Beware of Being Called a Sophisticated Investor

I recently had lunch with a lawyer who tried more than 150 arbitration cases against every brokerage firm in the industry. The arbitration panel is staffed by people from the industry, and it prevents anyone who is not affiliated with Financial Industry Regulatory Authority (FINRA) from participating.

In other words, fee-only advisors are excluded because we are not considered part of the industry. We are regulated by the SEC, not FINRA. It is a classic example of a stacked deck – the odds are in the houses’ favor. And when you sign the brokerage application to open your account, every single firm requires you to submit to arbitration in the event they harm you, thus avoiding the court system and full disclosure.

In other words, you cannot get a jury of your peers to decide the case. You get a jury of their peers. Great, isn’t it?

The wealthy person has the most to lose because you, by definition, are a sophisticated investor. What makes you sophisticated? Your significant net worth and the fact that you have likely owned a stock or bond before. That’s it. Would you consider yourself a sophisticated investor? The definition is designed to say, “Because you have money, you know better.” This shifts the burden to you in case they sell you something they shouldn’t have.

The brokerage firm can essentially create worthless products, harm thousands of their clients, and then hide among a panel of their “wink-wink” peers.