Charles Schwab's brokerage agreement contains a clause forcing customers to arbitrate disputes, and some RIAs are expressing concern that using Schwab as a custodian and requiring them to accept the arbitration clause imposes disclosure responsibilities. After all, these clauses have for decades been considered a heavy-handed tactic imposed by Wall Street firms to minimize their legal liability at the expense of investors.
"I would suggest that RIAs consider, as a strong and SUBSTANTIAL factor in the selection of the custodian to recommend to the RIA’s new clients, the existence of this waiver of the right to participate in class actions, given the very real impact it may possess upon the client at some future time," says Ron Rhoades, an advisor and leader in the movement to maintain a fiduciary standard based on the Investment Advisers of 1940. "I would also suggest that all RIAs considering enhancing their disclosures in their Form ADV, Part 2A, to inform clients that such a waiver of legal rights is mandated by certain recommended custodians, and that not all custodians possess such waivers. Also that class actions against BDs for misconduct are somewhat frequent, and often result in recoveries of funds for customers (albeit in relatively small amounts, per customer, in most instances)."
Rhoades, an attorney and CFP practitioner, adds that advisors may want to send existing clients an amendment to Form ADV. " I would suggest a timely Form ADV Part 2A amendment, with the Statement of Material Changes sent to the client and accompanied by a letter to the client explaining the situation in more detail," says Rhoades, an assistant professor at Alfred State University in blog post.
Please post a comment letting A4A members know if your custodian imposes an arbitration clause in its brokerage agreement.