Suitability violations occur when a stockbroker or financial advisor recommends investments that are not appropriate for the investor's risk tolerance, investment goals or financial situation. There are many factors that determine an investor's risk tolerance, including age, income and investment experience. Simply put, a teacher who is 65-years-old and about to retire will have a different risk tolerance than a 34-year-old attorney. As such, different investment vehicles will be considered suitable for the 65-year-old than the 34-year-old.
If the investment advisor recommends highly risky investments for the 65-year-old, and the account loses money, the investor could file a FINRA arbitration, alleging the investment advisor made recommendations that were unsuitable. In other words, the broker must have a reasonable belief that any securities or investments he recommends are suitable for the investor, based on the investment profile.
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In December 2012, however, FINRA clarified its position, saying people who were not actually customers of the broker--that is they did not either open an account with the brokerage or buy a product that the firm receives compensation for--could not file a suitability claim.
This means an investor must either be a client of the brokerage firm or have at least purchased a product the brokerage receives compensation for to file a FINRA suitability claim.