When a broker or investment advisor costs you money, you have the legal right and ability to take action. However, the legal action will take on a different form.
Instead of filing a lawsuit against them, you will probably need to file an arbitration claim. While the process may be different from a trial, you may be able to recover damages if you can successfully prove your arbitration case. Sometimes these types of cases can be pursued in court and decided by a jury. However, you need an experienced investment fraud attorney to investigate the matter for you and make that determination.
Both a broker and a financial advisor can be held accountable when they have broken the rules and cost you money. Let our investment fraud attorneys investigate instances of misconduct by your broker or financial advisor.
The Differences Between an Investment Advisor and a Stockbroker
There are several key differences between a broker and a financial advisor. The main distinction is that a financial advisor is paid a percentage of assets under management, while a broker is paid a commission to execute a trade — and, sometimes, a markup.
The second major difference is that a financial advisor owes a fiduciary duty to a client, while a broker may not.
Brokers who execute trades for a client on a discretionary basis do owe a fiduciary duty. Other brokers are bound by the rules of suitability, which require a broker to perform a three-pronged analysis before they recommend a security to a customer.
Fiduciary Duties vs. Suitability Obligations
Both a financial advisor and a broker owe some level of a duty of care to their clients. Since the financial advisor owes a fiduciary duty to their clients, they would owe them the following:
- The duty of care to perform their own due diligence on an investment and in the course of their business with the client
- The duty of loyalty to place the client’s interests ahead of their own
A broker can be responsible for:
- Negligence, where they are careless and do not live up to their own duty of care
- Gross negligence, where they engage in reckless conduct
- Willful misconduct, when they violate certain rules established by FINRA, such as churning
Examples of Broker Negligence
The broker also owes a duty of care to their client. One usual claim against a broker is for common law negligence. Many instances in which the broker violated FINRA rules are unintentional and not the result of willful conduct, but is the result of negligent conduct and decisions.
Here are some things that could be considered negligence on the part of the broker:
- Not doing more research about an investment before recommending it to a client.
- Failing to implement compliance and supervisory systems to supervise representatives.
- Mishandling an order that results in a very poorly timed execution.
- Investing the customer’s money in an unsuitable security that does not meet their investment objectives.
- Overconcentration into one area of assets and not providing a proper asset allocation plan
The Difference Between an Employed and Independent Advisor
Broker-dealers and investment advisors may be independent, or they may work for a company.
Employed brokers and advisors
If they work with a company, there may be restrictions on the type of clients they can get. The company may have its own interests that come into play. For example, if the company’s “book” becomes overloaded with a certain security, or the company makes more money when a certain product is sold, the representative may be under pressure to push that investment.
At the same time, companies have large legal budgets that they can spend on defending arbitration claims. Your claim would be against the advisor and the company, so there would be assets to pay your claim.
Independent advisors work for themselves. They could be affiliated with a company, but they are their own boss and have the freedom to set their own rules. An independent advisor does not have as much pressure to sell certain products.
When you file an arbitration claim, you would file it directly against the investment advisor. They may not have the assets to pay your claim that a company would. Usually they are covered by errors and omissions insurance policies.
You Almost Always Must Arbitrate a Claim Against a Broker
In most cases, you would not be able to file a lawsuit in court against a broker-dealer or an investment advisor when they have broken the rules and cost you money.
However, it does not mean that you are without recourse when the financial professional that you trusted has done you wrong.
Brokerages and investment advisors do what they can to rig the playing field in their favor. They know that they will often face lawsuits in the course of their business, and they want to avoid court cases when possible. They know that a long and drawn-out lawsuit may cost them far more money to defend, so they stick a mandatory arbitration clause in their customer agreements.
The United States Supreme Court held in the 1987 case Shearson/American Express, Inc. v. McMahon that claims filed under the Securities Exchange Act of 1934 were properly subject to arbitration. This holding, and another one two years after in Rodriguez de Quilas v. Shearson/American Express, Inc., upheld a longstanding practice in the brokerage industry that has long tried to force claims into arbitration.
Part of the reason why the Supreme Court accepted arbitration as a means of dispute resolution is that the Securities and Exchange Administration has substantial power over the arbitration mechanism in its role of overseeing FINRA.
When your case is arbitrated, you are still entitled to a hearing in front of an impartial decisionmaker. The arbitrator or arbitration panel has the power to award you the full damages that you suffered, along with possible punitive damages. However, you may not have the same ability to develop your case because the discovery process is more limited.
In addition, both you and the broker have a say in choosing the arbitrators from a list generated by FINRA. The broker may not want to select an arbitrator who has a history of making large arbitration decisions against brokers.
In practically every case, you would have to opt for arbitration if you want a financial recovery. The arbitration clauses in customer agreements are usually airtight. Even though investors have a perception that the arbitration process favors the industry, it is not necessarily the rule.
Reasons for FINRA Arbitration Claims
Here are some of the reasons why you would take a broker or financial advisor to arbitration:
- Violation of FINRA Rule 2110 that requires a representative to perform three separate suitability analyses before they recommend a securities transaction (The Securities and Exchange Commission has recently instituted a new suitability rule called Regulation Best Interest [Regulation BI], but the SEC has explicitly stated that Regulation BI does not give investors a private right of action.)
- Failure to disclose material facts about an investment
- Broker negligence
- Churning or excessive trading
- Unauthorized training
- Overconcentration in one asset class that results in damages
In order to take legal action against your broker, you should contact an attorney. While there is no legal requirement for an attorney, you are always better off getting legal help for your arbitration case.
Your broker has likely hired one or more attorneys to protect them from your claim, even if they know that they are in the wrong. The FINRA arbitration forum is one that requires someone who has experience and knows the rules.
Statute of Limitations for a FINRA Arbitration Claim
Under FINRA Rule 12206, you have six years from the date of the wrongful conduct to file an arbitration claim. There are many arguments surrounding when the 6-year eligibility rule is triggered. In reality, there is little reason for you to wait that long to file a claim. Always consult with an experienced investment fraud lawyer so that you can know your rights.
The FINRA arbitration process can take just over a year to complete when your case goes to a hearing. Even if your case settles before a hearing, you would need time to negotiate an agreement with your broker.
How to Start the FINRA Arbitration Process
The first step in your quest to get back what you lost is to call one of our attorneys. Even if you are allowed to file your own arbitration claim, you cannot take strong legal action without the help of an experienced FINRA arbitration attorney.
We will begin by investigating what happened and reviewing your documentation. We will work with experts to determine what your damages truly are. When ready, we will file a Statement of Claim with FINRA on your behalf that begins the arbitration process. Then, we can develop your case through discovery. Note that FINRA arbitration allows for less discovery than a court case.
One of the most important things that your FINRA arbitration lawyer will do is negotiate a settlement with the broker or investment advisor. While you are certainly entitled to a hearing, most FINRA arbitration claims do not go that far. Many will settle before a hearing, as the broker begins to understand the extent of their possible liability. The settlement process can take time, and you may even need a mediator to help you resolve it.
Contact an Investment Fraud Attorney Today
If you have lost money due to investment fraud, you may be able to get some or all of it back — not through a lawsuit, but through the process of FINRA arbitration. The attorneys at Rikard & Protopapas help clients as they try to recover what they lost. We can represent you in a lawsuit at no cost to you. We work on a contingency fee basis. That means we do not get paid until and unless our client makes a recovery. Generally, our fees will be a percentage of any recovery, and that percentage is computed before deducting expenses. Typically, the expenses are deducted from the settlement and reimburses our firm for any advanced expenses. Each matter is on a case-by-case basis and the fee structure is disclosed in writing if we proceed with your potential claim.
We are experienced lawyers who have delivered results for clients in the past when they took legal action against their broker or advisor. We offer free consultations to discuss your case. You can send us a message online, or you can call us today at (803)-805-7546.