Unsuitability

When investors are seeking FINRA arbitration, one of the most common types of claims is claims of unsuitability. Financial advisors, stockbrokers, and the firms that employ them are required to maintain a working knowledge of their customers or clients. When a broker creates an investment strategy that runs counter to a customer’s risk tolerance, that customer may have a claim for unsuitability. Another instance of unsuitability would be recommending an investment that fails to meet the goals and objectives of the customer. 

Overall, suitability is determined by considering an array of different factors in a holistic setting. The broker or financial advisor will need to consider many different factors such as risk tolerance, age, wealth and investment goals, and financial position. If your advisor’s advice, recommendation, or product offering was inappropriate and resulted in losses, working with an experienced attorney like the ones at TorkLaw can help you recover more of the compensation you may be entitled to.

What Does Unsuitability Mean For Investors?

Owing to the fiduciary duty and ethical obligations of a legitimate broker, they cannot recommend any investment unless they have reason to believe that it will provide a benefit to the investor. FINRA has determined that claims of unsuitability can arise from situations where the investment products or strategy that was sold to the client was inappropriate when considered in the context of their investor indicators.

In FINRA-registered firms, they are required to know their customer. This means that your broker should have a thorough understanding of your income, investment goals, overall wealth goals, your risk tolerance, and more. This is specifically for the purpose of preventing inappropriate or risky investment advice to the consumer. So, before your broker recommends anything, they will have researched it deeply and found it to be aligned with your personal investment profile, and if it doesn’t, there may be cause to begin claims of unsuitability.

Elements Of A Successful Unsuitability Claim

There are three significant elements to a successful claim of unsuitability. The burden of proof will be on the claimant, so it is imperative to work with an experienced attorney who can guide you and provide insight on what types of documents you may need to help strengthen your case. The elements of a claim of unsuitability that a claimant must demonstrate are:

1. The investment was incompatible with the investment objectives or was otherwise inappropriate.
2. The broker held a reasonable belief or similarly knew that the investment was inappropriate.
3. The broker recommended the investment, knowing it was inappropriate.

Proving Unsuitability

FINRA arbitrators will take into account several pieces of information and evidence when making a determination on whether a broker or advisor made unsuitable recommendations. In most cases, they will review account documents like statements and order records, the initial new account form with the investment goals, exception reports, correspondence with the advisor, and trade confirmations. They will also collect testimony from you, the investor, who will also need to do a portfolio analysis, which reports on the suitability of the portfolio for your investment needs.

Common Examples Of Unsuitability

Unsuitability is a major consideration in investing, and claims about suitability represent one of the biggest reasons that investors file claims. Just like anything else, however, most cases that need FINRA arbitration have more than one claim involved, and this multifaceted nature can include claims of churning, breach of fiduciary duty, omissions, and failure to execute. 

Sometimes, claims of unsuitability will revolve around a specific product, trade, or transaction. The concept of suitability, however, can be applied to a scale as large as the entire investment or asset allocation strategy for a portfolio. 

In one example, a broker may recommend a portfolio that is over-concentrated on financial sector stocks, which can create devastating losses if the financial market corrects. Another example may see a client’s financial advisor recommend a particular mutual fund based on what they think they understand about the fund, and neglect to do any material research or due diligence. Both of these situations represent the broker failing to act in the best financial interest of the customer, which can itself be a breach of fiduciary duty.

Unsuitability Due To Being Inappropriate For The Customer

The best way to understand if you may have been the victim of unsuitability is that it can be anything that seems inappropriate for the customer. If the customer is an older investor with very low-risk tolerance, a broker recommending investment in a risky startup would be inappropriate. Likewise, a broker recommending an extremely conservative, low-risk asset allocation for someone in their mid-20s who is looking for aggressive, high-risk gains is also inappropriate.

Solicited Trades vs. Unsolicited Trades

All market trades are either solicited or unsolicited. This is a crucial distinction to make if you have suffered losses. Solicited trades are those trades that your broker has recommended to you. It is often far easier to prove that a solicited trade was unsuitable than an unsolicited trade. In either case, making sure you have expert legal representation is essential.

What If I Can’t Afford FINRA Arbitration?

While the thought of bringing a claim against your broker may be intimidating for some, even more, intimidating can be the thought of needing to pay for an attorney to represent you throughout the process. This may even cause some people to refrain from seeking legal help to recover their losses. In most cases, we’ll be able to take your case with contingency representation. This means you won’t need to pay any large, upfront fees or retainers, as TorkLaw is only paid when you collect or receive a judgment.

TorkLaw Has Leading Securities Fraud Attorneys

If you feel that you or someone close to you has been the victim of a broker’s unsuitable investment recommendations, working with an experienced attorney is vital to the health and strength of your case. Not only do the attorneys at TorkLaw have an incredible amount of securities industry knowledge, but they also have decades of experience representing successful claims of unsuitability. Reach out today to discuss the specifics of your claim with a member of our expert legal team.