What is suitability?
A broker is obligated under Financial Industry Regulatory Authority (FINRA) rules to "know his customer" and recommend only the investments that make sense in light of the customer's full financial portfolio. The investor is also required to know and understand the security. Then the broker must ensure that his knowledge of the customer and the security match so that the broker’s recommendation may be deemed “reasonable” under the circumstances.
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An investment recommended by a broker is often unsuitable when inconsistent with the customer's willingness or ability to take risk or if the purchase or sale of a security is not aligned with the customer's investment goals.
Likewise, what is reasonable for one customer may be unreasonable for another. Reasonable depends on the financial circumstances of the particular customer and reasonableness cannot be generalized. This is why it is critical for a broker to stay current on the customer’s financial circumstances and to get regular updates from the customer on changes in financial circumstances.
New account forms are often the road map for brokers to garner critical customer information from their customers. Without a properly filled-out new account form, a broker does not necessarily know, much less have the ability to defend, his recommendations as reasonable. A recommendation can only be considered reasonable when compared to key components regarding investment objectives, risk tolerance, and the other suitability factors mentioned above.
Brokers’ recommendations of unsuitable investments are the most typical type of case that get filed against brokerage firms before the FINRA securities arbitration forum.
Please Note: McCabe Rabin, P.A. provides these FAQ’s for informational purposes only, and you should not interpret this information as legal advice. If you want advice as to how the law might apply to the specific facts and circumstances of your case, please contact one of our attorneys.