Investment advisors and brokers who invest on others’ behalf are required to have a reasonable basis to believe that the investments they choose are suitable for the customer’s investment profile. They must be acting on information obtained through reasonable diligence to ascertain the customer’s investment profile. Their recommendations must be customer-specific and quantitatively suitable.
When investors are pushed into unsuitable investments, it can be a form of securities fraud. The harmed investor can make a claim in court or arbitration that the investment was unsuitable, and this may allow them to get their money back, plus damages.
But what is unsuitable for you? It depends entirely on your individual investment profile. That profile includes (but isn’t limited to) these 9 items:
- Your age
- The other investments you have
- Your financial situation and needs
- Your tax status
- Your investment objectives
- Your investment experience
- Your investment time horizon
- Your liquidity needs
- Your risk tolerance
Your investment advisor or broker needs to establish an investment profile for you and then make recommendations based on a firm understanding of the product being recommended and on your individual facts and circumstances. The presentation of this recommendation triggers FINRA’s suitability rule.
Here are five ways an advisor or broker might violate the suitability rule:
- Lacking a sufficient understanding of the product being recommended
- Lacking a sufficient understanding of the customer’s investment profile
- Lacking a reasonable basis, based on reasonable diligence, to believe that the product is suitable for at least some investors. In other words, they must understand the potential risks and rewards
- Lacking a reasonable basis to believe, based on reasonable diligence, that the product is suitable for this particular investor, based on an analysis of customer-specific factors
- Recommending a transaction which, when viewed in light of the customer’s entire investment profile, would be excessive or unsuitable
For example, although investments in real estate are suitable for many investors, they are not suitable for those who need to keep their funds liquid. Government bonds are suitable for investors with a lower tolerance for risk, but not for someone with a long investment time horizon who is seeking to build their portfolio quickly.
Investment advisors and brokers should never apply the same strategy to all their clients. Instead, they are required to develop a tailored strategy for each individual investor.
If you have lost a substantial amount of money due to an investment advisor or broker making unsuitable recommendations, you may have legal options to get that money back. Contact an attorney who has experience with FINRA and securities fraud.