Investors have different objectives and risk tolerances. What might be a prudent investment for one investor might be entirely unsuitable for another. Stockbrokers and investment advisors have a responsibility to know their customers’ financial situation and objectives and refrain from giving investment advice that is too risky or unsuitable.
In recent years a growing number of senior citizens have been the recipients of unsuitable advice, as a growing number of investment professionals have recommended the purchase of variable annuities. Variable annuities are usually unsuitable for senior citizens because they are long-term investments that heavily penalize investors who want to take their money out early. Investments should be appropriate for your age, your monthly and annual cash requirements, and your risk tolerance.
Below are some common examples of unsuitable investments by stockbrokers and investment advisors:
1. Recommending that older and/or conservative investors take money from dividends and purchasing high risk stocks or options.
2. Recommending the purchase of tax exempt investments into accounts that are already tax free. For example, recommending the purchase of municipal bonds, which are tax free, into an IRA account or other qualified retirement account.
3. Recommending the purchase of an investment that is not in the client’s best interest but highly compensates the broker or brokerage.
4. Recommending the purchase of a stock that the broker’s firm has underwritten or an undisclosed financial interest in.
-NASD Rule-
NASD Rule 2310 provides the framework for suitability claims against financial professionals:
(a) In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and his financial situation and needs.
(b) Prior to the execution of a transaction recommended to a non-institutional customer…a member shall make reasonable efforts to obtain information concerning:
(1) The customer’s financial status;
(2) The customer’s tax status;
(3) The customer’s investment objectives; and
(4) Such other information used or considered to be reasonable by such a member or registered representative in making recommendations to the customer.
-NYSE Rule-
The comparable rule with the NYSE is Rule 405: Diligence as to Account, which is commonly known as the “Know Your Costumer” rule. Rule 405 requires brokers to learn the essential facts about each customer:
Every member organization is required through a general partner, a principal executive officer or a person or persons designated under the provisions of Rule 342(b)(1) to:
(1) Use due diligence to learn the essential facts relative to every customer, every order, every cash or margin account accepted or carried by such organization, and every person holding power of attorney over any account accepted or carried by such organization;
(2) Supervise diligently all accounts handled by registered representatives of the organization;
(3) Specifically approve the opening of an account prior to or promptly after the completion of any transaction for the account of or with a customer…[t]he member, general partner, officer or designated person approving the opening of the account shall, prior to giving his approval, be personally informed as to the essential facts relative to the customer and to the nature of the proposed account and shall indicate his approval in writing on a document which is part of the permanent records of his office or organization.
Seek Legal Help Quickly
If you have been the victim of unsuitable advice in your investment account it is important to seek legal help immediately. Any hesitation in filing a complaint and seeking legal help may be viewed negatively by arbitration panels and courts.
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Contact Mark & Associates, P.C. today to have your unsuitable advice case evaluated for free by an experienced stockbroker fraud securities lawyer. Please complete the case evaluation form on the right side of this page or call 1-866-50-RIGHTS (1-866-507-4448) to have your case reviewed.