financial advisors

Mandatory Arbitration Is Not A Fiduciary Practice

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Here’s a communication I wish all advisors would send to their clients:

Dear [Client],

You may have read news reports that both Facebook and Google have ended the requirement for mandatory arbitration for sexual-harassment disputes. I believe the elimination of compelling employees to arbitrate these disputes is long overdue. I am writing to tell you about a change in our policy, which takes this development to another level.

Effective immediately, we will no longer require our employees or clients to arbitrate any disputes with us. Instead, we will give them and you the option to either arbitrate or pursue claims in court, before a jury, if you wish.

Here’s why I made this decision.

Arbitration favors repeat players

There’s a reason corporations and the securities industry have insisted on mandatory arbitration of disputes. It removes the uncertainty of a verdict by a jury and it’s often quicker and more cost-effective than court proceedings. It’s also a confidential proceeding, which may be beneficial to all parties.

But there’s a hidden rationale behind the requirement that employees and clients submit to mandatory arbitration. It favors “repeat players” – typically the company, not the complainant. It also makes any appeal from the decision of the arbitrator very difficult, giving the arbitrator(s) extremely broad authority.

Arbitrators have a strong economic interest in perpetuating arbitration of disputes.

For them, being selected to decide a dispute has many perks. The pay is often good. The honor and power of serving as a “judge” is difficult to overstate.

While most arbitrators are fair and impartial, they understand that if they get a reputation for ruling against “repeat players,” their chance of serving on future panels will be diminished.

An employee or client of a broker is rarely a “repeat player.” Consequently, it should be the choice of our employees and clients to have disputes resolved in arbitration or in court.

Conflicts of interest

It’s a conflict of interest to insist on arbitration of disputes with our clients. As registered investment advisors, we are required to avoid conflicts where possible, to fully disclose any that exist and to always act in your best interest.

Because we adhere to these principles, we rarely have disputes with our clients. However, in the rare instance when we do, I no longer believe it’s right for us to insist on a forum for dispute resolution that puts you at a disadvantage.

We don’t just “talk the talk” about doing right by our clients. We “walk the walk.” That’s why I am changing our policy, effective immediately.

Read the full article here by Dan Solin, Advisor Perspectives


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