A Wealth Management Niche Your Competitors Probably Haven't Considered

Posted by Rob Johnson on Nov 24, 2022

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Developing unique value propositions can be difficult for financial advisors. Most advisors promise clients the same benefits, which can make it hard for advisors to showcase their value to investors and stand out in a crowded field.1 

Aside from emphasizing the importance of trust, transparency, and accountability as critical elements of their core services, advisors also should create a compelling value proposition for their clients. One way you can differentiate your practice is by discussing the potential benefits of moving away from active property management and into passive real estate investments. Investors with highly appreciated real estate assets can shed daily management duties by divesting current properties and completing a Delaware Statutory Trust-supported 1031 exchange in the exact amount needed to satisfy exchange requirements. 

Exchanges and DST investments can provide important tax advantages, as well as the potential for capital appreciation and recurring passive income. Below we’ll highlight the main points of 1031 exchanges and Delaware Statutory Trusts so you can get the gist of these types of investments, as well as provide additional resources so you can conduct some more in-depth study. 

What is a 1031 Exchange? 

Investors who own highly appreciated real estate assets face significant capital gains tax liabilities when selling investment properties. A 1031 exchange allows investors to defer 100 percent of any capital gains taxes due if they roll the entirety of their sale proceeds into a like-kind replacement property. 

When discussing this investment option with your clients, you can point out quite a few potential benefits. These can include: 

  • The potential to trade up in asset quality or invest in real estate assets of increased value 
  • Portfolio diversification by varying asset classes or through different geographical regions 
  • Potential to generate increased cash flow and greater annual returns 
  • Ability to effectively erase any deferred capital gains by bequeathing exchanged assets to heirs of your choosing when you pass. Your client’s heirs will receive the assets at a stepped-up basis that could eliminate the accrued capital gains. 

Like-kind exchanges aren’t without their drawbacks. These can include reduced liquidity, strict exchange deadlines, and reduced basis for depreciation in replacement properties. Regardless, leveraging the benefits of the 1031 exchange process can be a beneficial investment strategy for certain clients. 

What is a Delaware Statutory Trust? 

Delaware Statutory Trusts, or DSTs, are investment vehicles that give solo investors access to commercial real estate investment properties that typically are only available to high-net-worth and institutional investors. 

These professionally managed properties could include: 

  • Self-storage facilities 
  • Large Class A multifamily apartment complexes 
  • Medical office buildings 
  • Industrial warehouse and distribution facilities 

Investors purchase fractional ownership interests of the properties held under trust. DSTs are 1031 exchange eligible upfront and upon exit, and since DST offerings are pre-packaged – a DST sponsor has already performed all due diligence and lined up acquisition financing – investors are able to quickly purchase shares of DST investments in amounts necessary to satisfy their 1031 exchange requirements. Your clients also can purchase shares in multiple DSTs in an attempt to increase portfolio diversification by location and property type. 

Putting it all Together 

Distinguishing your services from competitors may require you to add a few more tools to your toolbox. Discussing the potential benefits associated with DST-supported 1031 exchanges with your clients not only creates a unique value proposition for your practice but also provides a more holistic approach to investment planning and wealth management. These additional tools may also help you demonstrate your vision for protecting and potentially growing your clients’ wealth, giving them a reason to choose or stay with you over others in the field. 

 

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.     

Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. 

There is no guarantee that the investment objectives of any program will be achieved.  

No public market currently exists, and one may never exist. DST programs are speculative and suitable only for Accredited Investors who do not anticipate a need for liquidity or can afford to lose their entire investment. 

Costs associated with a 1031 transaction may impact investor’s returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. 

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