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. Retirement

    Investment Suitability 101

    This a fundamental concept from both a legal and practical perspective.
  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

    Deal Effectively With Difficult Clients

    Learn how to tame the most shrewish clients with these simple methods.
  5. Professionals

    Tips For Boosting Your Business

    Find out how butter up new clients, build up old files and better your bottom line.
  6. Professionals

    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.
  7. Financial Advisor

    Advisors: Revisit Your Client's Risk Assumptions

    Financial advisors should avoid generalizing a client’s risk tolerance based on their age or other demographics.
  8. Financial Advisor

    What To Do When Your Client Behaves Badly

    As a financial advisor managing your client's assets is only part of the job; sometimes you have to manage your client, as well.
  9. Retirement

    Helping Your Clients Face The Financial Reality Of Retirement

    Altering retirement plans is tough, but when the retiree is unprepared, it's very necessary.
  10. Financial Advisor

    Advisors Need to Talk Less, Ask and Listen More

    Financial advisors spend a lot of time giving their clients advice on how to invest their money. But what they often forget to do is listen.
Trading Center