What if, however, you happen to have a bad advisor?
Then you can get into a mess you wouldn’t wish on your worst enemy – and that needs to change.
If you believe you lost a lot of money because your financial advisor was negligent, reckless or dishonest, you may want to try a lawsuit. But when you hired an advisor, you had to sign a type of contract called an investment advisory agreement. That document usually says that any disputes between you and the consultant are to be resolved in court.
It has become common for these advisory agreements to require that all disputes be directed to one of two organizations: the nonprofit American Arbitration Association, or JAMS, a private corporation formerly known as Justice and Mediation Services.
Unlike a court case or arbitration conducted by the Financial Industry Regulatory Authority, Wall Street’s self-regulator, no aspect of cases heard by JAMS is a public record. With very rare exceptions, there are no AAA cases.
And they can be bloody expensive.
Some of these arbitrators charge $1,950 an hour to hear cases, according to documents I reviewed. The projected costs of using just one arbitrator at AAA or JAMS could easily exceed $60,000, lawyers say.
And in order for a claim to be heard at any organization, the expected costs must be paid in advance – usually 50% by the client.
“That one [advisory firms] get the best of all possible worlds,” says Stuart Meissner, an attorney at Meissner Associates in New York, who represents investors who say they were harmed by brokers or advisors. , plus the firm gets the secrecy of a decision the public will never be able to see.”
So you can bankrupt yourself and try to recover the money you already lost. And, generally, no one else can say that a particular counsel has a history of entering into arbitration.
Registered investment advisers that manage assets of $100 million or less are generally regulated at the state level by the Securities and Exchange Commission. States, unlike federal agencies, require counselors they supervise to disclose all arbitration requests filed against them.
Those disclosures are on a document called Form ADV. This week, my colleague Tom McGinty analyzed the ADVs filed by 21,605 state-registered consulting firms and found that 493—2.3% of them—have filed at least one arbitration case for damages of at least $2,500 disclosed.
But advisers registered with the SEC are not required to disclose arbitrations—or, for that matter, consumer complaints—and civil suits in their official prospectuses. They are required to make these disclosures only if such events are “material” to the assessment of the adviser’s business practices and the integrity of its management.
As I wrote last week, the SEC’s registered advisors themselves decide whether such a complaint is “material.”
No one knows how often consumers win arbitrations against advisers at AAA or JAMS — or whether a particular adviser has faced claims there — because those organizations keep the results confidential. AAA and JAMS have refused my requests to provide even the most basic data on consultant arbitrators.
However, by mutual agreement, an advisor and client may decide to resolve the dispute at Finra rather than AAA or JAMS. It usually carries much lower fees than other forums.
In Finra arbitrations, investors are awarded damages 40 percent of the time. (A Finra spokeswoman says most claims are settled before they reach the award stage, meaning investors may receive at least some money.)
Since 2012, consumers have brought more than 22,000 arbitration claims against brokers through Finra. However, during the same period, a Finra spokesman says, consumers have brought only “a little more than 100” such cases against advisers in total.
Perhaps that’s because, unlike AAA or JAMS, Finra requires that results be disclosed.
Advisors emphasize in their marketing that they must act as fiduciaries, putting your best interests first.
“Being able to choose how to pursue a conflict is in the investor’s best interest,” says Melanie Senter Lubin, Maryland’s securities commissioner. Says Melanie Senter Lubin, Maryland’s safety commissioner. Forcing all consumers into arbitration deprives them of the choice of how to resolve disputes involving their own. money and “is inconsistent with the fiduciary duty”, he says.
Lawyers tell me it’s not uncommon for a consulting firm’s contract to stipulate that disputes will be resolved in AAA arbitration under commercial rules, meaning the parties will initially split most costs 50/50.
If a consumer pursues an arbitration case, however, the AAA can determine that it must handle the case under the consumer rules, which would drastically reduce the consumer’s costs. At that point, lawyers say, some advisers are asking to replace the original commercial rules, forcing clients to pay much more if they want to pursue the case.
In other words, the firm that may have mismanaged your money will now demand that you pay through the nose to prove it.
“It’s the antithesis of being fiduciary,” says Michael Edmiston, an attorney at Jonathan W. Evans & Associates, a Los Angeles law firm that represents investors in disputes with brokers and advisors.
Over the years, many Magazine readers have told me that they think hiring a financial advisor is a waste of money, because they can manage their portfolios at close to zero cost.
A good advisor, however, can do much more for you, providing authoritative guidance on taxes, mortgages, estate and retirement planning, and more. All these services together can make or save you a fortune. I think millions of investors could benefit from hiring a financial advisor.
Unfortunately, until counselors start treating clients better when things go wrong, many people won’t want to use them to help things out.
