Under FINRA Rule 2111, registered financial advisors can be held legally liable for any losses that were caused by an unsuitable investment recommendation or unsuitable investment strategy.
Of course, investing is extremely complex. In many cases, retail investors may not know what actually constitutes a suitable investment. As such, rule 2111 puts the responsibility on financial advisers and brokerage firms to understand what investments are appropriate for their specific clients.
Under FINRA Rule 2111 (the suitability rule) and FINRA Rule 2090 (the know your customer rule), all brokers must build a proper investment profile for every client. FINRA’s suitability rule clearly states the following:
Member firms and associated persons must have a reasonable basis for all recommended transactions and investment strategies.
Your broker cannot possibly comply with this professional requirement, unless they make a good faith effort to attempt to build a careful, personalized investment profile for you. Broker and brokerage firms must take proactive steps to perform sufficient research and due diligence in order to ascertain the desires and best interests of their clients.
More specifically, your investment profile should contain all of the following information:
Beyond merely compiling this information, you financial advisor also has a professional duty to use this information to ensure that they are always recommending investments that are truly suitable for your individual needs. Brokers that fail to properly take investment profile information into consideration can be held accountable for any related losses.
To be clear, FINRA Rule 2111 puts a professional duty on member firms and associated persons. It technically does not put a duty on investors. For example, imagine that a person owned a secondary real estate property as an investment.
That individual then went to open a brokerage account, but, for whatever reason, did not wish to disclose this property to their financial representative. On the investor’s end, that is legally permissible based on FINRA rules.
Financial professionals must make a good faith effort to inquire about their client’s full investment holdings, but FINRA gives customers flexibility to disclose how much information they choose to share. That being said, a broker does have the right to craft their own internal policy that requires investors to share certain information to become a client of the firm in the first place.
It must also be made clear that if you (as a customer) choose not to disclose information, then your broker cannot be held responsible for the failure to obtain that information. As such, it is generally recommended that investors choose to work with a broker or brokerage firm with which they feel comfortable sharing sensitive financial information.
This is because holding information back can put an investor at an increased risk of ending up in an unsuitable investment position. If you fail to disclose material information when your broker asks for it, you may not be able to bring a legal claim.
Beyond ensuring that all investment recommendations and strategies are reasonably appropriate for a specific investor’s individual profile, FINRA’s suitability rules also require registered investment brokers to practice something called ‘quantitative suitability’.
In the most simple terms, this means that a broker’s trades and trading strategies must always make sense when viewed as a whole, not just as an individual trade. One issue where this frequently comes up is with alleged excessive trading.
For instance, imagine that your broker purchases $25,000 worth of a certain long-term, low-risk mutual fund on your behalf. Three days later, the broker sells that mutual fund; then three weeks after that, your broker re-invests another $25,000 of your money into that same fund. In this scenario, you would have had to pay transaction fees three different times; yet you still ended up in the exact same investment position.
In effect, this means that money was being transferred out of your account, and over to your broker, in the form of fees and commission payments. That type of conduct is a clear violation of FINRA’s quantitative suitability requirements. Regardless of your individual investment profile or risk tolerance, your broker’s actions in the above hypothetical scenario made no sense.
At Sonn Law Group, our entire legal practice is dedicated to protecting the legal rights and financial interests of investors. If you have lost money because your broker or brokerage firm recommended unsuitable investments, we are standing by, ready to assist you.
For a free, no strings attached review of your unsuitable investment claim, please contact our team today. We take on all claims using contingency fee agreements. If we do not help you recover compensation for you unsuitable investment claim, then we will not get paid.