The mandatory arbitration of customer disputes must be made to go away. And not just because it hurts your customers. It hurts you — the financial advisor — just as much, and, I would argue, even more.
In my new book Wall Street Versus America, I describe how the system is unfair to investors for a variety of reasons, including stacking panels with arbitrators who have some connection to the securities industry. And it is certainly no secret that brokers gripe about it, since employment disputes are submitted to arbitration. “Brokers in arbitration are at a similar disadvantage as investors,” notes Jacob Zamansky of Zamansky & Associates, a lawyer who represents investors in arbitrations.
I sometimes suspect that brokers put up with mandatory arbitration for their own employment disputes — unfair as it is — because they believe that the scales tip back in their favor when customer disputes are involved. If so, that's a mistake. Even if customer disputes only were submitted to mandatory arbitration, it would still be in the interests of honest, reputable retail advisors to eliminate the system.
Sure, if you're working for a boiler room, or like to churn accounts or sell unsuitable investments or drop unauthorized trades in your customers' accounts, the current system works fine for you. The system seems almost designed to protect the small handful of brokers who generate the most complaints. The rotten apples of your business — the ones who give you the bad rap — are shielded by a system that hides everything but the decisions in arbitration cases from public scrutiny. That's terrific if you get a lot of complaints that your bosses have to settle (though they keep you because you're such a high producer).
If you're a rogue broker who wants to grind down your opponent, that's great, since it can take years (and thousands of dollars) for a case to be resolved. But if you didn't do anything wrong, have a clean record and want to keep it that way, the opacity and inequities of the system don't do you any good. This system can put a blot on your record that you don't deserve. And there's not a thing you can do about it.
The House Rules
The securities industry defends the arrangement, pointing out that customers win money 55 percent of the time, according to the latest report of the Securities Industry Conference on Arbitration. But, that includes investors getting everything they lost or just half of what they claimed, or even only a buck.
Remember that the customer only has money at stake. You have your reputation. Every time a customer complaint results in an award, no matter how trivial, it goes down on your U4 and is available for public inspection on the NASD Web site. So if an arbitration panel decides to “split the baby” as lawyers put it, and give the customer half of what he or she claims, everyone is the loser except the brokerage. The customer feels cheated, and you get a blot on your record you can't remove. Meanwhile, the firm walks away happy. It has settled a case at your expense and the firm's reputation hasn't been blemished — yours has.
Yes, you may get off scot-free. But do you like those odds? Do you think journalists would put up with a system that awarded money to 55 percent of libel plaintiffs — even if an editor was required to be on the panel?
The securities industry's other major argument is that the system is simple, fair and easy. But if you're an honest stockbroker facing a dishonest or overreaching client — or an honest client facing a dishonest broker — all this “simplicity” hurts you. Pretrial discovery is limited. Cases a court would kick out on pretrial motions go to full-blown hearings in the current system. The securities industry is willing to sacrifice your rights, as well as the customers', in the hope of pressuring the other side to settle for nickels on the dollar. If that tactic doesn't work, you go to a hearing. Your reputation is put in jeopardy, and your life is disrupted. The customer, for his part, faces a possible arbitrary slicing of a legitimate claim.
Honest stockbrokers don't need to play with a stacked deck. But you do need the protections afforded to you by the court system — and just as much as the client who has a justifiable grievance against a negligent or rogue broker. You need those protections whether your adversary is a greedy customer or a former employer who wants to give you the shaft.
It's time for stockbrokers and financial advisors to cross out those mandatory arbitration clauses on account agreements. Tell your clients, “Keep your rights. If I'm wrong, sue me in court.”
Gary Weiss, a former BusinessWeek reporter, is the author of Wall Street Versus America and Born to Steal.