At the time this article was authored, the Nasdaq closed at record highs that haven’t been seen since the Dotcom Bubble in 1999. Wall Street doesn’t seem to be bothered by the onslaught of breaking news from Washington – or, more likely, the market is trending upward due to the anticipation of “shifts in fiscal policy that will stimulate growth and perhaps raise earnings” per Federal Reserve chief Janet Yellen (as reported by money.cnn.com). Some strategists are taking a cautious approach, however, opining that the market may be overdone and is subject to correction in the near future. This could lead to substantial losses for those heavily invested in the current bullish market.
Generally, investors hire financial advisors, brokers and brokerage firms to make sound investment decisions for the investor. The relationship between the advisor and the investor is much like that of the attorney and the client: the client trusts in the financial advisor’s knowledge and acumen in the industry, therefore a fiduciary duty flows from the advisor to the investor. Traditionally, the investor will work with the advisor to identify his or her investment goal, and the advisor will make recommendations and take action to further the goals identified. Seems easy enough, but oftentimes advisors make investment decisions with their clients’ funds that may be motivated by their own financial gain. Perhaps the broker, encouraged by the bullish market, makes several risky investment decisions for a client who has a financial goal of long-term, low risk gains. Perhaps that broker was wrong, and ends up losing a substantial amount, or maybe even all of that client’s money. What then? Does the investor have recourse to recoup the losses in this hypothetical?
Yes, recourse exists. Typically when an investor signs a contract with a broker or brokerage firm, the contract contains a mandatory arbitration clause, which requires any dispute to be resolved by and through the Financial Industry Regulatory Authority (“FINRA”). Investors should familiarize themselves with the possibility of pursuing recoupment of losses resulting from potential mismanagement of funds by his or her broker or financial advisor. There are many ways in which a financial advisor can be held responsible for mismanaging investments, but most claims fall under the “Breach of Fiduciary Duty” cause of action. In the event of a potential Breach of Fiduciary Duty claim against one’s financial advisor, it is important to remember that claims must be filed within six (6) years from the date of the transaction or occurrence; what constitutes a “transaction or occurrence” depends on the factual circumstances of the case. Obviously, claims relating to mismanagement of investments are highly complex; often times quite a lot of money is at stake. Don’t assume arbitration is like a mediation: Phil Snyderburn, a veteran securities attorney with Snyderburn, Rioshi and Swann, emphasizes that binding arbitration is indeed an adversarial proceeding, with “each stage of the process requiring execution and high-level decision making processes, weighing costs and benefits and anticipating consequences.”
Based on statistics published by FINRA in 2016, 61% of all claims were settled during the arbitration process, meaning the investor/claimant most likely walked away with some form of recoupment of loss in exchange for the dismissal of the case. It’s only reasonable to assume the cases that are settled are handled by experienced securities arbitration attorneys; to proceed without one – for either the broker or the investor – would undermine the chances for a fair outcome. Arbitration is much more affordable than litigation, which is yet another benefit – particularly to those who may have already suffered losses due to trigger-happy brokers. And hey, not all brokers are bad, but when the transaction seems contrary to the investment goal discussed, it’s always wise to look a little deeper – FINRA has your back.