If at any time you knowingly recommend an unsuitable investment to a client, with the intention to defraud, you are liable for both civil and criminal penalties. Suitability is defined in many ways, a few of which will be discussed here.


Look Out!
The SEC specifically defines suitability as follows:
When your broker recommends that you buy or sell a particular security, your broker must have a reasonable basis for believing that the recommendation is suitable for you. In making this assessment, your broker must consider your risk tolerance, other security holdings, financial situation (income and net worth), financial needs, and investment objectives.


The USA 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 penalties.

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
  • Making trades of excessive size in a client's account
  • Churning in a client account (making trades too frequently)
  • Providing services that are not appropriate to the client's situation and needs
  • Failing to inquire into 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

Related Articles
  1. Financial Advisor

    Choosing A Financial Advisor: Suitability Vs. Fiduciary Standards

    Discover the differences between the Suitability and Fiduciary Standards when hiring a financial advisor.
  2. Investing

    Investment Suitability 101

    This a fundamental concept from both a legal and practical perspective.
  3. Managing Wealth

    RIAs and Brokers: What's the Difference?

    RIAs and brokers are held to different standards when providing investment advice. Here's how they differ.
  4. Financial Advisor

    What Is Your Client's Willingness and Ability to Take Risk?

    Financial advisors must carefully consider a client's willingness and ability to take investment risks, including tax concerns and liquidity needs.
  5. Financial Advisor

    Deal Effectively With Difficult Clients

    Learn how to tame the most shrewish clients with these simple methods.
  6. Financial Advisor

    Retirement Plan Advisors: Here's What the SEC Expects

    Here's what the SEC looks for when advisors align clients' suitability with investments.
  7. Financial Advisor

    When Are Mutual Funds Right for Your Client?

    Find out what factors determine whether mutual funds are right for your client, including risk tolerance, investment goals and tax implications.
  8. Small Business

    Tips For Boosting Your Business

    Find out how butter up new clients, build up old files and better your bottom line.
  9. Personal Finance

    When (And How) To Fire A Client

    Firing the clients who take more of your time and effort than the revenue they contribute is a great way to improve your bottom line.
  10. Managing Wealth

    Asset Manager Ethics: Acting In the Benefit of Clients

    Investment managers should always act to benefit the client. Learn what actions managers should take on a client's behalf.
Frequently Asked Questions
  1. What's the Best Way to Contact Warren Buffett?

    Learn how to contact Warren Buffett and what kinds of contact is most likely to receive a response from him or from his company, ...
  2. What is the Financial Services Sector?

    A diverse group of companies, beyond banks and credit unions, comprises the financial services sector.
  3. Who are Whole Foods' (WFM) main competitors?

    Whole Foods' main competitors are Sprouts Farmers Markets and Trader Joe's. However, the recent acquisition by Amazon my ...
  4. What caused the Stock Market Crash of 1929 that preceded the Great Depression?

    Find out what led to the stock market crash of 1929, which in turn led to the Great Depression. It sparked a nearly 90% loss ...
Trading Center