FINRA Attorney for Unsuitability Claims Against Brokers and Investment Advisors
When you hire an investment professional, you expect him or her to make recommendations with your best interests in mind. You expect to receive recommendations that take into account your financial condition and risk profile. In other words, you expect to receive “suitable” investment advice.
This expectation is not just reasonable, it is your legal right. Under the Financial Industry Regulatory Authority’s (FINRA) rules for investment brokers, financial advisors “must have a reasonable basis to believe that a recommended transaction or investment strategy…is suitable for the customer, based on the information obtained through…reasonable diligence.” If you have suffered losses in your portfolio due to an unsuitable investment recommendation (or multiple unsuitable recommendations), you may be entitled to recover your losses through FINRA arbitration.
FINRA Requirements for Suitable Investment Recommendations
As stated by FINRA, “[t]he suitability rule is fundamental to fair dealing and is intended to promote ethical sales practices and high standards of professional conduct.” To make suitable investment recommendations, brokers must take into account multiple factors, including the investors’:
- Other investments
- Financial situation and needs
- Tax status
- Investment objectives
- Investment experience
- Investment time horizon
- Liquidity needs
- Risk tolerance
When providing investment recommendations, brokers must also consider, “any other information the [investor] may disclose,” in connection with the particular trade in question. Taking into consideration all of the relevant investor-specific information, brokers must then satisfy three distinct suitability obligations: (i) reasonable-basis suitability, (ii) customer-specific suitability and (iii) quantitative suitability.
1. Reasonable-Basis Suitability
Investment brokers must have a reasonable basis to believe, “based on reasonable diligence, that the recommendation is suitable for at least some investors.” If a broker does not understand the risks associated with a particular investment or investment strategy, it simply is not possible for that broker to make an informed recommendation. Likewise, if an investment is not suitable for anyone, then it will not be suitable for a particular investor regardless of his or her financial condition and risk profile.
2. Customer-Specific Suitability
Brokers must make all investment recommendations based upon an assessment of whether each particular recommendation is suitable for the individual investor receiving the recommendation. This requires careful, trade-specific consideration of each of the factors listed above.
3. Quantitative Suitability
Brokers must also ensure that their investment recommendations are not “excessive and unsuitable” when viewed in light of an investor’s existing portfolio. Under this component of FINRA’s suitability rule, an investment recommendation can be unsuitable, “even if suitable when viewed in isolation.” According to FINRA, investment turnover rate, cost-equity ratios and use of “in-and-out” trading are all relevant considerations when evaluating quantitative suitability.
No one is immune to the risks of investment fraud. Scam artists and unscrupulous brokers do not discriminate when it comes to targeting unsuspecting investors.- Jacob H. Zamansky
Have You Suffered Losses Due to Unsuitable Investment Recommendations?
If you believe that losses in your investment portfolio are the result of unsuitable recommendations from your broker or investment advisor, we encourage you to contact us about filing for FINRA arbitration. To speak with an experienced financial fraud attorney in confidence, please call 212-742-1414 or request an appointment online today.