If you have entrusted your investment account to a financial advisor, they have a duty to recommend suitable investments. This is called the “suitability” requirement. Here are the basics of this requirement and what you can do if your account is “unsuitable.”

What is an unsuitable investment?

An “unsuitable” investment is straightforward: its an investment that is not suitable for you, given your investment profile, age, financial situation, and goals, among several other factors. The Financial Industry Regulatory Authority (FINRA) lists nine factors that an advisor must consider when determining whether to recommend an investment or strategy to you.

Unsuitable investments come in different shapes and sizes. And they depend on who you are as an investor. For a retired person who needs their account invested conservatively, an investment strategy based in speculative stocks is unsuitable. For many people, overconcentration in a certain market, such as energy, can be unsuitable.

Unsuitability for a 35 year old will likely look different from unsuitability for a 70 year old. Certain financial products can also be unsuitable because of their complexity or inherent risk. Others may be unsuitable if they carry large commissions for the broker, but aren’t a good fit for you.

The two-step suitability analysis your broker must conduct

Your broker must analyze any investment they recommend to you for suitability with a two-step process below.

The financial advisor first focuses on the investment product itself. What are its risks? What are its rewards? Is it sound? The recommendation to buy or hold an investment, or follow an investment strategy, must be suitable for at least some investors. Some financial products are unsuitable because they carry outsized risk or there isn’t enough good information about them. An advisor shouldn’t recommend these products to anyone at all.

The second step focuses on you, the customer. Even if a product is suitable for some investors, it’s not necessarily suitable for you. The advisor must have a reasonable basis to believe that his recommendation is suitable for a particular customer based on their time horizon for the investment, risk profile, and more. For example, recommending a speculative growth strategy is not suitable for a retired person who needs fixed income.

What happens if my broker recommended an unsuitable investment or strategy?

If your broker recommended an unsuitable investment or strategy, you may be able to file a claim against him or her with FINRA, the self-regulatory organization for securities firms.

If your losses are less than $50,000, FINRA has a special proceeding called a “simplified arbitration.” Your success depends on the strength of your case, which in turn depends on the evidence you have, or can obtain, to show that the investment was unsuitable.

So how do I prove that the investment was unsuitable?

We can show that the investment was unsuitable through documents and through your testimony.

The new account form that you filled out when first opening your account is one such document. Aside from having important biographical data about you, the new account form will also show your investment objectives and your risk tolerance. This document can help establish your expectations going into the relationship.

You should also keep a copy of all correspondence between you and the financial institution, including any emails or letters that discuss how your investment account and what your financial objectives and expectations were. This correspondence can be critical in preparing your case.

Of course, any conversations that you had with your advisor about the investment are important too, even if they are not written down. If you have any notes from conversations with your advisor, you’ll want those. Otherwise, you can still explain what your advisor told you about a particular investment or strategy.

What will the brokerage firm argue?

The brokerage firm might argue that you agreed to the investment strategy through your conduct. They might point to letters that the brokerage firm sent you to claim that you agreed to their investment strategy by not objecting when you received these letters. Brokerage firms regularly send letters about how your portfolio is doing. But these letters alone do not prove that you agreed to an unsuitable investment strategy.

The brokerage firm might also argue that you are a sophisticated investor who understood the risks of the investment strategy. Your previous investing experience, if any, could be relevant to any arbitration that you bring. The brokerage firm would point to any of previous experience as evidence that you understood the risks.

They also might make a legal argument that your claim is not timely, meaning that you did not file it within a certain time limit. One important time limit to remember is six years: this is the time you have to bring a claim for it to be “eligible” for arbitration.

But none of these issues should deter you from speaking with a lawyer about any claim you may have.

Regulation B.I.

In June 2020, the Securities & Exchange Commission published “Regulation B.I.,” which stands for “Best Interest.” Under Regualtion BI, brokers must act in their customers’ best interest when recommending a security or investment strategy. The S.E.C. has said that this is different from the suitability standard is intended to be a higher standard of care.

How does Regulation B.I. differ from the suitability standard in practice? That’s tough to say right now. Because Regulation B.I. is so new, it remains to be seen what, if any, practical effects it will have on the conduct of brokers. When bringing your claim, the standard of care analysis may still look a lot like the suitability standard. But that could change as more cases are filed and as the S.E.C. and FINRA provide more guidance about what they expect of brokers under Regulation B.I.

If you still aren’t sure if you have a claim to bring…

No need to worry. Bringing a claim for unsuitability, and avoiding the pitfalls, can be confusing. Contact Wilkowski Law and we will give you a free assessment of whether you have a claim for your investment losses.