Arbitration IS the Best Dispute Resolution Tool

The title of this blog post is, in my opinion, a solid myth.  Good proof of that are recent bills in Congress intending to end binding arbitration because, in general it is:

  •  Unfair.  The process is heavily biased in the industry’s favor  Which is probably why the Securities Industry and Financial Markets Association (SIFMA) is against reforms.  In addition, the arbitrator’s decision can rarely be appealed, which denies customers their legal due process.  It also precludes the victim from joining a class action.
  • Expensive.  To be sure their treatment is legal and fair, injured parties must hire legal representation, as they’re up against massively wealthy private institutions.
  • Inefficient.  The financial services industry essentially has a monopoly on individual dispute resolution.  As a result there are substantial incentives to drag out the process and burn out their victims.

The Investment News article at the above link only compares arbitration with outright litigation.  Indeed, arbitration can be faster and cheaper than court proceedings.  However, I would rather have a judge decide what evidence is admissible as opposed to an industry insider.

But isn’t there an even better alternative?  Since 2007 my advisory contracts have had a Mediation clause instead of arbitration, mandatory or otherwise.  (BTW, I’ve never even had to use Mediation with a client).  Here is Sec. H of my contract:

Should any dispute(s) arise between Client and Adviser or any of its directors, officers, employees,representatives or affiliates, Client and Adviser agree that dispute resolution through professional mediation is the most desirable first resort. A mutually agreed upon mediator shall be jointly selected by Adviser and Client according to the Oregon Mediation Association’s guidelines: This clause shall be considered automatically modified, or voided in its entirety, where it conflicts with applicable laws and/or regulations.”

My theory is that if we have a dispute, both parties just want to settle it.  If we can’t work it out amongst ourselves then we agree to get another adult in the room to help us out.  If that fails, then you can sue me.

The takeaway:

  1. Insist on a written agreement between you and your adviser (not to be confused with Investment Management Agreements, all of which currently contain arbitration clauses), spelling out your mutual obligations and expectations.
  2. Don’t sign such a contract unless there is no arbitration obligation.

Questions? Let’s talk!


Leave a Comment

Your email address will not be published. Required fields are marked *