What is Unsuitable Investment Advice?

Brokers are Subject to FINRA Suitability Rules

Brokers play an important role in helping investors make sound investment decisions. FINRA Rule 2111 (also known as the “Suitability” rule) provides critical investor-protection standards in the securities industry. Brokers need to abide by certain obligations imposed on them by FINRA’s Suitability rule before making any recommendations to investors. 

To meet these obligations, a broker has to gather enough information about an investor to understand their investment profile before they can recommend any investments. They must also do sufficient research to understand the investment or strategy and associated risks and rewards, and potential consequences before recommending it to an investor. 

So when a broker suggests an investment they must have a firm understanding of the investment, and must have reason to believe that the recommendation is in your best interest based on your financial situation (e.g., income and assets), tolerance for risk (e.g., conservative, moderate, aggressive and speculative), and investment objectives (e.g., preserve principal, achieve a moderate rate of return). 

A broker’s recommendation to investors must be suitable and based on a full understanding of the product and their risks. Brokerage firms are responsible for establishing a supervisory system that to keep a close watch on broker’s sales activities to ensure that these obligations are met.

Unsuitable Investment Recommendations

When a broker makes an unsuitable recommendation, whether it was intentional or negligent, they have violated the standard of care which often results in significant investor losses. Unsuitable investment recommendations may result from the broker’s failure to research investments, including failure to understand the specific features and terms of investments recommended to investors. Broker’s sometimes recommend securities that are complex and more difficult to evaluate placing investors at a greater risk of financial harm. 

Common unsuitable recommendations of products involve overconcentration in sector-specific investments, illiquid investments, non-traded real estate investment trust (REITs), leveraged and inverse exchange-traded products (ETPs), exchange-traded funds (ETFs) and notes (ETNs), and variable annuities. Brokers may also make unsuitable recommendations when they do not consider the customers financial needs by failing to take into account the cumulative fees, sales charges or commissions.

Recruit the Help of a Securities Fraud Attorney

Riera Law’s experience and thorough understanding of unsuitable investment claims allows us to help you to determine whether your investment loss was the result of unsuitable recommendation. Contact us for a free case evaluation.