Unsuitable Investment Recommendations

Was an Investment Recommended to You That Did Not Fit Your Financial Needs?

A financial investment can be legitimate and still be completely inappropriate for a particular investor.

The central issue is often not whether the investment itself was fraudulent, but whether the broker or financial advisor had a reasonable basis to recommend it to you based upon your financial circumstances, age, investment objectives, liquidity needs, risk tolerance, and other relevant factors.

At Mazer Law Firm PC, we represent investors who suffered losses after being placed into investments that were too risky, too illiquid, too expensive, too concentrated, or otherwise inconsistent with their needs.

What Makes an Investment Recommendation Unsuitable?

An investment recommendation may be inappropriate when it does not reasonably fit the investor’s financial profile.

Relevant considerations may include:

• Age
• Income and financial needs
• Net worth
• Investment experience
• Investment objectives
• Risk tolerance
• Liquidity needs
• Investment time horizon
• Other investments already owned
• Tax circumstances

FINRA Rule 2111 identifies these and other factors as part of a customer’s investment profile when determining suitability. 

For recommendations to retail customers, the SEC’s Regulation Best Interest also requires broker-dealers to exercise reasonable diligence, care, and skill and to have a reasonable basis to believe a recommendation is in the customer’s best interest, considering the potential risks, rewards, costs, and the customer’s investment profile. 

Warning Signs of an Unsuitable Recommendation

A recommendation deserves closer examination when an investor:

• Was seeking safety but was placed into a speculative investment
• Needed access to principal but was sold an illiquid product
• Was retired or elderly and placed into a long-term investment
• Had a conservative risk tolerance but was exposed to substantial market risk
• Had too much of the portfolio concentrated in one investment or type of investment
• Was sold a product with high commissions or expenses without understanding those costs
• Was encouraged to replace an existing investment without a clear economic benefit
• Was told an investment was safe or guaranteed when meaningful risks existed
• Did not understand how difficult it might be to sell or redeem the investment

Concentration Can Create Excessive Risk

Even an investment that might be appropriate in a small amount can become inappropriate when too much of an investor’s portfolio is concentrated in it.

For example, an investor may be exposed to excessive risk when a substantial portion of retirement savings is placed into:

• Non-traded REITs
• Private placements
• High-risk bonds
• Structured products
• Variable annuities
• Alternative investments
• A single stock or market sector
• Other illiquid or speculative investments

A recommendation should be evaluated in the context of the investor’s entire financial situation, not simply by looking at one investment in isolation.

Older and Retired Investors May Face Greater Consequences

An unsuitable investment can have particularly serious consequences for an older or retired investor.

A younger investor may have many years to recover from an investment loss. A retiree may not.

Liquidity can also become increasingly important because investment funds may be needed for living expenses, medical care, housing, or other unexpected needs.

An investment that locks up a substantial portion of an older person’s available assets may therefore deserve especially careful scrutiny.

The Broker’s Financial Incentive Matters

Different investment products can pay very different levels of compensation to financial professionals.

That does not automatically make a recommendation improper.

But when a broker earns a substantial commission, bonus, or other financial benefit from recommending one product instead of another, that conflict should be considered in evaluating whether the recommendation was made in the investor’s best interest.

Regulation Best Interest specifically addresses conflicts of interest and prohibits a broker-dealer from placing its financial or other interests ahead of the retail customer’s interests when making a recommendation. 

“But I Signed the Paperwork”

Investors often believe they have no claim because they signed account forms, disclosure documents, or prospectus acknowledgments.

That does not necessarily end the inquiry.

The circumstances surrounding the recommendation still matter, including:

• What the broker actually told the investor
• What risks were explained
• Whether important facts were omitted
• Whether account documents accurately reflected the investor’s true objectives and risk tolerance
• Whether the investor understood the product
• Whether the recommendation reasonably fit the investor’s financial circumstances

A signed document does not automatically answer every question concerning how an investment was recommended or sold.

You May Have a Claim Against the Brokerage Firm

Depending upon the circumstances, an unsuitable investment case may involve claims for:

• Unsuitable or improper recommendations
• Misrepresentation
• Failure to disclose material facts
• Breach of fiduciary duty
• Negligence
• Failure to supervise
• Excessive concentration
• Conflicts of interest

Many disputes between investors and brokerage firms are handled through FINRA arbitration.

Get an Independent Review of the Recommendation

If you suffered significant investment losses and believe the investment never made sense for your financial situation, the recommendation should be examined based upon the facts that existed at the time it was made.

Attorney Glenn Mazer spent more than 20 years in the financial-services industry before representing investors in securities disputes.

Mazer Law Firm PC can review your account statements, investment objectives, risk profile, transaction history, product documents, communications with your broker, and other records to determine whether the recommendation warrants further investigation.

Speak Directly With Attorney Glenn Mazer

Call (205) 644-3744 for a free case evaluation.

Mazer Law Firm PC — For the Investor.