Mandatory arbitration is evil.

If you’re a consumer or an investor, you’re familiar with mandatory arbitration. It’s required by the small print in agreements you never read. It deprives you of your constitutional right to access to the court system and to having your dispute resolved by a jury of your peers.

Instead, you are consigned to an arbitration panel often administered by the American Arbitration Association or, if you are an investor, by the Financial Industry Regulatory Authority (“FINRA”).

Arbitration is touted by its proponents as being less expensive and quicker than court proceedings.

Who are these proponents? Corporate America and the securities industry.

Think about that. If it’s good for them it’s probably bad for you – and it is.

Here’s what you may not know about arbitration.

• The proceedings are private, so public scrutiny is minimized.
• It’s almost impossible to appeal successfully from a decision by an arbitration panel, so the panel has broad, essentially unreviewable, latitude.
• It’s fundamentally unfair to consumers and investors.

How can this be? It’s primarily because of what’s known as the “repeat player effect.” Studies have shown that “repeat players” in arbitration (like corporations and brokerage firms) have an unfair advantage, leading to better results.

The pay and the prestige makes sitting as an arbitrator a plum assignment. Arbitrators understand that issuing a large award against a “repeat player” reduces (or eliminates) the possibility of being selected to serve on future panels.

FINRA arbitration is particularly dubious for investors. FINRA is basically a trade association for the securities industry. It’s a national disgrace that investors must submit disputes with brokers to this organization.

There’s not much most consumers can do to avoid the evil of mandatory arbitration. As an investor, you have a choice. Registered Investment Advisors are often not members of FINRA and aren’t required to submit disputes to FINRA-administered arbitrations. Read your agreement with your RIA carefully. It may still have an arbitration clause requiring arbitration administered by another entity (like JAMS or the American Arbitration Association.

If it does, negotiate and insist on maintaining your right to have any dispute adjudicated in Court before a jury.

Resource of the Week

If you have any doubts about the unfairness of FINRA arbitration, read this blog post by Bill Singer. The decision by the FINRA panel in this case is shocking, but not surprising.

This Week's Video: Time Is On Your Side

https://youtu.be/10R_P61IxMQ?rel=0

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