How appropriate an investment is for you is a consideration at the very heart of the investment process. It is a fundamental concept both, from a legal perspective and in terms of putting an investor's money to work sensibly and prudently.

When you, through an advisor or broker, invest your money in securities that aren't suitable for your investor profile, there is a potential for unacceptable losses or very low returns. This can cause considerable distress for an investor. 

FINRA Rule 2111 governs the obligations of advisors and brokers to ensure that investments are suitable for their clients.

Read on for a look at the concept of suitability and an advisor's or broker's role in helping their clients understand the risks and proper choices of investments and investment strategies.

What Is Investment Suitability?

A suitable investment is defined by FINRA as one that fits the level of risk that an investor is willing and able, as measured by personal financial cir♊cumstances, to take on.

These criteria must be met. It is not enough to state that an investor has a risk-friendly investment profile. In addition, they must be in a financial position to take certain chances with their money. It is also necessary for them to understand the nature of the risks and the possible consequences.

Concern for Risk Profile and Asset Allocation

Risk

Why is suitability such an issue? It's because investors often don't understand what risk entails, and brokers can be tempted to advise people to make risky investments.

Further complicating the matter is the fact that excessively low-risk investments can be just as damaging to an investor's portfolio as those that carry unsuitable levels of risk.

Therefore, suitability demands investments that are neither too risk-friendly nor too 澳洲幸运5开奖号码历史查询:risk-averse for a particular investor.

According to FINRA regulations, a broker must have a reasonable basis for believing that an investment meets a client's needs and objectives.

Asset Allocation

Unfortunately, suitability is not always entirely clear cut. While there can be no doubt that eve🐽n a risk-friendly investor should not put 100% of their total assets into the stock market, when the percentage drops to, say, 60% or lower, the issue becomes less clear. But the allocation of assets remains key to being properly invested.

An investor who owns some real estate and has a conservative 澳洲幸运5开奖号码历史查询:pension plan has different asset allocation needs compared to someone with a broadly diversified portfolio. Advisors and brokers must consider age and other aspects of the client's personal and financial profiles, as well.

For example, it is unlikely that someone on the brink of retirement should have their entire account tied up in the futures market. 🌟However, the same person may be able to have 50% of their po♒rtfolio in conventional equities.

Bear in mind t𒉰hat this may be too risky for someone about to retire, at which time a portfolio of about 25% equities is generally considered more suitable.

Suitability largely boils down to 澳洲幸运5开奖号码历史查询:asset allocation. Both the law and 𝓰good investment practices prohibit anybody being prodded into an asset allocation ꦉthat does not make sense.

An investor's portfolio must be appropriately diversified so as to generate a reasonable level of returns at a reasonable level of risk.

Life Events Affect Suitability

Suitability is constantly in flux. As indicated above, what is suitable for someone who is 30 y💯ears old is very different from what that perso⭕n will need when they are 60.

Getting married, having chil👍dren, getting a big raise, or losing a job altogether should prompt a reconsideration of suitability.

As usual, this boils down to risk, asset allocation, and liquidity. If someone needs their money soon, tying it up in stocks doesn't make sense. On the other hand, those who have many years to invest may want a portfolio that has a predominance of stocks for the purpose of growth and a lower percentage of government bonds.

Investors Must Understand Risks, Too

For investors themselves, an understanding of securities and risk also plays a role in suitability. But just because an investor understands the risks associated with, say, futures contracts, doesn't necessarily make this investment suitable for them.

And if an investor doesn't understand a complicated investment vehicle, such as a 澳洲幸运5开奖号码历史查询:structured product, a straightforward 澳洲幸运5开奖号码历史查询:mutual fund, may be more suitable.

For a broker, unsuitability can involve urging an investor to buy an asset that they are unfamiliar with. This can be viewed as an abuse of the investor's knowledge of particular investments or investing overall.

And, if there are perfectly good alternatives with which an investor is more familiar and co༒mfortable, there is no reason to take on more sophisticated instruments.

Unsuitable Investments and the Law

What does the law have to say about unsuitable investments? If an investor buys an investment purely on their own initiative (known as execution-only) and no one has advised the person to do so, there isn't much the law can do.

On the other hand, if a broker or other financial institution advises an investor to buy an uns๊uitable investment, that financial professional could be liable for the investor's losses, provided the person can prove the investment was unsuitable and that the broker or advisor did not make the risks clear.

As a result, in some cases, cautious brokers will only sell really high-risk and ♐potentially unsuitable investments if buyers sign a document stating that they are aware of the risks associated with ꦕthese investments.

Of course, firms generally have litigation insurance, so they can afford to fight claims of unsuitability in court. However, if investors can produce clear documentation of risk aversion and that an obviously high-risk investment cost them dearly, they do stand a chance in court.

But for investors, litigation remains a rocky road, which is often as costly as the unsuitable in♒vestments themselves.

The Bottom Line 

No one should ever own investments that are not appropriate for their personal circumstances and their willingness to ta🉐ke financial risks.

ꦐAt the extreme, truly unsuitable investments can destroy the value of a portfolio, but even lesser cases can cause undue stress for investors. Nothing in the investment process is more important than understand☂ing the consequences of risk and allocating assets correctly.

Furthermore, inv𝓀estment s♋uitability needs to be monitored regularly by investors and advisors.