Weighing In: Securities Arbitration is a Travesty of Justice

Securities Arbitration is a Travesty of JusticeEvery service agreement of every financial services company limits a damaged investor’s legal recourse to an arbitration process that is administered by FINRA and controlled by Wall Street business interests. This Wall Street travesty limits its liability when it sells bad advice, bad products, and false promises to investors. It is a lot less accountable when investors only recourse is an arbitration process that settles 92% of its claims. See Despite protests, you still can’t sue your broker.  It is all about limiting losses when you know you damage a percentage of your clients. Charles Schwab’s latest move would take this travesty to a new level. It would add a clause to its service agreement that prohibited its clients from joining class action suits. Maybe Chuck isn’t your friendly investment guy.

Ryan Bakhtiari, a securities attorney, recommends ineffective solutions. He says investors should document conversations with brokers and save the documents. Plus, he says investors should verify fees, and vet brokers using the BrokerCheck service on the FINRA.org website. Why is this good advice ineffective? Investors are dominated by brokers who are supposed to be financial experts. People rarely question the advice of experts. So what if 75% of brokers are sales reps with limited expertise. Investors simply do not question their sales claims so there is no need to check anything. People select brokers they like who tell them what they want to hear.

The second problem is investors do not have a process for documenting their conversations with brokers. They don’t think they need one, but even if they did, they would not commit time to developing one. Investors fail to realize verbal communications benefit brokers and not them. When there is no written record, it is their word against the advisors. There is a free, online solution. Paladin Research (www.PaladinRegistry.com) provides research, monitoring, and communication tools that investors can use to document their conversations with brokers.

The third problem is FINRA’s BrokerCheck system provides about 25% of the information that investors need to vet stockbrokers. It provides some valuable background information and documentation for compliance records, but it fails to provide any type of quality rating for brokers that would help investors identify real experts and avoid weak brokers. The Paladin Research website also provides a free process investors can use to rate the quality of brokers.

Charles Schwab and other Wall Street firms are infamous for anti-investor business practices. Their service agreements are the tip of the proverbial iceberg. But, don’t blame Wall Street. Investor apathy lets these travesties happen and until they hold Wall Street accountable nothing is going to change. They will continue to select the brokers with the best sales pitches and they will sign service agreements that contain anti-investor business practices. What is their choice when all of the major investment firms subscribe to the same business practices? Perhaps they should look at independent firms that have pro-investor business practices.

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