UNDERSTANDING UNSUITABILE INVESTMENTS
Unsuitability is what happens when a broker or financial advisor recommends a financial product or strategy that is inappropriate for a particular investor based on his or her investor profile. It is one of the most important and powerful concepts in securities law and litigation, though it can be challenging to prove.
What Is Unsuitability?
Binding the special relationship between broker and investor is something called a fiduciary duty. This is a duty for one party to treat the other party’s best interest as his or her own (and, by implication, to put that best interest before self-interest). That’s why, in securities misconduct cases, you will often see “breach of fiduciary” as well as “unsuitability” listed among a broker’s alleged offense.
The doctrine of fiduciary duty informs disputes involving allegations of unsuitability, when, for one reason or another, a broker fails to act in his or her client’s best interest by recommending inappropriate investments. When these investments succeed, it’s called blind luck. When they fail, it’s called negligence, and chances are the broker will find himself before a FINRA arbitration panel.
How Unsuitability Happens
The key to unsuitability is understanding that each and every investor is different. Accordingly, when a brokerage firm does intake of a new client or transfer client, they conduct an application process that provides them with the investor’s vitals. These include age, employment, investment experience, portfolio size, risk tolerance, investment objectives, and all kinds of other information about the investor. This helps shape what, in the securities business, we generally call the investor’s "profile:" a snapshot of who he or she is and what they’re trying to achieve by investing.
Once the investor’s profile has been created, it is the broker's job and even more importantly their duty to put together a portfolio that reflects that investor's profile and preferences, in strict accordance with suitability principles. When a broker fails to do this, either deliberately or through ignorance, we call the investments in the investor’s account unsuitable.
Unsuitability Means At Any and All times
One other thing to know about unsuitability is that, according to FINRA, an investor’s account must contain investments which are appropriate to that investor at all times. That means that the broker can’t just create a portfolio for you when you sign up and then forget about you for twenty years. They have to stay in touch with both the investor and the account, or risk allowing that account to descend into unsuitable. After all, investments are part of a dynamic, ever-changing stock market.
Even when individual companies or product do not change, their industry or context might. "At all times" also means that if an investor’s profile or life situation changes over time, his portfolio should reflect those changes.
Avoiding situations of unsuitability means maintaining harmony between the investor and his or her investments. It’s not an easy job. Which, coming full circle now, is the reason why unsuitability plays such a major role in so many of our securities litigation cases.
PA & NJ SECURITIES LAWYERS
The securities lawyers at Green & Schafle recognize the tremendous sense of grief and betrayal suffered by victims of broker misconduct and investment fraud. We want to help. You can count on us to use our skills and experience to advocate for you and seek maximum recovery of your damages.
If you or someone you know has been the victim of broker misconduct or investment fraud, please contact our attorneys immediately for a free consultation toll-free at 215-462-3330 or via email by clicking here.