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When Does Unsuitable Investment Advice Amount to Investment Fraud?

September 24, 2021 Blog

Stockbrokers and investment advisors can (and should) make decisions based on the best information available, but they cannot predict how the market will perform. As a result, sometimes, they will provide bad advice. But, when does bad investment advice amount to investment fraud? FINRA attorney Jake Zamansky explains:

Unsuitability of Investment Recommendations

When it comes to investment advice, one of the key issues is suitability. Brokers and advisors must provide advice that is “suitable” to their clients’ risk profiles and investment objectives. This means that they cannot recommend investments across the board but instead must assess whether a particular investment makes sense for a particular client.

The Financial Industry Regulatory Authority (FINRA) addresses suitability in its Rule 2111. This Rule states, in part:

“A member or an associated person must 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 member or associated person to ascertain the customer’s investment profile.”

With regard to ascertaining a customer’s “investment profile,” Rule 2111 requires consideration of factors including, “but not limited to,” the customer’s:

  • Age
  • Other investments
  • Financial situation and needs
  • Tax status
  • Investment objectives and experience
  • Investment time horizon
  • Liquidity needs
  • Risk tolerance

While Rule 2111 focuses on suitability from the perspective of evaluating a customer’s investment profile, brokers and advisors must assess the suitability of individual investments as well. Among other things, this means that brokers and advisors cannot recommend investments that they haven’t researched or that they don’t understand. Unfortunately, this is an all-too-common occurrence, and many investors have suffered losses due to their brokers’ and advisors’ ignorance of the risks associated with cryptocurrency-related securities, yield enhancement strategies, and other complex and high-risk investments.

Unsuitable Advice and Investment Fraud

Even if a broker or advisor does not realize he or she is providing bad advice, making unsuitable investment recommendations constitutes investment fraud. Brokers and advisors have a duty to ensure that they are not leading their customers into unreasonable and untenable risks, and FINRA’s Rules (and federal securities laws) hold them accountable when they fail to uphold this duty.

Investors who suffer losses due to receiving unsuitable advice can file claims in FINRA arbitration. FINRA arbitration provides a forum for investors to pursue fraud claims against their brokers and advisors without going to court. All registered firms and investment professionals are required to submit to arbitration, and investors who have received unsuitable investment advice can seek to recover their losses through arbitration with the help of an experienced FINRA attorney.

Speak with a FINRA Attorney for Free

If you believe that you have received unsuitable investment advice and would like to speak with an attorney about filing for FINRA arbitration, we encourage you to contact us promptly. To schedule an appointment with an experienced FINRA attorney at Zamansky LLC, call 212-742-1414 or tell us how we can reach you online now.