How to Talk About DST Risks With Clients
The advisors who lose client trust aren't the ones who disclosed the risks. They're the ones who didn't.
There's a quiet asymmetry in how most advisors approach DST conversations.
The upside is easy to articulate. Institutional-quality real estate. Passive income. 1031 exchange eligibility. No landlord headaches. A professionally managed, SEC-qualified replacement property delivered before the 45-day identification deadline.
The risks are harder. Not because they're complicated — they aren't — but because advisors worry that naming them will cost them the deal.
That instinct is understandable, and it is almost always wrong.
Clients who understand the risks of a DST investment before they commit are clients who stay satisfied through a seven-to-ten year hold. Clients who don't understand the risks are clients who call upset in year three when something they could have predicted — and would have accepted — becomes a surprise they resent. The difference isn't the investment. It's the conversation that happened before the check was written.
Here is a practical framework for having that conversation well.
The Three DST Risks Clients Most Often Misunderstand
1. Illiquidity — and what it actually means in practice
DSTs are illiquid instruments. There is no secondary market a client can exit into on a Tuesday afternoon because the market moved or their plans changed. The hold period is typically five to ten years, and early exit options are limited and generally unfavorable.
Most advisors mention this. Fewer explain what it means in lived experience.
The advisor conversation that actually serves the client isn't "this investment is illiquid." It's: "If your circumstances change — a health event, a family need, an unexpected expense — you will not be able to access this capital quickly or cheaply. We need to make sure this is money you genuinely don't need in liquid form for the foreseeable future before we proceed."
That's a different sentence. It asks the client to engage with their own situation rather than absorb a disclosure. Clients who engage with that question rarely object. Clients who absorb it as boilerplate sometimes call back later angry.
2. Lack of operational control
A DST investor is a passive beneficiary. The trust structure legally prohibits investors from making operational decisions about the property — a feature, not a bug, for 1031 purposes, but one that requires client understanding.
If the tenant vacates, if the property needs a capital improvement, if the sponsor decides to refinance or sell, the investor has no vote. The sponsor makes those decisions. The client has exchanged landlord control for institutional management, and the quality of that trade depends entirely on the quality of the sponsor.
This is where the risk conversation connects directly to your due diligence. When you walk a client through how you evaluated the sponsor — financial condition, track record, transparency standards, structural quality — you're not just managing the client relationship. You're closing the loop between your diligence process and their decision. The client who understands why you chose this sponsor is far more patient with the sponsor's decisions over a multi-year hold than the client who doesn't.
For a framework on how to conduct that evaluation, see Three Questions Every Advisor Should Ask a DST Sponsor.
3. Exit timing and market risk
DSTs are sold when the sponsor determines the time is right, based on property performance, market conditions, and fund strategy. That timing may or may not align with the investor's preferred horizon.
The practical implication is that a client who enters a DST in year one expecting a clean seven-year exit may be looking at year eight or nine if market conditions aren't favorable at the seven-year mark. This isn't a failure; it's the structure functioning as designed. But clients who weren't told this sometimes experience it as a broken promise.
The advisor who explains exit timing clearly, up front, gives the client a realistic mental model for the investment. That model almost always holds through a long hold. It's the absence of it that generates friction.
A Simple Framework for Structuring the Risk Conversation
The goal of the DST risk conversation is not to recite disclosures. It's to confirm that your client has a realistic picture of the investment before they commit. The following sequence works for most clients:
Start with the structure, not the risk list. Before naming specific risks, explain how a DST works mechanically — the trust structure, the passive investor role, the sponsor's operational authority. Most client objections downstream trace to a structural misunderstanding established at the beginning. Two minutes of structural clarity prevents most of them. The DSTs Explained guide on my1031options.com is designed to be shared directly with clients as pre-call reading.
Name the risks plainly, in client language. "Illiquidity" means "you can't access this money easily." "Lack of operational control" means "you're trusting us to pick the right sponsor, and then trusting the sponsor to manage the property well." "Exit timing risk" means "the sale of this property happens on the sponsor's schedule, not yours, and that schedule is responsive to market conditions." None of these are complicated. They just need to be said in language a client can actually hold onto.
Connect each risk to your mitigation. Illiquidity risk is mitigated by sizing the investment appropriately. Sponsor control risk is mitigated by your due diligence process. Exit timing risk is mitigated by realistic expectations set in advance. The risk conversation and the value-of-the-advisor conversation are the same conversation, done well.
Ask the client to respond, not just receive. After naming each risk, ask a direct question: "Does that make sense given where you are financially?" "Are you comfortable with that?" "Do you have any concerns about that element?" Clients who've been asked to engage rather than just listen own the decision differently. Compliance benefits from this, but the primary beneficiary is the client relationship.
Why This Conversation Is Easier With a Transparent Sponsor
The hardest version of the DST risk conversation is the one where the advisor can't actually answer the client's follow-on questions.
"How do I know the sponsor is financially sound?" — difficult to answer with confidence if the sponsor is a private company whose financials aren't independently audited and publicly available.
"What happens if something goes wrong with the sponsor?" — nearly impossible to answer with specificity if the sponsor's corporate governance, executive team stability, and capital position aren't verifiable from a public record.
"How will you know if there's a problem before it becomes a crisis?" — unanswerable in any structural sense for private sponsors, since there's no required disclosure timeline for material events.
These are good questions. Clients who are engaged enough to ask them are exactly the clients advisors want. The advisor who can answer them is in a fundamentally different conversation than the advisor who can't.
Publicly traded DST sponsors change this. An SEC-reporting sponsor files audited financials quarterly and annually. Material events — executive changes, loan covenant issues, auditor changes, property impairments — are required to be disclosed publicly within four business days via Form 8-K. The sponsor's governance, capital position, and ongoing operational history are part of a searchable, permanent public record on SEC EDGAR. Advisors can point clients directly to those filings and say, "Here is everything the sponsor is required to disclose. You can read it yourself."
That answer isn't just technically accurate. It's the answer that tells a sophisticated client their advisor did the work.
Medalist Diversified (NASDAQ: MDRR) is the only publicly-traded U.S. company purpose-built to operate as a DST sponsor platform. Every piece of our corporate history — audited financials prepared by Cherry Bekaert, an independent board, ongoing SEC disclosures — lives on the public record. When advisors use our platform, the risk conversation about sponsor transparency has a concrete answer, not a marketing claim. Learn more about how we work with advisors or view our current offering.
The Advisor Takeaway
The DST risk conversation done well doesn't cost deals. It earns them — with the right clients, the ones who will stay satisfied through a decade-long hold and refer their network when the experience meets the expectations they were given.
The advisors who consistently build 1031 practices on DST referrals are not the advisors who glossed over the risks. They're the ones who became known for explaining things clearly, choosing sponsors with documented track records, and giving clients the realistic mental model they needed to stay calm through a seven-year investment.
That reputation is built one risk conversation at a time.
The views in this article are the author's and are not investment advice. Medalist Diversified, Inc. (NASDAQ: MDRR) is the only U.S. publicly-traded company purpose-built to operate as a DST sponsor platform. Any DST offering is made only through a confidential Private Placement Memorandum to accredited investors as defined in Rule 501 of Regulation D. For more information, visit medalistdst.com.
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