When a stockbroker, investment advisor, or financial planner recommends an investment, there must be reasonable grounds to believe that the investment is suitable for the client in light of the client's circumstances and investment objectives. If the broker does not learn anything about the financial condition or goals of his client, he obviously cannot meet this responsibility. Moreover, some brokers and advisors recommend investments to their clients that are manifestly unsuitable for them.

Some common characteristics of investments that may be unsuitable are:

• Risk. Sometimes, a broker recommends that an investor invest a substantial portion of his net worth in a risky investment and that investor cannot tolerate such risk. A retiree should manifestly not be told to invest a significant portion of his or her savings in such risky investments as stock options, futures contracts, index options, startups, thinly traded issues, speculative common stocks, limited partnerships, and similar vehicles.
• Illiquidity. Sometimes, an investor will be told to invest a substantial portion of his or her assets in illiquid investments for which there is no ready market or that have a substantial penalties or fees for early redemption. Money that may be needed to meet forseeable obligations, such as living expenses, medical expenses, educational expenses, and so on, should not be put into illiquid investments.
• Concentration. Sometimes, an investor will be told to invest a substantial portion of his or her assets into a single stock, or into a single limited partnership, or into several such investments that are all sponsored by a single company. When that happens, the investor is often exposing all of those assets to an unreasonable risk of loss.
• Tax Insensitive Investments. Sometimes an investor who needs to minimize his or her taxes is told to put his money into investments, such as certain actively traded mutual funds, that generate large and unnecessary tax liabilities.
• Double tax exemptions. Sometimes a broker recommends that money that is already free of income taxation on gains, such as money in an IRA, be invested in tax free bonds or other securities. This is usually inappropriate because the investor does not need a tax free investment, and such investments usually do not yield as much as other investments.

DISCLAIMER: Vincent DiCarlo, who authored and maintained this site, has entered government service and, as of September 1, 2008, is no longer engaged in the private practice of law.  Therefore, this site is no longer being maintained,  may not be accurate, and should not be relied upon.  It is not now and was not ever intended as legal advice.  It is being provided for historical purposes, and for the benefit of those lawyers who are capable of independently verifying the information and judging the opinions in it, and then reaching their own conclusions.  You are strongly advised to consult qualified legal counsel before adopting any of the ideas or suggestions in this material, which may or may not be applicable in your jurisdiction or to your specific situation, and may no longer be accurate or prudent in any case.  The opinions and statements at this site were solely those of the author.  They were not and are not those of, nor were they nor are they made on behalf of, any agency of government or anyone else.

Copyright © 1998-2008 Vincent DiCarlo