What is an unsuitable investment?


Risk is an unavoidable part of investing, but investors can manage their risks. One of the most important ways they do this is by relying on the knowledge of investment brokers. These brokers are required to sell only securities that they know to be suitable to their clients. If they sell unsuitable investments, they are violating the trust that has been placed in them by their customers and the authorities.

But what is an unsuitable investment, and how can investors be protected against one?

FINRA helps regulate unsuitable investments

FINRA, is the licensing body that oversees brokers. All brokers dealing in securities must be licensed and registered through FINRA.

FINRA requires that brokers have a reasonable basis on which to believe that any securities or investment strategies that they recommend to clients is both a suitable investment in general and suitable for the client in particular.

This means the broker must believe any particular investment is suitable for at least some investors. This belief must be based on due diligence, meaning the broker must be informed of all the potential risks and rewards.

Furthermore, the broker must have a reasonable basis for believing any particular investment is also suitable for the particular client. This means before making a recommendation, the broker must consider the investor’s profile, including their age, their other investments, their tax status, their investment goals and other factors.

A broker who has control over a customer’s account must also believe an investment is suitable based on a quantitative analysis. This means they must believe that the investment is suitable when viewed in isolation, but also when viewed against the customer’s investor profile as a whole.

Many investors can have a lot on the line, including retirement or their life savings, when making investments that are important for their financial stability and that of their family. For that reason, they should understand when an investment may be unsuitable and the protections available to them if they have been harmed by an unsuitable investment or other securities fraud.