Stockbrokers and investment advisors may only make investment recommendations that are “suitable” for you, the investor. What is suitable for you may not be suitable for your spouse, co-worker, friend, etc. Your suitability now may differ from your suitability a year from now. A broker’s failure to inquire and learn about your investment profile is a violation of the suitability rules, and can be the basis of your recovery in arbitration.
FINRA requires that brokers have a reasonable basis to believe that any transactions or investment strategies involving securities are suitable for a particular customer. Brokers should base this reasonable basis on information obtained through due diligence to ascertain the customer’s investment profile. Meaning, before making any recommendations, a broker must investigate your financial situation, your prior investment experience, your tax status, your investment objectives, and your tolerance for risk to determine whether a particular investment or investment strategy is suitable for you. Other factors for a broker to consider include your age, income, net worth, liquid net worth, education, understanding of risk, ability to afford the risk, other investments, and financial needs. All of these factors are essential to a broker’s due diligence and must be considered before they make any recommendations. The totality of these factors makes-up your investment profile. For more information about understanding your investment profile, look here.
After determining your investment objectives and tolerance for risk, stockbrokers and investment advisors have a duty to investigate the risks of each recommended investment. The broker must disclose any known or discoverable risks to you before entering into any recommended transactions. The broker must conduct sufficient due diligence on any recommended securities to determine the level of risk an investment in such securities poses to you. To determine the level of risk an investment may carry, and to assist the broker in performing his/her due diligence, the broker can review the periodic SEC filings and audited financials of the Company involved. The broker may also review the Company’s press releases, research reports, trading history, liquidity, and analyst recommendations. Additionally, the broker should examine the sector, and the overall market and economy. If a broker’s customer claims suitability, the broker may need to explain why his/her recommendations and subsequent transactions were suitable to the customer’s investment profile. If the broker cannot explain the suitability of the investment, the arbitrator may determine that the broker failed to perform a suitability analysis.
A broker’s failure to disclose the known or discoverable risks about a particular investment or investment strategy may violate of the suitability rules, resulting in fraud or other actionable misconduct. Generally, it is not necessary that the broker intend to conceal facts from you. It is only necessary that the broker failed to disclose easily discoverable facts pertinent to your decision to invest in the security. Failure to follow suitability rules gives rise to other causes of action, including churning, selling away, and over-concentration.
It is important to note that suitable does not inherently mean risk-free. Just as unsuccessful investments are not necessarily unsuitable. No one can accurately predict the rise and fall of the market, and financial loss may occur from suitable investments. As an investor, hold your broker accountable for his or her recommendations and inquire as to how those recommendations are suitable for your investment profile.
If you believe your broker is recommending investments not suitable to your financial objectives, you may have a claim against your broker and/or the brokerage firm for suitability. If you experienced losses due to unsuitable investments, you may be entitled to damages.
To learn more about suitability, call us at 512-306-8188 or contact us online.