The next time you open an account at JP Morgan (JPM), Merrill Lynch (BAC) or even TD Ameritrade (AMTD) and Charles Schwab (SCHW) you’ll be asked to fill out a form that puts the odds squarely against you as an investor. It doesn’t matter which firm you open up an account with or currently have an account with.
It’s called a broker arbitration form. You can’t open up an account without one. What it does is forces you to use arbitration to settle any disputes you might have with your broker. These “disputes” as they are termed include things like improper trading in your account when a broker places trades in securities that you may not have given him/her permission to trade. For example, you may tell your broker that you are looking for income and one day you notice that half your money is gone because he invested it in speculative biotech companies.
The top cases involved in arbitration are as follows:
- Margin Calls
- Unauthorized Trading
- Failure to Supervise
- Omission of Facts
- Breach of Contract
- Breach of Fiduciary Duty
It pretty much covers just about any type of misbehavior on the part of the broker. Arbitration in itself is not a bad thing, unless the deck is stacked against you.
In the case of arbitration in the brokerage business, the arbitrators are all connected in some fashion to the securities industry. In other words, they have the back of the same people you are trying to punish for misdeeds. They may say differently, but believe me; I have seen many arbitrations where the client doesn’t stand a chance. I mean, why would you kill the goose that lays the golden eggs – the broker. It’s much easier to find a new customer than a high producing broker.
There are two types of arbitration. If your claim is less that $50,000, only one arbitrator is used and if it’s over $50,000 there will be three. You can have a lawyer present to represent you and you better find a good one. You can bet the firms with the deeper pockets will have a cadre of highly paid lawyers ready to take your case apart.
If you want to win against a brokerage firm what you need more than anything else is the same ammunition they are using. Brokers are required to take contemporaneous notes meaning they must be able to produce copies of notes where they have spoken to you about the type of trades you are doing and whether they are suitable in cases where they are asking you to invest as opposed to where you are directing them to invest. If you are directing them to invest then the onus is on you. But if they can’t prove that you asked to be put into a speculative trade, it gets more interesting for your defense.
You need to do exactly the same thing. Take notes of every conversation you have with your broker, no matter how tedious it may be. Note down what you asked him to do and what his response was and the date and time and if possible record the conversation with his permission. You can bet that he’ll be doing the same thing although sometimes those notes that he is taking are a little different that the conversation or that recorded phone call on his end somehow got corrupted or lost. Never assume that you broker is on your side.
And, if you do win against a broker, it’s just a judgment. Getting him to pay is another story. The Securities Investor Protection insurance guarantees your account against impropriety by a brokerage firm but is does not normally play a part in cases of broker misconduct or customer disputes.
You have no choice but to use a broker to invest in the markets. But you do have a choice as to how diligent you can be in your communication with your broker. Now that you know the deck is squarely stacked against you, you can be much better prepared!
To your wealth,