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Can I sue my brokerage for bad advice?

October 12, 2011: 5:05 AM ET

The investment counselor at the large brokerage where I invest my money never advised me about any "retirement funds" and guided me into 10 of their proprietary funds, which have lost 15 years savings for me. Do I have recourse to sue? I asked for mediation, but they denied the request. I tried small claims court, and their online agreement prevented this avenue. Please advise. -- Name withheld, Birmingham, Ala.

The issue at hand is the suitability of the investments your financial adviser steered you toward, not whether the funds may have been proprietary. Such funds, sponsored by the adviser's brokerage firm, may generate a sizeable commission for the broker and substantial profit for his company. But the key to whether you have a valid complaint is whether the funds were overly aggressive when relatively conservative investments would have been more suitable for your age, risk tolerance and objectives.

"Proprietary funds may be appropriate for retirement. Just because they are proprietary doesn't mean they're not conservative and not appropriate for the investors," says attorney Marc D. Powers, leader of the securities litigation & regulatory enforcement team at law firm Baker Hostetler.

If you believe the investments were unsuitable, you may take legal action. All major brokerage firms require clients to sign an arbitration clause when they open their accounts, so if the firm refuses mediation your only alternative is to file an arbitration claim.

Wall Street's self-regulatory body, the Financial Industry Regulatory Authority operates a widely used dispute resolution forum. While FINRA is Wall Street's self-regulatory body, its arbitration panels are composed of a majority of non-industry arbitrators. In small cases, $25,000 or less, arbitrators can simply rule after reading written submissions from both parties.

"Investors can do well in FINRA arbitrations," says Powers, who has both sat on panels and argued before them.

In about 60% of all cases, according to FINRA, the parties reach a negotiated settlement before arbitration actually takes place.

"They'll agree to mediate once they know you're serious, there's an arbitration date looming and they have to pay attorneys to gear up for the hearing," says securities attorney Kirk Smith of Shepherd Smith Edwards & Kantas. "At that point they're much more amenable, as opposed to if you just approach them and ask for mediation." (For more on securities arbitration see http://www.finra.org/arbitrationmediation)

To avoid further broker disputes, be sure you are tracking your investments on a regular basis. Even investments that are supposed to be conservative can turn volatile, as municipal bond investors learned late last year.

And remember, what you always have the right to do is take your account elsewhere if an investment adviser is failing you. Don't hesitate to pull the plug; other firms will welcome your account.

— Allan Chernoff

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