West Palm Beach Securities Litigation Attorneys Protecting Investors Against Unsuitability in Investments
The doctrine of suitability is the single greatest duty governing the relationship between broker and investor. Each broker and brokerage firm is required to recommend only suitable investments consistent with the customer’s risk tolerance and investment objectives. A broker is obligated under securities industry rules to “know the customer” and to recommend investments that make sense in light of the investor’s complete financial picture. When brokers violate this basic principle, the securities litigation attorneys at McCabe Rabin in West Palm Beach help the investor hold the brokerage firm accountable and recover compensation for the financial losses and damages caused.
Brokers Must Know Their Customers
A large part of a broker’s job is to provide advice to customers and make recommendations. Most customers, regardless of their level of sophistication in investing, rely heavily on the advice of their broker. An investment recommended by a broker is often unsuitable when it is inconsistent with the customer’s willingness or ability to take risk or if the investment does not further the customer’s investment goals.
What is suitable for one investor may be unsuitable for another. For example, an elderly person who is long retired, has limited assets, and is living on a fixed income, often is not willing or able to afford the possible losses associated with more risky investments. In contrast, a younger person with many working years left probably will have a different willingness and ability to take on risk and will have different investment objectives.
The FINRA Suitability Rule
FINRA, the regulatory authority which governs the brokerage industry for the protection of investors and the integrity of the financial markets, has a suitability rule (Rule 2111) that all brokers and brokerage firms are well aware of and bound to follow. The duties of a broker under this rule can be broken down into three parts. Brokers should:
- know their customer, including their investment goals and risk tolerance;
- know the stock or product they are recommending; and
- match that recommendation with the customer.
Making suitable recommendations therefore requires a firm understanding of both the customer and the product. Knowing a customer’s investment profile involves understanding a great many facts about the customer, including the customer’s:
- other investments;
- financial situation and needs;
- tax status;
- investment objectives;
- investment experience;
- investment time horizon;
- liquidity needs;
- risk tolerance;
It is vital for a broker to know these facts, among others, about a customer and to stay current on the customer’s financial situation and any changes in circumstances, in order to uphold the continuing duty to know the customer and make only suitable recommendations.
Brokers are Obligated to Have a Reasonable Basis for their Investment Recommendation
FINRA Rule 2111 applies whenever a broker makes an investment recommendation, including any recommended transaction or investment strategy involving a security or securities. The broker needs to have a reasonable basis for making the recommendation and a reasonable basis to believe it is suitable. This duty requires diligence on the part of the securities professional. If this duty is not met, the customer likely has a cause of action for an improper recommendation and can obtain compensation for the harm caused.
Our West Palm Beach Securities Litigation Attorneys Help Victims of Unsuitability
If you believe your broker recommended unsuitable investments that went against your investment strategy or risk tolerance, contact a knowledgeable and experienced securities litigation attorney who can look into the matter and help you recover for your financial losses. In West Palm Beach, call McCabe Rabin at 561-659-7878. You can also reach us toll free at 877-915-4040, or contact us online to schedule a free consultation regarding your concerns.