To begin, the type of misconduct committed by advisors can vary widely, ranging from simple negligence (e.g., misunderstanding a trading instruction from a customer) on one end to outright stealing from a customer’s account on the other. Most incidents of misconduct fall somewhere in the middle and involve issues such as misrepresenting or omitting facts in connection with the sale of a security, recommending unsuitable investments, churning, unauthorized trading, or generally failing to act in the best interests of the customer.
Depending on the severity of the misconduct, advisors may be subject to arbitration proceedings brought by their customers, discipline or termination by the firms for which they work, enforcement actions and penalties pursued by the Securities & Exchange Commission (“SEC”) or the Financial Industry Regulatory Authority (“FINRA”), or criminal action brought by state or federal authorities. Sometimes actions taken by the SEC, FINRA, or state/federal authorities result in restitution being paid by an advisor or the advisor’s firm to affected investors, but more often than not, an investor’s most likely chance of a financial recovery of losses caused by an advisor is through the FINRA arbitration process (*most agreements between investors and advisors or brokerage firms contain binding arbitration clauses). According to FINRA, there were 2,260 customer arbitration cases filed in 2017 (compared with 2,515 filed in 2016). The vast majority of these cases settle, but for those that go all the way through to a full trial, the customer is awarded damages in about 40% of the cases.