Is requiring investors to take disputes to arbitration consistent with the advisers’ duty to act in clients’ best interest?
The vibe is celebratory. There are coffee, doughnuts and croissants on the side table, smiles all around the conference room. On behalf of your team, which could be inside a brokerage firm or a registered investment adviser, you push paperwork across the table to open an advisory account.
Smiling, your soon-to-be client pulls out a pen and scans one of the forms. But he hesitates, and his brow furrows as he reads aloud the predispute arbitration clause: “All parties to this agreement are giving up the right to sue each other in court, including the right to trial by jury.…”
Arms folded, the warmth gone from his face, he is no longer an imminent client. Now, he sounds like a prospect in full retreat. “Seriously, you’re starting our business relationship by asking me to give up my constitutional right?”
He is clearly on to something. The paperwork requires you to put your client’s interests first. But are you really acting like a fiduciary when you include language in your contract that forces clients to take their gripes to arbitration rather than to court?
For the purpose of this column, let’s assume arbitration is a fair process. You could defend the clause to the prospect and cite the Financial Industry Regulatory Authority’s website: “Arbitration is similar to going to court, but is usually faster, cheaper and less complex than litigation.”
David Weintraub, a securities-arbitration lawyer who represents both investors and financial advisers, agrees on the comparative cost and ease of arbitration. Among the reasons: The arbitration process avoids what can be numerous pretrial appearances before judges, as well as the depositions that are standard practice in court cases but discouraged by Finra for its arbitrations.