The $400,000 Non-Traded REIT and the Joint Account with Her Son
Denise Okafor, 61, plans to retire at 64. Her KYC profile shows $1.25 million in a 401(k) she is about to roll to an IRA at your firm, $180,000 in a taxable brokerage account, a $95,000 emergency reserve, and a $310,000 mortgage. Her stated objective is "income now, growth later," with moderate risk tolerance and no anticipated need for principal before age 70. She asks you to place $400,000 of the rollover into a non-traded REIT paying a 6.5% distribution. Your firm's written policy caps non-traded REIT purchases at 10% of a client's liquid net worth. She also wants the new account titled jointly with her 34-year-old son, who has no income and lives at home, "so he can manage it if anything happens to me."
1. What do you do with the $400,000 request? Walk through the analysis you would put in the file.
Read the worked answer
Two independent problems: sizing and suitability.
1. The firm limit is a ceiling, not a suggestion. Liquid net worth here is the $1.25 million rollover plus the $180,000 taxable account = $1.43 million. The $95,000 emergency reserve is earmarked and the residence/mortgage are excluded. A 10% cap is therefore roughly $143,000. The requested $400,000 is about 28% of liquid net worth and about 32% of the rollover. You cannot submit it as written.
2. Even without the policy, the recommendation fails. A non-traded REIT is illiquid, has limited or suspended redemption, no public market, and an estimated per-share value. A 6.5% distribution rate is not a 6.5% return - it may be funded partly from offering proceeds or return of capital, which erodes principal. For a client who is retiring in three years, still carrying a mortgage, and wants income now, liquidity matters.
3. Reg BI customer-specific care. You must weigh reasonably available alternatives - a laddered Treasury/corporate bond portfolio, a listed REIT, an interval fund, a diversified income fund - against costs, liquidity, and her need for access. Document those alternatives and why the chosen product wins.
Conclusion: bring back a compliant size at or under ~$143,000 (arguably less given the mortgage) with the distribution composition in writing.
2. She wants the account titled jointly with her son. Evaluate that request and propose what you would do instead.
Read the worked answer
Joint tenants with right of survivorship is not an estate-planning shortcut, and it is not a management solution.
- It makes the son a present co-owner, not a successor. The assets become reachable by his creditors, a future divorce, and his own spending.
- It is a completed gift for gift-tax purposes the moment it is funded (likely within the annual exclusion, but still reportable in concept).
- Her stated reason - "so he can manage it" - is a management problem, not an ownership problem. Ownership and authority are different things.
Better tools for the real goal:
- A durable power of attorney or trading authorization signed by her, which lets him act without owning the assets.
- A revocable trust or transfer-on-death registration for the taxable account, and a beneficiary designation for the IRA.
- If he is to trade, the firm needs his own account application, identity verification, and a suitability review - and his lack of income matters if he ever requests margin or options.
Also flag: a joint account blends two people's objectives and risk tolerances into one suitability profile. Getting that wrong is a supervisory finding waiting to happen. Document the alternatives you offered and her decision.
3. She counters: "Fine - do $140,000. That's under your 10%." She also says the 401(k) is in the rollover pipeline. What now?
Read the worked answer
Fitting under the cap does not end the analysis. The policy is a maximum, not a target, and $140,000 is still ~10% of liquid net worth in a single illiquid product for a client with a mortgage and a three-year runway to retirement.
Verify before you count. Do not include the 401(k) in liquid net worth until you have current statements or the assets are actually at the firm. If the rollover stalls, the denominator collapses and $140,000 may blow through the cap. Recompute on verified numbers.
If she insists on $400,000:
- Escalate to a principal the same day. A registered rep cannot waive a written firm policy.
- Document the client's insistence, the alternatives presented, and the specific risks she is accepting.
- A signed client "suitability waiver" does not cure an unsuitable recommendation. Under Reg BI, the recommendation itself must be in her best interest - disclosure is not a substitute for suitability.
- If a supervisor grants a written exception, expect heightened documentation and principal sign-off on the order.
Bottom line: submit a size you can defend, in writing, with the distribution composition and redemption terms disclosed.