Written by: Peter Mastrantuono
Last year there were 3,902 arbitration cases initiated by individual investors against their broker. The three top investor disputes involved breach of fiduciary duty (not acting in the client’s best interest), negligence and misrepresentation.
Investor claims against their brokers are very low when compared to the millions of investors and billions in dollars of trades that brokers service every year. Nevertheless, if you are a victim of broker incompetence or dishonesty, it matters a great deal.
The Arbitration Process: An Overview
The first thing investors must understand is that when they opened their brokerage account they agreed to forfeit their right to bring a lawsuit and pursue any disputes through an arbitration process.
In order for an arbitration claim to be heard, a claim must be filed within six years of the occurrence that gave rise to the dispute. Complicating this time rule are individual state laws that may differ from this standard.
The number of arbitrators that hear an investor’s claim generally depends on the level of damages sought. For instance, if the claim is for $50,000 or less, one arbitrator will hear the case. For claims of over $100,000, three arbitrators will hear the case. (Between $50,000 and $100,000, one arbitrator will hear the case unless both parties agree to three arbitrators.)
7 Important Investor Tips
There are a number of steps investors can take to achieve the best outcome for themselves.
- Make sure to keep good records of all transactions and communications, including any sales literature received relative to the disputed investment. Take notes and record dates and times of conversations with your broker.
- Before taking action to bring a dispute through arbitration, an investor should speak first with his or her financial advisor’s branch manager or the firm’s compliance department. Each may have the authority to resolve the problem, thereby saving the firm and investor the cost and inconvenience of an arbitration hearing.
- If you do not receive a satisfactory response, an investor may file a written complaint with the SEC, FINRA or his or her state securities regulator, which will investigate any possible violations of securities laws or regulations. (They cannot, however, pursue a claim for monetary damages on your behalf.)
- Consider entering into mediation, which may result in a faster settlement. Mediation has no risk since it’s voluntary and non-binding, keeping open the arbitration option. (Once a settlement agreement is signed, it becomes an enforceable agreement.)
- Hire a lawyer if arbitration is inevitable. Investors are best served when represented by a lawyer experienced in securities arbitration; their brokers will certainly be represented by lawyers.
- Some lawyers will not take claims under a certain dollar amount. In such instances, there are a number of law schools that will provide legal representation in such cases. Start here to find a lawyer.
- When hiring a lawyer ask about their experience in representing individuals in securities arbitrations, how they may make their case (communicating a clear and coherent case for how laws and regulations were breached in an individual case is critical) and how they will be paid. (Most are paid on a contingency basis, receiving a percentage of any settlement.)
It is an unfortunate reality that some investors will suffer a bad experience with their financial advisor. When that occurs, investors should not be shy about asserting their right to fair treatment and proper recompense.
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Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.