Valenti Hanley PLLC

What qualifies as an unsuitable investment?

Trusting some of your finances to a broker or advisor is a significant decision. You're handing over a piece of your potential future to another person, someone you believe has the knowledge to act only in your best interests. Unfortunately, things don't always turn out that way.

If a broker or advisor makes what is called an "unsuitable" recommendation to their customer, and it results in a negative outcome, that investment professional may be liable. But what constitutes unsuitability?

Defining when an investment is suitable

Someone making investments on behalf of a customer must believe a recommendation they make is "suitable" for the client. To determine whether something is suitable, the investment professional has to consider their customer's full investment profile. That can include:

  • Customer age
  • Other investments
  • Current financial situation
  • Investment goals
  • Risk tolerance
  • Tax status
  • Any other information the customer provides

Within this, there are three main obligations. A broker has to believe the recommendation is suitable for at least some investors; has to then believe the recommendation is suitable for their customer; and then has to believe the recommendation is not "excessive and unsuitable" for the customer when viewed as part of their entire investment profile.

Determining unsuitability

If an investment professional violates this concept of what makes a recommendation suitable, then it may qualify as unsuitable.

For example, if a customer is well into retirement and looking for a safe, reliable investment option for income, it would be unsuitable for a broker or advisor to recommend they invest money into a risky stock, or one that won't produce a return for many years. Or maybe a customer is already heavily invested in one particular sector and wants to expand. If a broker or advisor puts more money into that same market sector, it might be unsuitable.

Regulations don't outline specific scenarios or actions that constitute unsuitability. Instead, in cases where suitability is questioned, the unique facts and circumstances of each case have to be investigated, reviewed and analyzed.

This is a complex area of the law. If you believe a broker or financial advisor has not acted in your best interests, and instead made unsuitable investments that resulted in a loss, you may want to contact an attorney. There may be options to take legal action against the person responsible.

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Valenti Hanley PLLC
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Louisville, KY 40202

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