What qualifies as an unsuitable investment?


When you put your investment portfolio in the hands of your broker, you likely trusted that any decisions they made would be sound. Yet, upon scrutiny, some of their choices may seem at odds with your circumstances or needs.

Your broker should protect your financial interests. If they have failed to do so, they may have made unsuitable investments, resulting in negative consequences for your portfolio.

Defining unsuitable investments

FINRA has guidelines governing the suitability of investments. Under these guidelines, brokers must have a reasonable basis for recommending an investment strategy, or a specific transaction, to a customer.

In doing so, they must consider the investor’s:

  • Age
  • Investment experience, objectives and timeline
  • Financial circumstances
  • Current portfolio
  • Tax status
  • Ability and willingness to tolerate risk
  • Need for liquidity

The suitability requirements have recently been expanded beyond a recommendation to purchase or sell to include a financial advisor’s recommendation to “hold” or stay the course regarding a client’s investments. When a broker makes an investment recommendation that is at odds with a customer’s risk tolerance and/or investment objectives, it may qualify as unsuitable. There are no hard and fast rule exists about whether an investment meets this threshold.

Often, unsuitability relates to the investor’s age, and it takes the form of brokers risking a customer’s portfolio when they should be playing it safe.

The consequences of unsuitable investments

If your broker has made a series of unsuitable investments recommendations to you, the broker and the firm the broker works for may be responsible to compensate you for losses resulting from such unsuitable recommendations. in many circumstances, the firm and the financial advisor failed to disclose material risks related to the unsuitable recommendation. these risks often involve lack of liquidity, use of internal leverage, opaque financials, conflicts of interest and undisclosed costs.

If your account was discretionary, i.e. you provided written authority to the broker and the firm to purchase or sell investments in your portfolio without discussing same with you, the broker and the firm are held to a higher standard. Under these circumstances, the broker and the firm are considered fiduciaries and must place your interests above all other considerations. When the firm and financial advisor exercise trading discretion, the bar is much lower to establish that they are responsible to compensate you for losses resulting from inappropriate investments.

Because unsuitable investments can severely harm your and your family’s financial health, you should scrutinize any recommendations made by your advisor. if you have any questions regarding the suitability of investments you should consult with a well regarded and seasoned attorney that specializes in protecting investors’ rights. By doing so, you can evaluate the full impact of your financial advisor’s actions and, if appropriate, hold them the firm accountable for any losses caused by their misconduct.