Author Topic: Investment accounts with Binding Arbitration  (Read 823 times)

Participant

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Investment accounts with Binding Arbitration
« on: July 27, 2018, 08:40:28 AM »
I'm looking to create my first non-retirement investment account. It seems to be standard for them to require me agreeing to binding arbitration as part of signing up. It's one thing to get stuck with that nonsense as part of a cell phone contract, it seems quite another to agree to that when my investments are on the line instead.

Can anyone recommend a good company that doesn't require this? I was really disappointed to run into this problem with Vanguard.

PizzaSteve

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Re: Investment accounts with Binding Arbitration
« Reply #1 on: July 27, 2018, 09:36:42 AM »
Dont think you are going to find a way to preserve your option to sue in US Courts with any financial institution.

Penn42

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Re: Investment accounts with Binding Arbitration
« Reply #2 on: July 29, 2018, 06:49:57 AM »
I noticed this as well.  I opened my first taxable account with vanguard the other day and was also disappointed to have to agree to an arbitration agreement.  Has this really been standard in the industry?  I'm admittedly no legal buff, but arbitration seems like the most ridiculous loophole to me. Having to agree to it definitely made be uncomfortable and has caused me to not fund the account yet.

Hargrove

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Re: Investment accounts with Binding Arbitration
« Reply #3 on: July 29, 2018, 09:00:48 AM »
Arbitration has removed a lot of legal liability from many areas of the business sphere - businesses absolutely love it, and legal challenges have gone like this:

https://www.nytimes.com/2018/05/21/business/supreme-court-upholds-workplace-arbitration-contracts.html

Silly people and your rights!

Indexer

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Re: Investment accounts with Binding Arbitration
« Reply #4 on: July 29, 2018, 10:24:27 PM »
Good source on this:  https://money.usnews.com/investing/articles/2017-03-27/why-your-financial-service-agreement-includes-arbitration

I doubt you will find a brokerage account that has another option since arbitration is FINRA's preferred method for dispute settlement. FINRA stands for Financial Industry Regulatory Authority. If you have a dispute they are the ones you are going to contact, and they are who the investment firms report to.

My solution: pick a company you trust, but still keep your eyes open.

While I don't agree with arbitration across industries, I understand why the investment industry, including the regulator, prefers arbitration. Can you imagine trying to explain an investment scenario to people who don't understand investments? It's normal to have investments go down in value, but would the average person understand that? Once they understood that part, would they be able to separate an unsuitable trade VS a suitable one? I don't think the average person would be able to make an informed decision after listening to two lawyers each try to distort the situation in their own favor. To properly try an investment case you would need experts/professors teaching the jury everything they need to know, but then you would still have the lawyers cross examining the professors in an attempt to distort everything that was said along the way. The arbiter already understands investments, that's the point. Having them try the case saves a lot of time and money for both sides.

Examples, assume both have an advisor.
1. An aggressive investor with a long time horizon lost 40% in index funds during a down market.
2. An elderly retired investor who prefers conservative investments and lives on a fixed income also lost 40% in leveraged index funds.

People in this sub forum understand what I said, and they recognize that the person in situation 1 has no case and the person in situation 2 has been given bad advice. However, the average person probably doesn't understand half the definitions used and wouldn't even understand the words used to explain those definitions. To understand leveraged index fund you first need to know stock, mutual fund, active VS index funds, and leverage.

An arbiter can see the difference between those cases much clearer than some randomly picked peers who didn't finish high school. If I had a dispute, I would rather go to the arbiter. 
« Last Edit: July 29, 2018, 10:26:39 PM by Indexer »

Hargrove

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Re: Investment accounts with Binding Arbitration
« Reply #5 on: July 30, 2018, 10:15:59 PM »
Can you imagine trying to explain an investment scenario to people who don't understand investments?

I mean. Yeah. It's kind of the investment industry's job.

If those "random peers" who "didn't finish high school" are good enough for a murder trial, I think I would count on them to tell when someone got bilked by a shady investment firm, without giving up my right to legal recourse for a potentially biased third party who pre-empts class-actions, has significantly less obligation to oversight, and can't be appealed.

Most jurors don't understand murder trials, either. The lawyers typically explain what's happening. That's their job.

Indexer

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Re: Investment accounts with Binding Arbitration
« Reply #6 on: July 31, 2018, 08:18:02 PM »
Can you imagine trying to explain an investment scenario to people who don't understand investments?
If those "random peers" who "didn't finish high school" are good enough for a murder trial, I think I would count on them to tell when someone got bilked by a shady investment firm, without giving up my right to legal recourse for a potentially biased third party who pre-empts class-actions, has significantly less obligation to oversight, and can't be appealed.

You have more faith than I do. Whether the case is justified or not the defense will probably say, "they understood the risks when they invested," or "they were given the disclosures, they knew about the fees," etc. FINRA deals with this stuff everyday. They know the difference between a market loss VS bad advice.

PS: FINRA isn't some third party that was recently created for the benefit of the investment industry. It's predecessor, NASD, was formed back in the 30s, shortly after the creation of the SEC. FINRA answers to the SEC so there is oversight.  If they weren't doing their jobs I'm sure we would have heard something by now, especially during in years like 2008.

Nick_Miller

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Re: Investment accounts with Binding Arbitration
« Reply #7 on: August 01, 2018, 07:43:09 AM »
Can you imagine trying to explain an investment scenario to people who don't understand investments?

I mean. Yeah. It's kind of the investment industry's job.

If those "random peers" who "didn't finish high school" are good enough for a murder trial, I think I would count on them to tell when someone got bilked by a shady investment firm, without giving up my right to legal recourse for a potentially biased third party who pre-empts class-actions, has significantly less obligation to oversight, and can't be appealed.

Most jurors don't understand murder trials, either. The lawyers typically explain what's happening. That's their job.

I co-sign this statement.

Frankly, I think it is a weak argument that these things are "too complex" for jurors. Hell, there are two-month capital trials with hundreds of witnesses and highly technical and/or scientific data. Our jury system is the backbone of the justice system. When you take the juries away, power shifts even more to the already-powerful. Lawyers try airplane crash cases. Lawyers try medical malpractice cases. These all involve highly technical standards of care that a jury must be educated on to understand when the applicable standard of care was breached.

I've pointed out the evils of arbitration in other threads, but most people don't care until/unless it directly affects someone they love. Companies do NOT insert mandatory arbitration clauses in contracts to create a level playing field with their customers/vendors/employees. They do it to keep away from juries, aka "normal people." Juries are risky, and many companies are downright terrified of such risks.

That being said, yes it's damn near impossible to sign a contract with ANYONE these days that doesn't require arbitration. I wish courts would start stepping in and only enforcing arbitration in cases where the customer was given a true option between arbitration and civil remedies (with no other elements of the agreement affected by the decision).
« Last Edit: August 01, 2018, 07:46:07 AM by Nick_Miller »

Hargrove

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Re: Investment accounts with Binding Arbitration
« Reply #8 on: August 01, 2018, 07:59:17 AM »
If they weren't doing their jobs I'm sure we would have heard something by now...

Now you've got more faith than I do! As far as the SEC and its revolving door being "oversight" of the financial industry, that's close to True Believer...

You seem more concerned about whether the judging party is informed. I am more concerned about whether the judging party is neutral. You can add information - it's way harder to add neutrality. That's why juries are screened for bias, not expertise.

A non-neutral party hates neutrality, and big corporations are not socially neutral entities. You can make an awful lot of money screwing people. The pretext some people have that corporations are benevolent is nonsense - they'll say "it's just business" when companies lay off workers and spend a billion on stock buybacks, but they'll jump in to say these same companies will take a tax break and use it to create jobs. It's the best marketing trick in politics.

Arbitration awards are pathetic compared to winning lawsuits, and while it's sad that we live in such a litigious society, class-actions are a deterrent in a playing field where the little guy is routinely ignored or taken advantage of. Some point out that nuisance lawsuits are expensive for corporations - but the alternative is the expense of no recourse, footed by the consumers.

There's only so much big-business the average wage earner can bail out. Corporations want to be citizens in that they can spend infinite money on campaigns. They can be citizens in that they have to be accountable to other citizens, too.