Unsuitable transaction cases are like unsuitable recommendation cases. In both cases, the investment must be unsuitable based on the client's circumstances and investment objectives. In an unsuitable recommendation case, the broker merely makes a recommendation and the investor makes the investment decision. In an unsuitable transaction case, the broker either has formal discretionary control over the account and makes the trade without consulting the investor, or the broker has practical ("de facto") control over the investor or the account, so that he is held responsible for the trades as if he had made them without the investor's approval.

Some common characteristics of investments that may be unsuitable are:

• Risk. Sometimes, a broker or investment advisor puts a substantial portion of an investor's net worth in a risky investment and the investor cannot tolerate such risk. For example, 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, a broker or investment advisor puts a substantial portion of an investor's 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, a broker or investment advisor puts a substantial portion of an investor's 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 has a substantial portion of his money into investments, such as certain actively traded mutual funds, that generate large and unnecessary tax liabilities.
• Double tax exemptions. Sometimes a broker or investment advisor puts money that is already free of income taxation on gains, such as money in an IRA, into 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