The stock market has been especially volatile this year. And if the markets maintain this level of volatility, we fully expect to be fielding plenty of calls in a few months’ time as there is typically a six to nine-month gap between a market event and a meaningful rise in cases. As this market gets sorted out, we understand there’s going to be a meaningful difference compared to our experience through previous market cycles. That difference arises out of who is providing the financial advice these days.
While stockbrokers often call themselves “financial advisors,” there is a type of professional who is officially called an “investment advisor.” There is a difference between the two, and it could have a huge impact on individual investors because when things go wrong the difference between the two becomes stark and meaningful.
Stockbrokers
- Stockbrokers are regulated by the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization that sits under and is subject to SEC oversight
- A stockbroker can effectuate a trade on behalf of a client
- Some stockbrokers are fiduciaries by operation of law
Investment Advisors
- Investment advisors are regulated by the SEC or their local states – depending on how much money they’re managing
- An investment advisor makes a recommendation that is ultimately carried out through a broker dealer
- All investment advisors are fiduciaries as a matter of law.
Almost every brokerage firm requires clients to agree that any disputes will be heard in a FINRA-overseen arbitration process, as opposed to in a court of law. FINRA’s arbitration process isn’t perfect, but it has made great strides toward being a fair, efficient, and fairly priced forum. FINRA requires its members, including firms and individual brokers, agree to arbitrate if the client requests, even if the firm’s customer agreement doesn’t require arbitration. If a client proceeds in a FINRA arbitration, one of the best aspects is that the hearing will be held in a FINRA hearing location closest to the investor’s residence, with the brokerage firm subsidizing a significant portion of the arbitration forum expenses. FINRA has hearing locations throughout the country and are convenient for the vast majority of Americans.
Investment advisors, on the other hand, are free to include whatever dispute resolution provisions they want in their client agreements. They can require that a client travel across the country in order to pursue a recovery. They can require the client use a dispute resolution forum that’s tremendously expensive (some require tens of thousands of dollars to be deposited before they’ll even start administering the case), to the point where it’s simply not economical to pursue claims under $100,000. They can require that the dispute be heard under some other state’s law, when the client had every expectation that the advisor providing services would be subject to the investor’s local law. The bottom line is that investment advisors can make arbitration so difficult or expensive that only large claims could be heard, and even then, at great expense and difficulty to the investor. Those investment advisors use their arbitration clauses as a shield against potential claims.
The number of investment advisors is growing, and growing quickly. Where there were slightly more than 10,500 registered investment advisors in 2012, that number has grown to more than 14,000 in 2021. At the same time, the number of firms serving as broker-dealers alone fell from 3,545 to 2,921 over the same period. McKinsey reports that registered investment advisory firms represent the fastest growing category in the US wealth management market since 2016. There’s no doubt that the investment advisory space is growing by leaps and bounds, and there’s no doubt that the lack of a standardized dispute resolution forum for those increasing number of investment advisors means that an ever-growing number of investors could have unexpected difficulty in seeking recovery if they have the misfortune of having dealt with an investment advisor who did not take their fiduciary duty seriously. Well-informed investors using investment advisors would do well to check the dispute-resolution terms in their account agreements before any sort of problem arises. If the terms seem offensive, or heavy-handed, there may be an opportunity to renegotiate the terms in order to keep the business with that advisor.
An investor who was trying to be careful with their money likely spent time researching to find a well-regarded, trustworthy financial advisor. If the investor later has questions about whether they made the right choice or not, it is best to address the question without delay. If the advisor’s answers are unsatisfactory or just plain confusing, we stand ready, willing, and able to work with you to figure out whether you were the victim of a lousy market, or a lousy advisor. If it turns out we believe the advisor is at fault and responsible to you, we’ll work with you to determine the best, or perhaps only, avenue to pursue a recovery. Our initial review is performed at no cost to you, though if we require the use of an outside expert, we’ll talk to you about that expert’s cost before we retain them.
Time is of the essence in these situations. If you have concerns or questions, reach out now to request a consultation, call us at 216-696-1422, or visit Hugh’s bio for his contact information to reach out to him directly. And, for more information about investor claims and securities fraud, visit our partner website, StockMarketLoss.com.
