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. Investing

    Investment Suitability 101

    This a fundamental concept from both a legal and practical perspective.
  2. 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.
  3. Financial Advisor

    Manage Your Clients' Expectations

    You can't control how they react to the market, but you can help them understand the reality of the situation.
  4. Financial Advisor

    Impact of Proposed DoL Rules on Financial Advisors

    The DoL had proposed rules that would have a major impact on financial advisors. If they are approved here's what it would mean.
  5. Financial Advisor

    Tips for Assessing a Client's Risk Tolerance

    Determining a client’s risk tolerance is a critical piece of the puzzle in designing and appropriate asset allocation.
  6. Financial Advisor

    Deal Effectively With Difficult Clients

    Learn how to tame the most shrewish clients with these simple methods.
  7. Small Business

    Tips For Boosting Your Business

    Find out how butter up new clients, build up old files and better your bottom line.
  8. 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.
  9. Financial Advisor

    Losing a Client Is Not Always The End of The World

    Losing a client is never pleasant for a financial advisor, but sometimes this is a better outcome than continuing the relationship.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center