What it sounds like
“My stockbroker put me into investments that were just too risky for me.” “I told my broker that I did not want a lot of risk in my portfolio.” “My stockbroker knew that I was retired and that I could not afford to take a lot of risk.”
The Financial Industry Regulatory Authority (FINRA) requires that a broker must have a reasonable basis for recommending an investment, investment strategy, trade, or portfolio to a customer. Your broker has a duty to “get to know you” and to only make recommendations to you based upon certain factors, including, but not limited to the following:
- Age
- Risk tolerance level
- Investing experience
- Financial goals
- Liquidity needs
- Tax status
- Other investments you have disclosed
- Other key factors
Registered representatives at brokerage firms must conduct the proper due diligence to make sure that their recommendation is a good fit for a customer. According to SEC regulations, brokers can only sell a financial product to a customer if it is in the customer’s best interests.
Common examples of unsuitable recommendations include selling speculative, high-risk stocks to retirees or clients with limited resources, or concentrating a portfolio in a single type of security, or recommending high-cost annuities or alternative investments.
If you have received a phone call or letter from the brokerage firm seeking to confirm that you are aware of the risks of a certain investment or trading strategy in your accounts, watch out! These are generally considered to be “comfort letters” and they are an attempt by the brokerage firm to cover up unsuitable or excessive trading. Similarly, if your stockbroker, investment advisor, or brokerage firm has required you to sign an “accredited investor” form, you should beware as it indicates an extremely risky investment is headed your way. If you think your brokerage firm made unsuitable investments on your behalf, you should contact us immediately.