The Uniform Securities Act requires IAs to determine the suitability of investment recommendations given each client's circumstances. Failure to do so is considered an unethical business practice and is subject to the penalties referred to in previous sections.
The following practices are examples of violations of the suitability rules:
- Recommending securities without having a reasonable basis for the recommendation
- Recommending securities without taking the client's financial situation, needs and objectives into account
- Recommending the same security to all clients
- Failing to describe important facts and risks about the security to each client
- Churning in a client account (making trades too frequently in order to increase commission)
- Providing services that are not appropriate to the client's situation and needs
- Failing to inquire into a client's tax situation, risk tolerance and other assets
The Investment Advisers Act of 1940 also defines "failure to meet suitability standards" as an unethical practice.
- An IA who does not make reasonable inquiry or suitable recommendations, given the information from such an inquiry, is guilty of violating the suitability requirements.
Prudent Investor Standards
InvestingThis a fundamental concept from both a legal and practical perspective.
Financial AdvisorYou can't control how they react to the market, but you can help them understand the reality of the situation.
Financial AdvisorFinancial advisors have to carefully consider a client's willingness and ability to take investment risks, including tax concerns and liquidity needs.
Managing WealthRIAs and brokers are held to different standards when providing investment advice. Here's how they differ.
Financial AdvisorDetermining a client’s risk tolerance is a critical piece of the puzzle in designing and appropriate asset allocation.
Managing WealthInvestment managers should always act to benefit the client. Learn what actions managers should take on a client's behalf.
Financial AdvisorThe DoL had proposed rules that would have a major impact on financial advisors. If they are approved here's what it would mean.
Financial AdvisorOne of the best things that advisors can provide to clients is an annual review of their financial situation. Here are some guidelines.
Financial AdvisorLosing a client is never pleasant for a financial advisor, but sometimes this is a better outcome than continuing the relationship.
Financial AdvisorFinancial advisors should avoid generalizing a client’s risk tolerance based on their age or other demographics.