The Financial Industry Regulatory Authority (FINRA) has established rules and regulations regarding the sale of securities. All sales recommendations must meet the ethical standards of the industry as set forth by FINRA. Brokerage firms are required to supervise the suitability of their broker’s investment recommendations. The Suitability Rule requires brokers to make recommendations that are suitable for their clients, based on the client’s investment objectives, financial situation and needs. Recommendations must also be reasonable in light of the client’s other investments. If a broker makes a recommendation that is not suitable for a client, the brokerage firm can be held liable. For this reason, it is important for investors to choose a brokerage firm that has a good reputation and a history of compliance with FINRA rules.
FINRA Rule 2111 – The Suitability Rule
FINRA’s suitability rule requires that brokers only recommend investments that they believe are suitable for at least some investors. Before recommending a security or investment strategy, the broker must explain the risks and rewards associated with the investment. They must also take into account the investor’s risk tolerance, investment objectives, age, financial circumstances, other investments, and experience. This ensures that the customer understands the recommendation and that it is in line with their financial goals. Suitability is an important consideration for all brokers and advisors when making recommendations to investors.
In order for an advisor to make this determination, FINRA’s Rule 2111 requires firms and their employees who make recommendations to customers to “have reasonable grounds for believing that the recommendation is suitable for at least some customers.” FINRA Rule 2111 focuses on the recommendation itself, not on the particular customer to whom the recommendation was made. In other words, the rule prohibits recommending a security or investment strategy that would be unsuitable.
FINRA requires firms and their employees to consider six factors when making a recommendation:
- the investor’s profile
- the terms of the account
- what discretionary authority is granted
- knowledge of the customer
- reasonable basis suitability
- and other information known by the firm or employee.
The customer’s investment profile consists of information about the customer’s other investments, risk tolerance, financial situation and needs. It also includes information regarding their tax status, investment objectives, and experience. The advisor and firm need to pay attention to their investor’s time horizon, liquidity needs, return expectations, and any other information that the customer may disclose.
A broker needs to take into account all of a customer’s investments when determining whether a series of recommendations is suitable. For example, if an investor tells their advisor that they want their portfolio managed conservatively, their advisor cannot then go and place the investment into speculative securities.
My Financial Advisor made an unsuitable investment, now what?
There are some ‘red flags’ that can become evident before and after major losses to an investor’s account. If a firm’s clients are invested in the same products, have their profile ignored, or notice that their broker went outside their discretionary agreement, then there’s room to recoup investments.
When an advisor does not follow FINRA Rule 2111 they can be held liable for a client’s losses. This is where a FINRA Arbitration attorney steps in. Our securities and investment fraud attorneys have decades of experience in the industry. They’ve helped recover settlements for their clients in tough cases and through expert litigation. We’re based in Chicago and practice throughout the US. Give us a call at 312-291-4650 or click here to get in touch.
