Financial Industry Regulatory Authority (FINRA) Rule 2111 requires that a broker have reasonable grounds for recommending any investment, investing strategy, trade, or portfolio structure to a customer. This means that the recommendation must be suitable for the client given their investing profile including:
Registered representatives at brokerage firms must conduct the proper due diligence to make sure that their recommendation is a good fit for a customer. Not only that, but under the Securities and Exchange Commission’s (SEC) Regulation Best Interest rule, brokers can only sell a financial product to a customer if it is in the latter’s best interests.
Here is Shepherd Smith Edwards and Kantas managing partner and securities fraud attorney, Kirk Smith, speaking about unsuitability:
Unsuitability continues to be one of the most common reasons cited in FINRA arbitration claims brought by customers against brokerage firms and their financial advisors. Shepherd Smith Edwards and Kantas (SSEK Law Firm at investorlawyers.com) represent investors with unsuitability claims. We’ve helped thousands to recover damages from financial firms for fraud or negligence. Call us today at
Unsuitability is the cornerstone of most, if not all, investor claims. However, it does not exist in a vacuum. Almost all FINRA arbitration cases are multifaceted. The allegations of omissions, churning, breaches of contract, breach of fiduciary duty, and margin/credit line usage can all be related to unsuitability.
Unsuitability may involve a specific transaction or product, but the concept is generally applied to a portfolio's composition and/or strategy. For example, in one unsuitability claim, the broker recommended a portfolio with almost 50% exposure to financial stocks. Such a recommendation was extremely unsuitable regardless of the client’s risk tolerance and financial wherewithal. When the stocks plummeted, the portfolio was decimated.
In another case, the financial advisor failed to perform proper due diligence on a mutual fund and suggested the fund based on his beliefs about the fund's safety and lack of fluctuation. By neglecting due diligence efforts, the advisor misrepresented the product, which equated to an unsuitable recommendation.
Unsuitable if Inappropriate for the CustomerSimply put, a broker’s recommendation is unsuitable if it is inappropriate for the investor. For example, recommending a private placement that is illiquid and risky might be the right choice for an accredited investor, but it is not suitable for a retiree with a conservative investing portfolio.
HNW Individual Investors and Institutional ClientsHigh-net-worth individual investors and institutional customers can also fall victim to unsuitable broker recommendations. In one case, the broker of a wealthy physician utilized margin to purchase securities for the client and recommended leveraged mutual funds that were aggressive in nature. The portfolio was simply not sustainable. It would have been unsuitable for anyone. A minor downturn in the market caused the entire portfolio to implode.
When working with an institutional customer, the financial advisor and their firm must have a reasonable basis to believe the client has evaluated the concepts and strategies that are being recommended and understands the risks involved.
Making this determination can be complex because institutional investors, such as a Bank/Credit Union, a Corporate entity, or even a municipality, are entities manned by human beings, each with their own level of knowledge and experience when it comes to investing.
As far as FINRA is concerned, the only way a financial advisor and brokerage firm can escape their duties when it comes to preventing unsuitability is if the institutional customer has affirmatively stated that it is acting on its own accord. This is rare, as the whole point of hiring a financial services firm while paying it large fees, is to get solid, sound, and suitable recommendations.
What is the Difference Between Solicited Trades and Unsolicited Trades?Every trade made by a broker on behalf of a customer is either a solicited trade or an unsolicited trade. This distinction between the two becomes very important especially if significant investment losses were suffered.
Your broker can more easily be held liable for recommending a solicited trade, which was their idea, as opposed to an unsolicited trade, which was your recommendation. Either way, working with seasoned securities lawyers, with years of experience successfully going after Wall Street firms for unsuitability claims, can increase the chances of maximizing your financial damages.
Skilled Securities Fraud LawyersSSEK Law Firm represents investors throughout the US, as well as those living abroad who suffered losses because of the negligence of US-based firms and their financial advisors. Over the years, we’ve recovered many millions of dollars for clients, many of whom have suffered financial harm because of unsuitability.
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