Unsuitable investments are investments that are not appropriate for the individual investor. In other words, the advisor or broker should have known better than to advise his/her client to make the investment.
Because investors rely on financial advisors and brokers, federal securities laws where created to protect investors from fraudulent and unethical financial advisors and brokerage firms. One of the most common violations of securities law is “Rule of Suitability.”
FINRA Rule 2111 “Suitability” and FINRA Rule 2090 “Know Your Customer” governs suitability for a particular investment or investment strategies for a client.
Under Rule 2111, a broker must have a “reasonable basis to believe a recommended transaction or investment strategy involving a security or securities is suitable” based on the client’s age, other investments, financial situation, tax statues, investment experience and objectives, risk, and need for liquidity.
Additionally, the investment must be suitable based on the investors total portfolio. Although the invest may be suitable by itself, the investment may not be suitable based on the investor’s total account or portfolio.
Brokers are also required “To Know Your Customer” pursuant to FINRA Rule 2090. When opening and maintaining an account, brokers and financial advisors are required to “use reasonable diligence” to learn essential facts about their customer. The broker or advisor must understanding of the investment, customer, as well as their portfolio.