have to worry about a conflict of interest since the fee-only consultant is free to recommend the best investments available and not the ones that pay the highest commissions.
The news is even worse for the commission-driven DST salesperson because many fee-only DST consultants are well versed in financial planning, tax planning, investment management and estate planning which is a critical component in the DST decision-making process. It’s critical because to even consider an investment in a DST you must be an accredited high net worth investor. Furthermore, the profile of the DST investor when they make their first DST investment is someone that age-wise is in their 60s. In our opinion it’s not the type of investment for those looking to build wealth, it’s an investment more appropriate for those looking to preserve wealth in a tax efficient manner. Registered Investment Advisors such as ourselves routinely work in this area of expertise which means the DST is one of several arrows in their quiver. Most of the top fee-only consultants will also have affiliations with commercial real estate agents that specialize in 1031 exchange triple net leases that may be more suitable than a DST.
To better understand the Delaware Statutory Trust Fee vs Commission debate, put yourself in our shoes and ask what you would do. Several years ago, we were strictly registered investment advisors. We had never heard of a DST. Then one day we get a call that someone wants to sell a highly appreciated property and the 4 taxes associated with the sale amount to about 1/3 of the proceeds. Our traditional answer, in other words, the financial planning or investment advisory solution is to sell the property, pay the taxes and hand over the remainder to the advisor to invest in a securities portfolio. We didn’t do that. We looked for alternative solutions that were tax efficient. After a protracted study period, the DST became one of the best alternatives we discovered. But there was a problem.
Here’s what we found. As we studied the DST landscape, we immediately recognized that it had an archaic compensation structure. Almost 100% of DSTs were sold on a commission basis and not only did these commissions seem high to us, they varied from DST to DST. We had grown up in the securities business back in the 1980s when most people purchased mutual funds in a similar fashion. They paid a broker a commission and the commission varied from about 3% to 8.5% depending on the mutual fund company. There was a tremendous conflict of interest back then with mutual funds as it is today with DSTs to recommend the mutual fund or DST that pays the selling agent the highest possible commission. We knew we would not operate this way. Just as the mutual fund industry has almost completely evolved to a fee-only model, we think the DST industry will as well and is how we structure our compensation.
Our philosophy is simple. We will charge a flat consulting fee for our services and we will credit 100% of the stated commission in the DST prospectus to our clients. This makes the process clean, unconflicted and transparent leaving us as well as the client with the solitary objective of just finding the right investments in the right proportions for their situation.
If you are considering a DST investment and would like to see the “what’s it going to cost” difference between utilizing our services vs that of our commission driven competition schedule a free 30-minute consultation on our calendar, enter your information and we will provide you with an answer.
In general, what we find is that commissions range from 6% to 9% for DSTs. Our approach is to charge a flat consulting fee that is about 1/2 to 1/3 of the commission rate and then to credit our clients with whatever the commission they would have paid had they dealt with a commission-driven broker.
For example, if a hypothetical DST has an internal commission of 8% and you have $100,000 to rollover in your 1031 exchange, at Sera Capital, we credit you with the entire $8,000 and on your closing statement instead of you having a value of $100,000 had you taken the commission route you instead have a value of $108,000. This means more money and more income for you. Again, hypothetically, if the DST was paying 5% annually, a $100,000 investment pays you $5,000 per year if purchased from a commission driven agent, but $5,400 if purchased from Sera Capital. This means your annual return is immediately transformed from 5% per year to 5.4%. Furthermore, assuming the DST appreciates 25% over the 5-6-year period, when the DST matures the $100,000 would be worth $125,000 if purchased from the commission driven broker but worth $135,000 if purchased from Sera Capital.
We hope this helps you understand the differences between the two compensation methods.
For those who are more visually inclined or numbers oriented, here’s hoe the above hypothetical example of how a 100% DST Commission Waiver works.
|Sera Capital||Commission-Based Broker|
|Initial Equity (1031 Proceeds)||$100,000||$100,000|
|Cash on Cash Distribution||5%||5%|
|Hypothetical Ending Capital||$135,000||$125,000|