Barron’s (July 25, 2023) – When disputes arise between investors and the financial advisors, the process for resolving them is opaque and often expensive. An influential group of attorneys who represent investors is embarking on an advocacy campaign to change that.

Piaba, the Public Investors Advocate Bar Association, is responding to a report the Securities and Exchange Commission recently produced detailing the advisor arbitration process. Among other issues, the SEC noted that there is no reliable and complete public record of client complaints.

Advisor service agreements frequently include mandatory arbitration clauses, stipulating the terms under which disputes can be brought.

But unlike the brokerage sector, where arbitration disputes take place in a single forum overseen by industry self-regulatory organization Finra, advisor arbitration proceedings end up in private forums such as the American Arbitration Association or Jams where arbitrators frequently charge up to $8,000 a day.

The resulting fees for a several-day proceeding with multiple arbiters on the panel can easily reach tens or even hundreds of thousands of dollars. For many investors, that cost is prohibitive and keeps them from pursuing a complaint.

“Many investors aren’t aware of this clause in their agreement and are shocked to find out that those forum selections work to prevent them from ever bringing a claim,” Piaba President Hugh Berkson said Tuesday during an online meeting with reporters.

Even when an investor wins a dispute, it is common for the arbiters to split the fees 50-50 among the parties, Berkson said, so even the best-case scenario for the client can still cost thousands of dollars in arbitration fees.

Joe Peiffer, president-elect of Piaba, is planning to make advocacy on advisor arbitration a central issue during his tenure heading the group. That effort will start with the SEC, which produced the report outlining many of the faults in the arbitration system but didn’t offer recommendations for reform.

Peiffer would like to see the agency move forward with rules that would bring transparency to the system by logging each complaint in a database the way Finra does with broker disputes. He is also calling for more protections and rights for investors, including a prohibition on clauses in service agreements preventing clients from bringing class-action litigation.

As for the proceedings themselves, he would like to make it easier for clients to pursue complaints by ensuring that the hearing will be closer to where they live than where the RIA is based, and to reign in the fees.

“Too often RIA customers are priced out of justice,” Peiffer said. “The SEC report highlighted the irony of RIA fiduciaries being allowed to treat their aggrieved customers far worse than brokers who claim they are not fiduciaries are allowed to do.”

If Piaba and allied groups don’t succeed in convincing the SEC to overhaul the process, Peiffer said he would turn his attention to lobbying Congress for legislation, arguing that it isn’t a Republican or Democratic issue, but one of basic fairness.

“Something needs to change, and it needs to change quickly,” Peiffer said. “We are not going to stop until we have fairness on this issue.”

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