RIA clients seeking compensation for losses as a result of advisors’ harmful conduct may have an even smaller chance of success than customers of dually registered firms and brokerages.
Customer agreements requiring RIA clients to pursue any claims through arbitration forums operated by alternative dispute resolution services JAMS and the American Arbitration Association pose costs so high that they’re out of reach for clients who can’t afford to spend tens of thousands of dollars, according to attorneys from the Public Investors Advocate Bar Association. While they often criticize the FINRA arbitration process, they view it as a better forum for clients seeking damages for unsuitable recommendations or other claims.
With
“You have a fiduciary preemptively taking away a customer's right to a jury trial but also taking away a customer's right to dispute resolution based on cost factors,” said Michael Edmiston, an attorney with Jonathan W. Evans & Associates and PIABA’s current president. “I don't know how any RIA can say they're acting in a customer's best interest when they do that.”
The prices often run to $50,000 or more up front for any clients, who are also subject to hourly fees collected by the arbitrators, according to attorney Lisa Bragança of
“It's not less expensive than a court proceeding when you're doing it through AAA and JAMS,” Bragança said. “Just because something is efficient doesn't mean that it's just.”
Representatives for the SEC declined to comment, while representatives for JAMS didn’t respond to inquiries. A spokeswoman for AAA, Victoria Castelbuono, emailed a statement saying that the organization “does not handle a significant number of cases involving RIAs.”
AAA has resolved more than 400,000 cases of all types in 2021, as of Nov. 15, according to its website. JAMS administers about 18,000 cases each year in filings “ranging from two-party personal injury mediations to complex, multi-party, multimillion-dollar arbitrations in the United States and other jurisdictions worldwide,” its website states.
The number of FINRA arbitration cases has tumbled in 2021, after the regulator
With client advocates and impact investors arguing that forced arbitration in any forum gives too much of an advantage to firms and sweeps disturbing cases out of public view, some Democrats in Congress have taken up the issue with support from PIABA, the North American Securities Administrators Association and progressive interest groups such as the American Association for Justice and Public Citizen.
In April, Sen.
“Individuals shouldn’t need to surrender their legal rights because they choose to work with a financial advisor or broker-dealer to plan for their retirement and invest their hard-earned money,” Rep. Foster said in a statement this spring. “This legislation levels the playing field for consumers and prevents them from being victims of a rigged system that denies them fair legal recourse if they are wronged.”
Under
“Let me ask about the tilted roulette tables on Wall Street,” Warren said to Gensler. “If someone has been cheated by a broker-dealer, hypothetically, for example, if Robinhood cheated individual investors, hypothetically, should that company be able to use forced arbitration clauses to avoid getting sued and held accountable?”
“I think, Senator, that while arbitration has its place, I think it's also important that investors, or in that case, customers have an avenue to redress their claims in the courts,” Gensler replied.
Cryptocurrency brokerage agreements are adding urgency to the matter, according to Bragança, who said they sometimes mandate that clients show up for proceedings in remote locations such as the U.S. Virgin Islands. One company where she’s a customer once gave her a contract that called for her to appear in Switzerland. In one irony, she said that there are even investor advocate attorneys who stipulate that clients must resolve any disputes in arbitration.
Edmiston
