© 2020 Arizent. All rights reserved.

When Settling a Suit Makes Sense

Register now

I'm being sued in arbitration. Over the course of 15 years, I did very well for the client. True, his account was down almost 40% after the 2008 crash. But if he'd stayed with me instead of liquidating everything and locking in his losses, he'd be back to where he was by now. My attorney tells me I should settle (for between 10% to 20% of the client's actual loss), but I don't see why I should. What do you think?

— L.B., New York

Far be it for me to interfere in what your attorney is telling you. However, I do get asked this type of question frequently. Without looking at more details of your case, all I can tell you is what your attorney has probably already said. You settle because you make a business decision. When the cost of paying your attorney, plus the FINRA fees, plus the risk that an arbitration panel may award the claimant something add up to less than the settlement demand, you settle.

I understand people will say that kind of attitude only encourages frivolous lawsuits, but here's the thing-assuming the claimant has some (minimally) rational argument, there's always the chance that an arbitration panel might find that you did something wrong. And who among us can say that we did everything perfectly? There's always a risk of losing, no matter how weak the client's case may be.

And if that still doesn't satisfy you, look at it this way: What you're buying with that money is certainty and time-the certainty that the case is over and the time you won't have to spend sitting in an arbitration hearing listening to other people tell you what you did wrong. Those three or four days (or more) of your life are worth every penny.

What does it cost to become a registered investment adviser?

— W.T., California

There are too many variables for me to give you an easy answer. Will you be hiring a consultant and an attorney to help with registration? How many states will you be registering in? Will you be state- or SEC-registered? Does your home state have a net capital requirement? These and other questions all affect the cost.

So while I can't give you an answer here, I can tell you to make sure you have enough money set aside to get you through six to 12 months with no income. This is due not only to the start-up costs that any new business faces, but also to the length of time before you can actually begin generating revenues.

First, you need to establish the company. If you're going to be solo, it's relatively quick. But if you plan on having one or more partners, you may spend several weeks negotiating back and forth while your attorneys draft up the partnership agreement.

Once the company is established, you'll then file your registration application. Simply preparing the application can take upwards of 30 days. Once filed, the regulators may take a month or more before they review the application and respond. Often they will want more information. Once you respond, it may take several more weeks before they approve. Then there's setting up the infrastructure to operate. Setting up relationships with one or more custodians could take some time.

Can you do all this while you're still employed and your registration application is pending? Perhaps. But know that some firms may see these actions as "engaging in an outside business activity." And once you resign from your firm, it has 30 days to file the U5, which could further delay the approval.

Finally, keep in mind that getting your clients to transfer their accounts can take more time, and if you plan on billing your clients on a quarterly basis (which is standard in the industry), it could be another three months before you see revenues. Your bills, however, don't stop coming and, of course, there's likely to be unplanned expenses and unforeseen delays. Having enough cash set aside to cover expenses (including your own household expenses) for at least six months to a year is a sensible idea.

Alan J. Foxman is an attorney with the law offices of Rita G. Dew, P.A.
and a senior consultant with National Compliance Services, Inc.
in Delray Beach, Fla. He can be contacted at: 
this email address.

For reprint and licensing requests for this article, click here.