Suitability Attorneys – FINRA Rule 2111
A suitability claim ranks among the most prevalent types of grievances that customers bring before a panel of securities arbitrators. This common occurrence prompts a critical question: why do investment professionals extensively probe into your investment experience, risk tolerance, and other financial aspects?
The answer lies in FINRA’s suitability rule, formally known as FINRA Rule 2111. This rule is anchored in a fundamental principle that mandates brokerage firms and their associated persons—including brokers, financial advisers, or financial consultants—to engage in fair dealings with their customers. FINRA has developed comprehensive documentation to enlighten investors about the suitability rule. This effort aims to clarify why firms and their representatives must gather detailed information about a client’s financial circumstances.
Understanding the suitability rule is crucial for both investors and professionals within the securities industry. This rule ensures that any recommendations made by brokers or financial advisers are appropriate for the clients based on their financial needs, objectives, and unique circumstances. Such a requirement not only protects investors but also guides professionals in offering sound financial advice.
For individuals who believe their investment losses may be due to recommendations that were not suited to their financial situations, consulting with lawyers well-versed in securities law can be an invaluable step. These lawyers are adept at navigating the complexities of suitability claims. They provide the legal expertise needed to assess whether a brokerage firm or its associated persons have complied with the requisite standards of the suitability rule.
Securities lawyers play a pivotal role in representing investors in disputes involving suitability claims. They meticulously review the investor’s financial profile, the advice given, and the actions taken by the brokerage firm to determine if there has been a breach of the suitability standard. By leveraging their profound knowledge and experience, these lawyers help clients understand their rights, pursue appropriate legal recourse, and seek compensation for any financial harm suffered due to unsuitable investment advice.
For any investor facing potential losses due to what they suspect might be unsuitable advice, reaching out to a competent securities lawyer can provide the necessary guidance and representation to navigate through the arbitration process effectively. Such legal support is crucial in ensuring that investors receive the protection they deserve in the securities market.
FINRA’s suitability rule states that firms and their associated persons “must have a reasonable basis to believe” that a transaction or investment strategy involving securities that they recommend is suitable for the customer. This reasonable belief must be based on the information obtained through the reasonable diligence of the firm or associated person to ascertain the customer’s investment profile. The rule requires firms and associated persons to seek to obtain information about the customer’s:
- age;
- other investments;
- financial situation and needs, which might include questions about annual income and liquid net worth;
- tax status, such as marginal tax rate;
- investment objectives, which might include generating income, funding retirement, buying a home, preserving wealth or market speculation;
- investment experience;
- investment time horizon, such as the expected time available to achieve a particular financial goal;
- liquidity needs, which is the customer’s need to convert investments to cash without incurring significant loss in value; and
- risk tolerance, which is a customer’s willingness to risk losing some or all of the original investment in exchange for greater potential returns.
To help ensure that customers receive suitable investment advice, firms and their associated persons are required to learn as much about a customer’s investment profile as possible before recommending a securities transaction or investment strategy. The rule thus places an obligation on a firm and associated person to seek information from customers. Customers are not required to provide this information; therefore, the suitability rule provides some flexibility when information is unavailable despite the fact that the firm or associated person asked for it. This process is governed by FINRA Rule 2090 titled “Know Your Customer.”
The suitability of the overall mix of investments in a portfolio is determined by asset allocation. Asset allocation is the split of investment products between cash, fixed income, equities or other non-traditional asset classes.