Many people in the U.S. use stocks, bonds and other securities as major investment vehicles to help finance important personal and family goals. These retail investors – meaning individual, private, nonprofessional and noninstitutional investors – often turn to investment advisors as their resource for investment information and advice.
When small investors are victimized
Unfortunately, it is not as uncommon as it should be that investment advisors provide inappropriate financial advice to retail customers such as steering them to improper or risky investments that will not meet their needs and may expose them to potential loss. In the most extreme situations, actual or would-be advisors engage in securities fraud or outright investment scams. They may advise unsuitable investments, make unauthorized transactions, act in their own financial interests, suggest transactions with which they have a conflict of interest without disclosure or other, similar unprofessional or illegal behavior.
For retail investors, this can be dangerous since individuals and families may be investing to finance college tuition, home purchases, retirement, long-term care or family safety nets. Following a negligent or unscrupulous investment advisor’s advice could endanger a nest egg, life insurance payout, inheritance or other asset of high value to the individual.
An organization to support investors
The federal government has given authority to the Financial Industry Regulatory Authority (FINRA) to oversee investment brokers and markets with the mission to protect investors and the integrity of capital markets. FINRA is a nonprofit organization overseen by the Securities and Exchange Commission (SEC), the main federal agency charged with enforcing securities laws.
FINRA increases the soundness of private investment in many ways, including:
- Overseeing, testing, licensing, disciplining, sanctioning and suspending brokers and advisors
- Monitoring securities markets using cutting edge technology to detect abusive transactions
- Establishing and enforcing ethical standards for registered brokers and firms
- Imposing fines and ordering the payment of restitution to wronged investors
- Referring egregious violators to government agencies for assessment of civil or criminal securities law violations
- Providing information and education to retail investors, including resources for older investors often targeted by scammers or unethical advisors
- Accepting and investigating investor complaints against brokers and brokerage firms
FINRA dispute resolution forums
An important function of FINRA is its alternate dispute resolution (ADR) program that uses mediation and arbitration to resolve investor disputes with their brokers and advisors. When appropriate, this can be a cost-effective, private and time-saving alternative to a lawsuit that may allow recovery of losses from unsuitable investment advice, unethical broker behavior or securities fraud.
In mediation, a neutral mediator trained in conflict resolution and communication techniques facilitates a dialog between the investor and advisor with the goal of reaching settlement of the dispute. Arbitration places the dispute in the hands of a neutral party – the arbitrator – who acts like a private judge and decides the dispute. The investor could potentially recoup their financial loss plus interest as well as receive other kinds of relief.
In FINRA arbitration, a securities attorney often represents the investor, advocating for their interests and presenting their case.