What Is Blanket Recommendation?
A blanket recommendation is a buy or sell recommendation sent by a financial professional or institution to all clients. This advice to buy or sell a particular security or product is distributed in an indiscriminate fashion, regardless of whether the particular asset is ideal or even compatible with the investment goals or risk tolerance of the individual client.
- A blanket recommendation is advice provided by a financial entity to all clients without any consideration for individual differences.
- The goal of a blanket recommendation on a single security is usually to alert clients that a stock is predicted to make a big move in the near future.
- Blanket recommendations for riskier investments are usually ill-advised and may be prohibited by regulations as investors have a variety of risk profiles and circumstances.
Understanding Blanket Recommendation
Typically, a blanket recommendation will give advice on whether to buy or sell a particular stock or sector. The goal may be to alert clients that the financial professional or institution's research indicates the stock or sector in question is likely to make a big move in a certain direction. If this projected move is to the upside, investors might think it advisable to buy shares of a stock or fund to attempt to capitalize on it. If the projected move is to the downside, they might consider or be advised to sell a particular security or attempt to implement a shorting strategy.
Sometimes blanket recommendations are appropriate, for instance recommending that all clients diversify their portfolios across several asset classes or to include a small portion of alternative investments like real estate or commodities. Other times, a blanket recommendation can be inappropriate; for instance, recommending all clients purchase shares of a risky IPO.
Blanket recommendations do not consider an investor’s risk profile, time horizon, nor their investment goals.
Communicating to clients through a blanket recommendation is usually ill-advised because recipients will have varying investment profiles. For instance, a retiree who can't afford to lose a lot of money and a young professional with a much higher risk tolerance may both be the recipients of a blanket recommendation to consider investing in a speculative stock. While the young professional may be able to tolerate the higher risk associated with it, the retiree risks losing a portion of the savings it has taken years to accumulate and could be difficult to replenish given their more limited time horizon.
The recipient of a blanket recommendation should carefully consider how it aligns with their investment goals and risk tolerance, and conduct their own research before acting on it. Remember that blanket advice is given without specifying individual clients' best interests on a personalized basis. If the advice provided is general in nature, it may be a good idea to follow it. Such recommendations may include broad-based advice like how to diversify among asset classes or how much to keep in cash reserves. As the nature of a blanket recommendation becomes more specific, individual investors should pay greater attention to the details and how it may or may not fit with their personal goals or risk preferences.
Some blanket recommendations may be more narrowly conveyed as well. For instance, a broker may choose to provide a blanket recommendation about retirement saving, but only to those clients aged 20-45. Likewise, they may provide blanket advice about social security income but only to clients 55-75.
Financial Industry Regulatory Authority (FINRA), the agency that regulates financial advisors, prohibits blanket recommendations for individual securities.
Blanket Recommendation and Suitability
Both financial advisors and broker-dealers must fulfill a suitability obligation, which means making recommendations that are consistent with the best interests of the underlying customer. The Financial Industry Regulatory Authority (FINRA) regulates both types of financial entities under standards that require them to make appropriate recommendations to their clients.
FINRA Rule 2111 deals with suitability and requires, in part, that a broker-dealer or associated person "have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the [firm] or associated person to ascertain the customer's investment profile."
Because blanket recommendations do not consider particular clients' investment goals, time horizon, risk tolerance, or values, these types of recommendations are prohibited by this rule. Indeed, a blanket recommendation may provide unsuitable investments to certain clients.