The short answer is no. It may seem like an easier and quicker way to recover lost money, but the Financial Industry Regulatory Authority (FINRA) and firms do not want financial advisors to be able to avoid reporting your complaint. If their misconduct has cost you money, make sure to recover your funds via official channels.

Disputes and complaints eventually show up as disclosures on the investor’s BrokerCheck record. BrokerCheck is the FINRA-maintained site that compiles information regarding investor disputes and financial misconduct. These records need to be complete to ensure that other investors can get a complete picture of their financial advisor’s conduct before investing.

Why Do Financial Advisors Break This Rule?

When an investor agrees to work with a financial advisor, they typically agree to resolve any disputes through FINRA arbitration. But arbitration can prove a hassle for the financial advisor as well as the investor, and investors may be tempted to resolve the issue by simply taking the financial advisor’s offer of payment. Financial advisors may also have their own reasons for not wanting their firm to know about their less-than-stellar business practices.

A financial advisor recently entered into an Acceptance, Waiver, and Consent agreement (AWC) with FINRA in which he consented to the findings that he compensated an investor to resolve their complaint. (AWCs allow financial advisors to accept FINRA’s findings without admitting or denying the allegations.) This matter may have been swiftly resolved by the firm, but as a result of FINRA’s findings, the financial advisor will have to pay a fine and endure a suspension.

What Happens When Financial Advisors Offer to Pay for their Investor Disputes?

In June 2020, an investor wanted to transfer shares of their employer-company stock to their broker-dealer account. The financial advisor gave the investor mistaken instructions on how to complete the documents for the transfer. As a result, the investor’s stocks were liquidated. Once the investor received a check for the liquidated stocks, they reached out to the financial advisor with their complaint. They complained verbally and did not include the firm in their initial communication.

The financial advisor did not inform his firm about the investor complaint. FINRA requires financial advisors to update their Form U4 with any new investor complaints within 30 days of receiving the complaint. Instead of making the update, the financial advisor allegedly took matters into his own hands.

On August 7, 2020, the financial advisor sent the investor a personal check for $2,678.50, as part of an alleged attempt to make the dispute go away. FINRA further alleged that the financial advisor intended for the money to cover the appreciation value that the investor missed out on due to the liquidation.

The financial advisor’s cover-up attempt backfired when the investor reached out to the firm. The firm terminated the financial advisor in September of 2020, stating in the allegations section of the disclosure that they had fired him over “Concerns the registered representative tried to remedy a processing error in a client account by providing personal funds.”

The consequences did not end with termination. As part of the terms of his AWC, the financial advisor consented to a 15-day suspension and a $5,000 fine.

What Should I Do if My Investor Offers to Pay Me for Their Mistake?

If your investor offers to pay you instead of contacting their firm or entering arbitration, you should be wary. You may want to consult with a securities attorney before you take the next step. Don’t hesitate to reach out to the securities attorneys of Fitapelli Kurta for a free case evaluation – call (877) 238-4175 or email info@fkesq.com.

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