When a broker meets with an investor, the broker’s first job is to get to know the client. He or she needs to obtain information about their financial situation, their goals, and what kind of investments they feel comfortable making. And because brokers and financial advisors are obligated to know their customers, they are only supposed to recommend suitable investments. If they offer unsuitable advice contrary to a client’s means or situation, this violates two Financial Industry Regulatory Agency (FINRA) rules: 2090 and 2111.
FINRA Rule 2090
Rule 2090 is referred to as the “Know Your Customer” rule. When a customer account is opened, the broker is required to uncover important facts so they can effectively serve the client, follow special instructions, and comply with industry rules and regulations.
FINRA Rule 2111
This suitability rule mandates that when a firm or an advisor makes a recommendation for an individual investment or a strategy, there is a reasonable basis to believe that it is suitable for the customer’s profile. To adhere to this rule, certain information concerning the client has to be obtained, including:
- Employment and tax status
- Investment objectives
- Risk tolerance
- Any other pertinent information
In addition to knowing their customers, brokers have to know the investments they are recommending as well. If a vehicle and a client are not a good fit and the broker advises someone to make the investment, this is a clear rule violation.
Why suitability is especially relevant for older investors
When people are nearing retirement or it has already begun, they usually alter their investment strategy as their financial situation changes. This is why it is particularly important that brokers recognize this and act accordingly with elderly clients; investments that may have been suitable just a few years ago may not be now. For example, many elderly investors have a much lower risk profile, require easy access to their capital, and may rely on income from investments to maintain their standard of life. Thus, a broker who recommends a particularly risky investment or one that ties up capital for an extended period of time is violating the suitability rule.
If you believe that you lost money due to unsuitable investment advice, you may be able to recover it through FINRA arbitration. To find out if you are eligible, contact the Silver Law Group for a free consultation. We are a contingency-based firm, so you won’t owe us anything unless you get money back. You can get in touch with us today by sending us a message through our online contact form.