By Qudsia Shafiq, Spring 2017 Student Intern
Just like your favorite piece of clothing, investment products that are recommended to you are best when they’re tailored to fit your needs. Everyone’s needs are different and FINRA recognizes this and therefore requires every brokerage firm and their brokers, financial advisers and financial consultants to recommend products on a case-by-case basis designed to fit your unique needs.
Unfortunately, this doesn’t always happen. In 2016, suitability claims were the fifth most common type of controversy in FINRA’s customer arbitration cases. Although there are often multiple allegations in arbitration cases, the prevalence of suitability claims indicates why it is important for customers to know what suitability means and how it impacts their relationship with a financial professional.
What is Suitability?
Suitability, according to FINRA, requires brokerage firms and their associated persons to deal fairly with their customers. FINRA has codified this rule under FINRA Rule 2111, commonly referred to as FINRA’s Suitability Rule.
The suitability rule is simple: a broker should seek to gather information about their customers to create a customer investment profile. This profile should include the following information related to the customer:
- other investments
- current financial situation and needs
- short and/or long term investment objectives (whether you want to generate income, fund retirement, facilitate a large purchase, etc.)
- short and/or long term liquidity needs (whether your situation requires you to be able to convert your investments to cash)
- experience with investments (if any)
- risk tolerance (how much risk do you want to and can afford to handle?)
As an investor, you should always expect to be asked about these factors by your broker. It’s the only way a broker can assist you by making a recommendation suited to your needs.
In fact, I would argue that if you visit a new broker who does not ask you these questions before making a recommendation about one product or another, this could be a red flag. But as an educated investor, knowing what to expect going into an initial consultation meeting can make the difference between finding a broker who truly understands your needs and can help you with making the right investment decision. An ill-fitting product that doesn’t suit you or your needs can be the difference between sinking, swimming, or flying away on a rocket ship.
To learn more, see FINRA’s advice to investors here.