Registered Investment Advisors
Claims against Registered Investment Advisors (RIAs) are far less common than claims against stockbrokers and brokerage firms. The primary reason is because Registered Investment Advisors do not have the conflict of interest that permeates the brokerage industry. RIA’s are typically compensated based on a percentage of the assets under management. Therefore, if your investments grow, so does your RIAs compensation. Conversely, if your investments go down in value, so does your RIAs compensation. RIAs have a financial incentive to do what they can to not only help you make money, but to prevent you from losing money.
And because stockbrokers are paid in commissions, that means that stockbrokers make more money the more that they buy and sell in your account and the more that they buy higher-paying commissioned products in your account. This is the inherent conflict of interest in the brokerage industry. Your stockbroker makes no less money if your account takes a nosedive.
Registered Investment Advisors also have a built-in duty that not all stockbrokers have: a fiduciary duty. A fiduciary duty means that the RIA must always act in your best interest. There is an argument that stockbrokers need only recommend suitable investments. Although fiduciary duties on the part of stockbrokers can be established depending on the facts of the case, there is no automatic fiduciary duty as there are with Registered Investment Advisors. There is a big push to make stockbrokers fiduciaries, like RIAs, however I doubt that it is going to pass.
What causes confusion for investors is that their stockbrokers sport titles such as “financial consultant,” “financial advisor,” and “wealth manager.” These terms infer a relationship based upon trust and confidence, which your broker may play upon during your relationship, with the broker saying such things as, “You can trust me”. Let me tell you that any relationship of trust and confidence will be denied by the brokerage firm at the arbitration.
Registered Investment Advisors typically do not put arbitration provisions in their Client Agreements. If the parties agree, FINRA allows claims against Registered Investment Advisors to be brought within the FINRA arbitration process. Typically, RIAs do not agree to arbitrate, because they realize it will be harder for the investor to bring a claim in court than in arbitration. The converse of the benefits of arbitration are the detriments of a court case: can be very expensive and can take years to get a final result or recovery.
Years ago, I had a case against a brokerage firm for recommending a third-party investment advisor. It was a mess, because I had to bring the claim against the brokerage firm in arbitration and had to bring the claim against the investment advisor in court, because the investment advisor did not agree to arbitrate. I currently have a case pending in Dallas federal court against investment advisors who are claiming they have no money to pay. This is another problem with cases against investment advisors because many of them are one-man shops. They would just as easily fold than get faced with a big judgment.