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Signs Point to "Tsunami" of Lawsuits Imminent for Financial Advisors

By Miriam Rozen February 5, 2019

Has a “tsunami” of investor complaints against financial advisors landed, as plaintiff lawyers predicted it would following a market correction?

Yes, according to Andrew Stoltmann, a Chicago-based plaintiff lawyer and a director and past president of the Public Investors Arbitration Bar Association.

Lawyers who usually defend financial advisors against clients’ allegations, and even broker-dealer managers — including Raymond James Financial’s CEO Paul Reilly — also anticipate that, if the equity markets keep skidding, a rise in investor complaints will follow.

It was during an interview with FA-IQ in September 2018 that Stoltmann used the “tsunami” term to describe the amount of litigation targeting advisors he expected if the S&P Index slid south.

Since he made that comment, as stock indexes kept dropping December and early January, Stoltmann reports investors have called him asking to lodge complaints against their advisors.

“We’ve gotten probably a 20% higher volume of calls in the last four months versus 12 months ago. The reason is because of the plummeting markets,” Stoltmann says.

And Stoltmann is not the only plaintiff lawyer spotting an uptick in investors seeking to file claims against their financial advisors. “That’s probably a conservative number,” says Marnie Lambert, a Columbus, Ohio lawyer who is also a PIABA board member, about Stoltmann’s 20% increase in calls.

Both Stoltmann and Lambert, as with most plaintiff lawyers representing investors, charge their clients on a contingency basis rather than hourly fees. The plaintiff lawyers get paid only if their clients win damage awards, and they only get paid well if their clients win big damage awards. Therefore, their willingness to represent clients hinges on the size of the investment losses. With the stock market downturns, investors’ losses have grown and so have their potential damage award amounts — inspiring plaintiff lawyers.

Raymond James’ Reilly will reap no financial rewards if greater numbers of clients file legal complaints against the broker-dealer’s advisors. Indeed, the litigation would likely nick Raymond James’ profits.

But Reilly recently conceded to an audience of analysts, as he detailed the company’s 2018 fourth quarter results, that “downturns tend to bring out more cases.”

For the fourth quarter of the fiscal year ending Sept. 30, 2018, Raymond James reported net revenues of $1.90 billion and net income of $262.7 million. The results of the quarter were “negatively impacted” by not only unrealized losses on its private equity investments, but also an increase in the company’s cash reserves for legal matters, the company reported.

“It’s been elevated about $10 million-ish,” Reilly told the analysts about Raymond James’ legal reserves’ costs. “It’s just too hard to tell” if all that will be needed, Reilly said.

An escalation in broker-dealers’ reserves for legal matters usually signals more about the expected expenses of individual cases that have already been filed, rather than macro-economic factors, such as stock markets sliding, according to Jonathan Brennan, who, prior to opening his own New York law firm this summer, served as Merrill Lynch’s lead lawyer for its wealth management unit’s customer litigation division.

Although Brennan rejects broker-dealers’ legal reserve costs as an accurate leading indicator of investor-against-advisor litigation trends, the former Merrill Lynch executive also expects more investors to file allegations against advisors as asset portfolios shrink. Already, Finra statistics show there has been a spike, Brennan says. In 2018, according to recently released Finra numbers, there were 2,713 new customer complaints filed against broker-dealers — a 20% increase from the previous year.

Broker-dealers’ internal customer complaint departments will most likely be the first to spot a significant increase in clients’ beefs with their advisors, and those units typically don’t publicize those numbers, Brennan says.

Clients usually lodge complaints with those internal departments before proceeding to Finra, he says. The broker-dealer's internal units’ reviews of clients’ complaints typically delay by a few months any increase in Finra filings, Brennan says.

Marnie Lambert

If, by the end of this year’s first quarter, investors start seeing declines not just in their profits but also in their principal investments, Brandon Reif expects a deluge of complaints against financial advisors will follow.

The managing partner of the Reif Law Group in Los Angeles, Reif typically defends broker-dealers and RIAs against investors’ complaints. If their asset portfolios shrink to values lower than what they were when they began with an advisor, clients will have stronger arguments to make during legal battles targeting financial advisors, Reif says. They will argue their financial advisors failed to warn them adequately of the risks of losing principal, Reif says.

“We are getting to that tipping point,” Reif warns.