The client complaint process for some registered investment advisory firms may cost the harmed customers several tens or even hundreds of thousands of dollars upfront just to press a case.
That was one key takeaway from
At the event, two investors represented by PIABA members explained how RIA tactics harmed them. In one case, the RIA's client complaint procedure initially imposed costs of nearly 90% of losses; in the other, an advisory firm has failed to pay an award of more than $4 million. FINRA has drawn
RIA customers are often "priced out of justice," said Joe Peiffer, the president-elect of PIABA and a
"The costs of trying to recover life savings lost to fraudulent RIAs is, well, more than many people's life savings — again, a major problem pointed out by the report with no solution," Peiffer said. "The SEC report highlighted the irony of RIA fiduciaries being allowed to treat their aggrieved customers far worse than brokers who claim they're not fiduciaries are allowed to do. The RIAs get to put anti-investor clauses in their [customer] agreements, and even broker-dealers don't do that."
PIABA collaborated with the AFL-CIO, the Consumer Federation of America and other organizations to lobby Congress successfully to get language into
An estimated 61% of RIAs working with retail investors have mandatory arbitration clauses in their customer agreements, the SEC's study found. A small but significant number of them use restrictive terms that limit the damages and types of claims and waive class-action rights. Of the firms with language setting the location of the arbitration, 97% of the agreements "disregarded" any convenience for the client, the report stated. And, PIABA pointed out, many RIAs make the deposit of arbitration fees compulsory prior to any hearings.
Representatives for the SEC declined a request for comment on PIABA's concerns. The regulator's Office of the Investor Advocate and Ombuds have "previously acknowledged growing concerns about the use of mandatory arbitration clauses in investment advisory agreements among SEC-registered advisors," according to the agency's in-house consumer advocate's
"Staff reviewed a broad, diverse sample of investment advisory agreements, and compiled data regarding the occurrence of mandatory arbitration clauses, as well as the occurrence of other terms that would have an impact on the affordability and accessibility of arbitration for retail investors," according to the report. "Given the significance of mandatory arbitration for investors harmed by their advisers, our office will continue its efforts to objectively study the issue and inform the public of relevant findings."
Two speakers at PIABA's event explained their personal struggles with collecting damages from RIAs. A former registered nurse named Rita Berardelli had two brain aneurysms before losing $228,000 at the hands of an RIA that steered her portfolio to "risky investments" and "let the losses pile up for almost a year," according to Berardelli's cousin and estate conservator, Marykay Dragovich. Filing a claim in the private JAMS forum against the firm and the advisor — whose identity PIABA declined to share — could cost more than $200,000. Ultimately, she and her lawyer negotiated a lower but substantial cost of $32,000 for half of the arbitrator's pay plus a 13% fee.
"We were shocked and completely dumbfounded that this is how the system actually worked," Dragovich said. "It really makes you wonder how many investors can afford to pay thousands of dollars out of pocket right after getting hit with huge life-changing losses. Where is the justice? I hope that by sharing my story, we can help fix this broken system and prevent this from happening to other victims in the future."
Another investor that PIABA says is a victim of RIA fraud, Michael Phillips, has been unable to collect his February award of millions of dollars from a Guam-based company called Asia Pacific Financial Management Group during the firm's bankruptcy case, he said. The damages from the risky, unauthorized trades would have gone toward supporting an elementary and middle school on the U.S. island territory, Phillips said.
"The situation is already horrible on many levels," Phillips said. "Asia Pacific's actions have changed my life. Now they could change the lives of innocent schoolchildren. Rather than getting the education they deserve, they get a cruel lesson on the problem of unpaid arbitration awards."
Representatives for the company didn't immediately reply to an email seeking comment.
Peiffer and Hugh Berkson, an attorney with
"Just because it's hard doesn't mean it's not worth doing," Peiffer said. "We're not going away on this issue. We'll be here. Someone told me in Washington a long time ago that if you're not prepared to spend a decade on something, then don't do it. This is our third year of it. We'll spend 10 more until this gets done."
