Broker Misconduct: Unsuitable Investments

Posted by on Jun 18, 2017 in Investment Fraud | 0 comments

Potential investors consult brokers because these people are the ones who know better. They study investments to check which ones can potentially grow and determine their involved risks. Of course, not because a particular investment has good potential for growth and has acceptable risks, it automatically means that it is the right investment for the potential investor.

There are a lot of other factors to consider to determine where an investor should invest his money. According to the website of Erez Law, these may include the following:

  • Financial situation
  • Investment experience
  • Room for risks
  • Liquidity
  • Condition of other investments, if there are any
  • Investment goals
  • Tax status
  • Age

If the broker has recommended a particular investment opportunity without considering that investment’s growth potential, its risk factors, and the potential investor’s financial standing, he may be committing a broker misconduct called unsuitable investments.

Suitability occurs when a potential investor’s status, such as the financial standing factors bulleted above, coincides with the investments he has made. Failing to have suitability is almost always the broker’s fault, because he is the one responsible in studying investments and determining the status of the potential investor.

Unsuitability can arise in two ways. First, it can arise because of the lack of knowledge regarding the particular investment or the potential investor’s status. Second, it can arise because of the financial advisor or broker’s incompetence, usually in the form of lack of understanding of the investment’s potentials and risks and lack of adequate financial strategies.

To guarantee suitability, it is recommended that the broker have the following:

  • Adequate knowledge of the nature, potential, and risk of the investment
  • Adequate knowledge of the potential investor’s profile, including the financial standing factors bulleted above
  • Adequate investment strategy that fits the investment and the investor’s profile
  • Full understanding of the investment strategy before recommending it

 

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