Robo-advisers like Betterment LLC, Financial Engines Inc. and Wealthfront Inc. stand to win a lot of business even if the Department of Labor fiduciary rule they avidly support is revised or scrapped.
But as the number of retirement savers using robo-advisers increases, it’s also creating the potential for those savers to lose a mechanism they might lean on to enforce their rights: class actions. That’s because many robo-advisers require their customers to arbitrate disputes and give up their right to class actions—one of the very things the fiduciary rule is attempting to curtail.
A major component of the rule is that it allows advisers to work on commissions but requires them to sign contracts with their customers and those contracts can’t make arbitration mandatory. This provision could be one that the Trump administration targets, particularly in light of recent moves in Congress to stymie class actions.
Arbitration agreements also prevent arbitrators from learning from one another to the detriment of investors, Julie G. Reiser, a partner at Cohen Milstein Sellers & Toll PLLC, in Washington, told Bloomberg BNA.
“The arbitration process is between private parties and typically arbitration outcomes remain confidential,” Reiser said in an email. “This means that consumers who have the same dispute against a corporation can receive different outcomes in arbitration as there are no published opinions that create precedent for the next dispute. It also means that companies can continue acting as if deceptive practices or defective products are isolated and avoid public pressure to change. Transparency is a hallmark of the court system that results in more corporate accountability.”
Although arbitration is perfectly legal, “there’s just no good reason to force one avenue of dispute resolution before a dispute ever arises,” Reiser said.
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