THE BLOG
07/14/2009 08:18 pm ET | Updated May 25, 2011

Why Don't You Just Give Your Broker a Gun and Tell Him to Shoot You?

A reader of my blogs sent me an e-mail with a Customer Agreement from a major brokerage firm. She asked me to look it over and tell her if she should sign it.

The first thing that struck me was this clause:

"Brokerage activities are regulated under different laws and rules than advisory activities and generally do not give rise to the fiduciary duties that an investment adviser has to its clients."

The agreement pointed out that the brokerage firm "...may face certain conflicts of interest and as such, its interests may differ from yours."

These statements are typically inserted in account opening agreements.

I asked the reader this question: Why would you entrust your assets to a firm that tells you it does not have to act in your best interests and further that it may have conflicts of interest with you which it will resolve in its favor?

It gets worse:

The agreement also provided that all disputes must be resolved by mandatory arbitration. Not before an impartial panel, but one appointed by FINRA, which is essentially a trade group for the securities industry.

William Galvin, the highly respected Secretary of the Commonwealth of Massachusetts aptly described FINRA's arbitration process in testimony before a congressional sub-committee as "an industry sponsored damage-containment and control program masquerading as a juridical proceeding."

Taken together, these clauses are a sucker punch for the unwary investor. The brokerage firm is telling you straight up that they will not act in your best interest. By consigning you to FINRA's mandatory arbitration, it is unlikely that you will get justice when you try to recover for their misconduct.

Why don't you just give them a gun and tell them to shoot you?

What's your option?

Don't play by their rules. Instead, if you need investment advice, retain a Registered Investment Advisor. They are required by law to be fiduciaries. If their agreements provide for arbitration, it will not be FINRA arbitration and you can often negotiate the removal of the arbitration clause altogether.

Just be sure the advisor focuses on your asset allocation and limits your investments to a globally diversified portfolio of low cost index funds, Exchange Traded Funds or passively managed funds.

The reader sent me this note: "Amazing how 90% of the public does not understand that they are the investor sheep heading to the Wall Street butcher shop."

My sentiments exactly.

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