I was catching up on my reading and came across a column in Investment News by Mark Schoeff that described the results of a recent FINRA arbitration, results which I found a bit alarming. I caution you: reading too much into any arbitration award can be dangerous and/or foolhardy since they don’t always follow – or, occasionally, even slightly resemble – the rule of law. Indeed, screwy arbitration awards abound, and sometimes all you can say is dang, glad it wasn’t me. That’s why, in the eyes of the law, anyway, arbitration awards, even those that are well reasoned and sensible, do not constitute binding legal precedent.
Nevertheless, this award serves as a nice cautionary tale for firms that are willing to open accounts for advisory customers but not serve as the actual advisor, which is an altogether common practice in the securities industry. Remember: investment advisors can recommend securities transactions, but they cannot actually effect any trades. To make a securities trade that was recommended by an IA, the customer must have a securities account at some broker-dealer. Some advisors are dually registered, and work for a BD, and that’s where the account is generally opened. Many other advisors, however, are not associated with a BD, so their advisory clients need a brokerage account somewhere. Often, that somewhere is a discount BD that charges low commissions, like TD Ameritrade, the respondent in this particular arbitration.