Unsuitable Investment or Investment Strategy Claims
Financial advisors have a duty to their clients to recommend suitable investments and investment strategies.
There are three primary criteria used when evaluating whether a financial advisor recommended a suitable investment or investment strategy:
Reasonable-Basis Suitability: Whether the financial advisor appropriately researched and performed due diligence on the investments recommended to the client.
Customer-Specific Suitability: Whether the investment or investment strategy was appropriate and suitable for a particular investor in light of the investor's profile.
Quantitative Suitability: Whether the investment or investment strategy was appropriate relative to proper asset allocation and diversification.
Reasonable Basis Suitability Focuses on the Security or Strategy.
All financial advisors and brokerage firms have an obligation to research and perform appropriate due diligence on an investment prior to recommending an investment to a client. Appropriate due diligence may include researching the risks associated with an investment, the nature of a company's business, the company's financial history and general market conditions. Financial advisors must also believe that the investment is appropriate for at least some investors.
The nature and extent of research required for a particular investment varies by they type and complexity of each investment. For example, private placements require greater due diligence than a stock listed on an exchange because private placements usually have limited public information. If your financial advisor recommends an investment without adequately researching the investment and you suffer losses, then you may have a claim for suitability.
Customer-Specific Suitability Focuses on the Particular Customer.
All financial advisors and brokerage firms have a fundamental responsibility to "know" their clients. Under New York Stock Exchange Rule 405 (the "Know Your Customer" rule), one of a financial advisors first duties to an investor is to obtain all of the information necessary to be able to recommend suitable investments.
Typically, financial advisors will inquire about an investor's financial history, investment goals and objectives, and other investments. Specifically, a financial advisor should obtain information about a client's investment experience, risk tolerance, investment objectives, investment time horizon, net worth, general financial circumstances, and other investment holdings.
After a financial advisor acquires the customer-specific information, then the financial advisor is required to recommend suitable investments. In other words, the financial advisor must recommend investments that "fit" the customer's needs. As an extreme example, a 90 year-old investor seeking steady income should not be recommended a portfolio that is comprised 100% of risky investments that does not produce income.