Unsuitability / Unsuitable Investments

FINRA’s suitability rule is based on a fundamental requirement that brokerage firms and their financial advisors deal fairly with their clients. FINRA’s suitability rule states that the financial advisor “must have a reasonable basis to believe” that a transaction or investment strategy involving securities they recommend is suitable for the customer. This “reasonable belief” must be based on the information obtained through reasonable diligence to ascertain the investor’s investment profile. The rule requires the financial advisor to seek to obtain information about the client’s:

• age;
• other investments;
• financial situation and needs, which might include questions about annual income and liquid net worth;
• tax status, such as marginal tax rate;
• investment objectives, which might include generating income, funding retirement, buying a home, preserving wealth or market speculation;
• investment experience;
• investment time horizon, such as the expected time available to achieve a particular financial goal;
• liquidity needs, which is the client’s need to convert investments to cash without incurring significant loss in value; and
• risk tolerance, which is a client’s willingness to risk losing some or all of the original investment in exchange for greater potential returns.

To avoid that the client makes unsuitable investments, firms and their financial advisors are required to learn as much about a client’s investment profile as possible before recommending a securities transaction or investment strategy. The rule places an obligation on a firm and financial advisor to seek information from its customers. If the financial advisor recommends securities, investment products or investment strategies that are considered unsuitable investments for you, you likely have a viable cause of action against the financial advisor and their firm.