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Unsuitable Investment Advice

For many years stockbrokers have held themselves out as “financial advisors” to their clients. When a financial advisor lauds his or her financial expertise to garner clients’ business and those clients rely upon these representations, a fiduciary relationship may be formed. Because investors may not have the time, information or market sophistication, to fully understand today’s complex financial products, they place their trust in financial advisors to guide them and make suitable investment recommendations.

FINRA Rules Dealing with Suitability

As regulated entities and persons, brokerage firms and financial advisors are regulated by federal securities laws and FINRA rules and standards. The suitability of a particular investment and/or investment strategy is governed by FINRA Rule 2111 “Suitability” and FINRA Rule 2090 “Know Your Customer.”

Suitability requires that a broker have “a reasonable basis to believe a recommended transaction or investment strategy involving a security or securities is suitable” based upon the investment profile of the customer meaning specifically: the customer's age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance.

The suitability of an investment and/or investment strategy is to be determined based on an investor’s ability to understand and assume the risks associated with an investment and/or investment strategy. Brokerage firms and its financial advisors are required to only recommend suitable investments to their customers based upon these factors.

In addition to determining suitability of the specific investment, under FINRA Suitability Rule 2111 stockbrokers also have the obligation to ensure that a recommended series of transactions in a customer’s account that may appear suitable when viewed in isolation must also be suitable when viewed in aggregate. So while an investment is suitable individually, overall the transactions in the account must not be excessive or unsuitable when view in aggregate given the customer’s investment profile (this is also referred to as Quantitative Suitability).

FINRA Rule 2090: Know Your Customer

Know your customer FINRA Rule 2090 requires that a financial advisor “use reasonable diligence” when obtaining the essential facts about the customer at the time of account opening and maintenance. At the time of opening the investment account for the customer financial advisors are required to ask the appropriate questions and obtain the required documentation to evaluate the customer’s investment profile and risk tolerance. This is necessary for compliance with the suitability requirements at the time of making investment recommendations.

Suitability applies a flexible approach to the “facts and circumstance” surrounding a particular customer recommendation. When making a recommendation a financial advisor must have a firm understanding of the investment, the portfolio, and the customer. Failure to take into account all of these factors prior to making a recommendation could lead to violations of the suitability rule and result in sales practice violations.

Suitability is one of FINRA’s top 15 controversy types in customer arbitration claims.

Contact Our Firm if You Believe You Were Sold Unsuitable Investments and Suffered Losses

Silver Law Group can help you determine whether an investment loss is the result of unsuitable investment advice. If an investor suffers losses as a result of unsuitable investment advice they may be able recover their losses in a FINRA arbitration claim.

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