Every brokerage firm, investment advisor, and broker is required by securities rules to “know their customer,” so they can make appropriate recommendations given the investor’s age, net worth, risk tolerance and goals.
FINRA Rule 2111 also known as the “Suitability Rule” requires that firms and their brokers have a reasonable basis to believe that each securities transaction they recommend is suitable for the investor. This rule is based on the fundamental requirement that all FINRA firms and their brokers deal fairly with their customers.
Before any investment advice is given, firms and their associated persons have an obligation under the Suitability Rule to obtain as much information as possible about each investor’s particular financial situation and needs. Firms are required to request the information, but investors are not required to provide all of the information requested. The more information the firms and brokers have about any given customer, the more likely the firms will be to provide suitable investment advice to that customer.
The Suitability Rule requires that firms seek information from each customer about that particular customer’s
• willingness to risk losing some or all of their investment in exchange for the potential for higher returns;
• annual income;
• net worth;
• other investments, including real estate and other non-securities holdings;
• tax rate;
• investment goals and objectives;
• projected time frame for reaching a particular financial goal;
• investment experience; and
• liquidity needs.
The Suitability Rule does not prohibit a firm from providing investment advice to a customer in the absence of customer-specific information. The onus is on the firm to request the information, but it cannot force the customer to provide it. To increase the likelihood that a customer will be given appropriate investment guidance, the customer should be forthright with the firm regarding his or her investment profile.