If you are reading this article, you are likely a financial advisor or part of a firm facing a FINRA arbitration. Having spent years in the trenches representing parties in this space, I understand the weight and complexity these cases carry. You're not just dealing with allegations; you're defending your professional integrity and livelihood!
One area where I've seen significant strategic evolution is in the use of expert witnesses. For years, the standard playbook involved separate experts for liability (the "did they do wrong?") and damages (the "how much did it cost?"). But increasingly, a more streamlined and frankly, often more effective approach has emerged: the dual-role expert.
Consider this: In a Finra arbitration, you're trying to connect the dots for a panel that might not have lived and breathed this industry like you have. You need to explain not just what happened, but also why it wasn't necessarily a breach of conduct, and even if there were missteps, how the claimed losses might be disconnected. That's where the power of a single, well-versed expert comes in.
Historically, parties often retained separate experts to address liability and damages in Finra disputes. However, a strategic shift towards utilizing a single expert capable of opining on both aspects of a case has emerged as a powerful tool. This dual-role expert model can offer significant advantages in terms of efficiency, cost-effectiveness, and the presentation of a cohesive and persuasive narrative to the arbitration panel.
In the following sections, we will explore the strategic value of this approach, examine relevant case scenarios, and address the crucial ethical and procedural considerations that must inform the decision to engage a dual-role expert. The aim is to provide you, the financial advisor respondent, with actionable insights to enhance your defense strategy in FINRA arbitration.
From my experience, the beauty of a dual-qualified expert lies in their ability to weave a cohesive narrative. In cases involving allegations of unsuitable recommendations, churning, or misrepresentation – all too familiar scenarios, I'm sure – having one expert who understands both the regulatory landscape and the financial implications can be incredibly persuasive.
Imagine your expert explaining not only why a particular investment strategy aligned with the client's risk profile at the time, but also demonstrating through market analysis that similar losses occurred across the board, irrespective of your actions. That direct link between conduct and consequence, articulated by a single credible voice, resonates with arbitrators. It cuts through the potential confusion of dueling experts and presents a unified defense.
Let's be honest, cost is always a factor. Engaging one expert instead of two can offer significant savings, especially in those cases where the stakes might not warrant a small army of consultants. Expert fees in FINRA can add up quickly – we're talking hundreds to over a thousand dollars an hour for document review, report writing, depositions, and hearing testimony. Consolidating that expertise can free up resources better allocated elsewhere in your defense.
Beyond the practicalities, a dual-role expert can be a powerful tool in challenging the claimant's case. Because they're analyzing both liability and damages, they're often better positioned to identify weaknesses in the opposing expert's opinions – flawed assumptions, misapplied industry standards, or outright overreach. This comprehensive rebuttal can significantly strengthen your position and, in my experience, even pave the way for earlier settlement discussions. A strong expert report that convincingly argues both no wrongdoing and no demonstrable damages can make the other side seriously reconsider their chances at a full hearing.
Think about that retiree who claims you put them in overly risky energy stocks. A dual-role expert can dig into their investment history, showing their past appetite for higher-yield investments, and then demonstrate that even conservative energy ETFs took a hit during the same period. This suggests market forces, not necessarily your recommendations, drove the losses.
Or consider the client alleging excessive trading. Your expert can analyze the account activity, potentially showing the client initiated a significant portion of the trades and had a history of active trading. Furthermore, a performance analysis might reveal overall positive returns, even after commissions, weakening both the claim of misconduct and resulting damages.
And in those complex failure-to-supervise cases, a dual-role expert can explain the firm's supervisory structure, highlighting compliance reviews and communication logs, while also pinpointing any actual losses directly attributable to the alleged supervisory lapse, separating them from broader market downturns or client-directed trades. This nuanced approach helps the panel avoid broad-brush judgments.
Now, let's be clear: this strategy isn't a silver bullet. Not every expert is equipped to credibly address both liability and damages. FINRA Rule 12604 requires expert testimony to be helpful to the panel, based on sufficient data, and derived from reliable methods. Your expert needs to pass muster on both the "conduct" and the "money" sides of the equation.
There's also the potential for the other side to cry foul, alleging bias. They might argue that a single expert is inherently less neutral. That's why it's crucial to select an expert with impeccable credentials and to structure their engagement to emphasize their role as an objective educator on industry practices and financial principles, not just an advocate for your defense. Upholding the FINRA Arbitrator Code of Ethics, particularly around impartiality and integrity, is paramount.
Furthermore, in highly specialized cases – think complex derivatives or alternative investments – it might still make sense to bring in separate, deeply specialized experts. An expert on regulatory compliance might not have the sophisticated econometric skills needed for complex damage calculations, and vice versa. It's about matching the expert's specific skillset to the technical demands of the case.
Ultimately, the decision to use a dual-role expert in your FINRA arbitration is a strategic one. But from my perspective, having seen it work effectively time and again, it offers a compelling way to streamline your defense, potentially reduce costs, and present a clear, unified narrative to the arbitration panel.
When you choose wisely and ensure your expert is both qualified and credible, they can bridge the gap between complex regulatory standards and tangible financial outcomes. In a forum where clarity, efficiency, and trust are key, the dual-role expert can be a valuable asset in navigating the FINRA maze and working towards a favorable resolution.
Louis Tambaro is a New York- and New Jersey-based commercial litigator who advises broker-dealers, RIAs, wealth management firms, and financial advisors on a broad range of transactional, litigation, and regulatory matters, including expungement applications and advisor transitions. He is regularly quoted on issues impacting the broker-dealer business.
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