" In matters of truth and justice, there is no difference between large and small problems, for issues concerning the treatment of people are all the same." - Albert Einstein

Investment Suitability

All advisors and brokerage firms should treat the investors with honesty, integrity and with professional ethics. Their conflict of interest or selfish motive of financial benefit should not play a role in selling an investment product to any investor of any economic background.

The suitability rule of Financial Industry Regulatory Authority (FINRA) states that companies and their related individuals must have reasonable grounds to believe that a transaction or investment strategy involving the securities they recommend is suitable for the client. Suitability obligations are critical to ensuring investor protection and promoting fair dealings with customers and ethical sales practices.

The Investment suitability is often based on the information obtained through the due diligence of the firm or its members to ascertain the client’s investment profile that includes but not limited to:

  • Client’s age
  • Other investments
  • Financial health and needs
  • Tax status
  • Investment objectives
  • Investment experience
  • Investment time horizon
  • Risk tolerance

Rule 2111 of the Financial Industry Regulatory Authority (FINRA) requires the brokers to have a solid understanding of both the product and the client. The lack of such an understanding itself violates the suitability rule.

Rule 2111 lists below the three main suitability obligations for brokerage firms and their associated members.

  1. Reasonable-basis suitability requires a broker to have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors. Reasonable diligence must provide the firm or associated person with an understanding of the potential risks and rewards of the recommended security or strategy.
  2. Customer-specific suitability requires that a broker, based on a particular customer’s investment profile, has a reasonable basis to believe that the recommendation is suitable for that customer. The broker must attempt to obtain and analyze a broad array of customer-specific factors to support this decision.
  3. Quantitative suitability requires a broker with actual or de facto control over a customer’s account to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, is not excessive and unsuitable for the customer when taken together in light of the customer’s investment profile.