What is FINRA’s Suitability Rule?
FINRA Rule 2111, also known as FINRA’s Suitability Rule, requires brokers and investment advisors to make a reasonable effort to determine whether or not a proposed investment is “suitable” for a client. What does that mean? A suitable investment matches the client’s financial profile, including their risk tolerance and investment goals. In order to ascertain whether a certain investment is suitable for you, your broker may ask you a series of questions to get a better sense of your investment profile. The burden of doing this due diligence falls on the financial professional; it is their job to ask questions of the client.
These questions may include:
- How old are you?
- What other investment holdings do you have?
- What is your annual income? What about your total liquid net worth?
- What is your tax bracket?
- How much investing experience do you have?
- What are your investment objectives? Do you want to build wealth, preserve wealth, save for retirement, or buy a home? Are you interested in market speculation?
- How long are you willing to wait to access your investment gains? Do you have short-term or long-term goals?
- What are your liquidity needs? Might you need your investments to convert to cash quickly?
- How much risk are you willing to tolerate? Are you willing to risk larger losses in exchange for potentially greater returns? Or would you prefer to take a more conservative approach to investing?
When brokers examine suitability, they take a three-pronged approach:
- Reasonable-basis suitability means that, according to FINRA Rule 2111, broker-dealers should “have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the [firm] or associated person to ascertain the customer’s investment profile.”
- Customer-specific suitability is determined based on a customer’s specific investment profile.
- Quantitative suitability means that the broker who controls the client’s account must believe that the investment is suitable for the client.
Even though it is your broker or advisor’s responsibility to determine if a product is suitable, you should never consent to an investment strategy or securities transaction unless you fully understand everything presented to you. If you’re given a prospectus, read it. Make sure you understand all the risks involved.
If you fear you may have been talked into an unsuitable investment or if you have questions about FINRA’s Suitability Rule, don’t hesitate to contact the securities attorneys of Fitapelli Kurta. Call Jonathan Kurta and Marc Fitapelli at (877) 238-4175 or email firstname.lastname@example.org.