Many investors believe that if your financial adviser doesn’t make you big money, you’ve been robbed.
A far smaller group of investors actually has been ripped off, taken in by mistakes in judgment or guidance that violate both the client’s trust as well as securities law.
For that latter group, there’s no time like the present to seek redress. October is Dispute Settlement Month.
This is not some feel-good national celebration invented by Ann Landers readers, where they ask everyone to let bygones be bygones. It’s a program offered by NASD Dispute Resolution Inc., where investors who feel they’ve been wronged can try mediation at greatly reduced rates.
To see why this is important, you need to consider how disputes between investors and financial advisers are resolved. Typically, the contract an individual signs with a financial firm stipulates that disputes will be settled via arbitration, a process where both sides agree to a binding decision made by a neutral third party. Arbitration keeps disputes out of open court (where the costs rise dramatically for all involved), though contentious cases often wind up there, too.
Mediation is a lower-cost alternative to arbitration. The neutral mediator hears the case, but any decision made is not binding; the investor can still pursue other legal remedies. The key thing about mediation, however, is that it re-opens communications.
Generally speaking, there are three main problems that send investors and brokers off to battle. Cases typically involve:
– Misrepresentation, where the broker does not tell the client about key risk factors, makes improper guarantees and generally does not tell the truth in selling investments to the customer.
– Suitability, where the investments sold do not fit in with the investment objective and risk profile of the client.
– Breach of fiduciary duty, where the adviser has taken actions that do not have the client’s best interests at heart, such as trading to generate commissions rather than to follow a prudent investment strategy, selling products on which the adviser has a conflict of interest, and more.
The dispute-resolution system is not a money-back guarantee on your investments, nor is it a hedge against taking undue risks, as in “If this investment doesn’t pay off, I’ll sue.”
The complaint process against an adviser should take the following course:
– Tell the adviser, the supervisor and/or compliance officer at the firm of your complaints.
“If you’re not getting anywhere with the branch manager or compliance officer, suggest mediation,” says Rick Ryder of the Securities Arbitration Commentator. “If they don’t take mediation, you are ready to go to arbitration.”
– File your mediation or arbitration case.
“The beautiful thing about mediation is that you can walk away,” says Matt Nestor, director of the Massachusetts Division of Securities. “It gives an investor another opportunity to get heard, and maybe get some justice if they are entitled to it, but it lets them explore a case without agreeing to settle it.”
For information on either type of filing, check out www.nasdadr.com, the Web site for NASD Dispute Resolution. At the site, you can notify the agency of your intent to file claims and start the ball rolling.
You can, in fact, file for both types of dispute resolution simultaneously, effectively agreeing to drop the arbitration case if the mediator comes up with a suitable compromise.
Part of the thinking behind Dispute Settlement Month, however, is that many cases can be settled using mediation only, keeping filing fees, plus time and aggravation, to a relative minimum.
“If you think a case is important enough to bring forward, that’s what mediation is there for,” says Kenneth Andrichik, director of mediation at NASD Dispute Resolution. “We tend not to analyze the merits of a case as the case comes in. That is up to the arbitrators. We provide the service, and it’s there for anyone who thinks they have a case to bring forward.”
– Contact the state securities regulator.
If you don’t get problems resolved and believe that you are the victim of securities fraud, contact the state securities office where the adviser is located. (You can find the contact numbers at the Web site for the North American Securities Administrators Association, www.nasaa.org.)
Empirically — because there are no statistics on such things, only stories — some people skip mediation and arbitration and move to this step, largely because they fear not getting a fair hearing from the supposedly neutral third party.
Again, this highlights the beauty of mediation, where the decision is not binding unless both sides agree to the mediator’s proposed compromise. If you don’t think you’ve gotten a fair shake, keep pushing the case forward.
Andrichik noted that roughly 80 percent of the cases that are mediated wind up being settled.
During October, NASD Dispute Resolution is waiving all filing fees for cases with claims of $25,000 or less, and it will charge just $100 for a four-hour mediation when the actual damages fall within that range. The fee scale goes up slightly as the value of the claim rises.
What’s more, mediation and arbitration do not require an attorney.
Ryder noted that a recent General Accounting Office study shows that investors can do well on their own, at least on small cases.
Says Mary Calhoun of Calhoun Consulting Group, a Waltham firm that acts as an expert witness in securities cases: “Some people don’t want to compromise because they think that means they lose. Mediation does not mean you lose or that you are giving up, it’s just a way to re-open the dialogue. Once that happens, you have a chance at reaching a settlement that won’t make you feel like a loser.”
