Suitability

Much has been written about the concept of suitability as it pertains to investments.

In essence, the “suitability rule” mandates that all licensed financial professionals have an obligation to make appropriate (suitable) investment recommendations to their clients, given their clients’ needs and objectives.

The rule has a long history and is codified as Rule 2111 in the FINRA manual.

Suitability claims make up the biggest category of investor related complaints, and are the single, biggest source of disagreements between a customer and a broker when an investment recommendation doesn’t work out.

With so much “grey area” and the potential for “he said-she said” disagreements over why the recommendation was made, FINRA requires extensive documentation to determine suitability.

Brokerage firms are required to document information pertaining to suitability which is usually recorded on opening account documents. Questions such as investment objective, risk tolerance, net worth, income, need for liquidity are common questions, and should be answered accurately, since this form will serve as a blueprint for the financial advisor to make recommendations.

Periodic updates are required, especially when an investor’s objectives change, oftentimes due to a life altering event, such as the death of a spouse, divorce, or the loss of a job.