Series 7 Suitability & Customer Recommendations Guide 2026
Suitability questions are the backbone of the Series 7 exam — with 20-25 scenario-based questions, they test your ability to think like a registered representative making real investment recommendations. Combined with product knowledge and tax consequences, this area covers approximately 73% of the exam.
This guide teaches you exactly how to analyze customer profiles and select the right investment for every scenario you'll encounter on the Series 7 exam.
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What Is Suitability on the Series 7?
FINRA Rule 2111 requires that a registered representative have a reasonable basis to believe a recommendation is suitable for a customer based on their investment profile.
Three Types of Suitability
| Type | Test | Question It Answers |
|---|---|---|
| Reasonable-Basis | Is this investment suitable for anyone? | "Is this a legitimate investment?" |
| Customer-Specific | Is this investment suitable for THIS customer? | "Does it match their profile?" |
| Quantitative | Is the activity level appropriate? | "Is there excessive trading (churning)?" |
Most exam questions test customer-specific suitability — you'll receive a customer profile and must choose the best investment match.
Quantitative Suitability (Churning)
Quantitative suitability focuses on whether the volume of trading is appropriate. Excessive trading for the purpose of generating commissions is called churning and violates this rule.
Red flags for churning:
- High turnover rate (buying and selling the same positions repeatedly)
- High cost-equity ratio (commissions eat into returns)
- In-and-out trading (short holding periods with frequent sales and repurchases)
- De facto control — the rep makes trading decisions without meaningful customer input
Exam Tip: Even if individual trades are suitable (customer-specific), the overall volume of trading can be unsuitable (quantitative). Think of it as: each meal is healthy, but eating 20 meals a day is excessive.
The Customer Profile: 8 Key Factors
When you see a suitability question, immediately identify these factors from the scenario:
1. Age & Time Horizon
| Age Group | Time Horizon | General Allocation |
|---|---|---|
| 20s-30s | Long (30+ years) | 70-80% equity, 20-30% fixed income |
| 40s-50s | Medium (10-20 years) | 50-60% equity, 40-50% fixed income |
| 60s-70s | Short-Medium (5-15 years) | 30-40% equity, 60-70% fixed income |
| 75+ | Short (0-10 years) | 20% equity, 80% fixed income |
The "100 minus age" rule: Subtract age from 100 = approximate equity percentage. A 30-year-old → ~70% equity. An 80-year-old → ~20% equity.
Why it matters: Younger investors have time to recover from losses and need growth to beat inflation. Older investors cannot afford large losses and need income preservation.
2. Income & Net Worth
| Financial Profile | Suitable Products |
|---|---|
| Low income, low net worth | Conservative: money market, government bonds, blue chip stocks |
| Moderate income, moderate net worth | Balanced: diversified mutual funds, investment-grade bonds |
| High income, high net worth | Broader range: alternative investments, options (up to 10-20%), DPPs |
Exam Tip: High-income investors may benefit from Direct Participation Programs (DPPs) for tax advantages and options for hedging, but these should never be a large concentration.
3. Investment Objectives
| Objective | Focus | Typical Products |
|---|---|---|
| Capital Preservation | Protect principal | Money market, Treasury bills, CDs |
| Income | Regular cash flow | Bonds, dividend-paying stocks, REITs |
| Growth | Long-term appreciation | Growth stocks, growth mutual funds, small-cap funds |
| Growth & Income | Balance of both | Balanced funds, large-cap dividend stocks |
| Speculation | Maximum returns (high risk) | Options, penny stocks, leveraged ETFs |
4. Risk Tolerance
| Level | Acceptable Products | Avoid |
|---|---|---|
| Conservative | Government bonds, money market, blue chips | Options, small-cap, sector funds |
| Moderate | Diversified mutual funds, investment-grade bonds | Penny stocks, leveraged products |
| Aggressive | Growth stocks, options (hedging), small-cap | N/A (wider range acceptable) |
5. Tax Status
This is one of the most testable suitability factors:
| Tax Bracket | Key Recommendation |
|---|---|
| High bracket (28%+) | Municipal bonds (tax-exempt income) |
| Low bracket | Taxable bonds (higher yield, low tax impact) |
| Any bracket in retirement account | NEVER municipal bonds (tax benefit wasted) |
The Golden Rule: Municipal bonds = high tax bracket, outside retirement accounts. ALWAYS.
Taxable Equivalent Yield Formula: To compare a muni's tax-free yield to a taxable bond, use:
Taxable Equivalent Yield = Tax-Free Yield ÷ (1 − Tax Rate)
Example: A muni yields 4% and the client is in the 35% bracket:
- 4% ÷ (1 − 0.35) = 4% ÷ 0.65 = 6.15%
- This means a taxable bond would need to yield over 6.15% to beat the muni after taxes
The Muni-in-IRA Trap (Tested Repeatedly): Municipal bonds should NEVER be recommended for IRAs, 401(k)s, 403(b)s, or any tax-deferred retirement account. Why? IRAs already defer taxes — so you're paying for a tax benefit (muni's lower yield) that provides zero additional value. A corporate bond yielding 6% in an IRA is better than a muni yielding 4%, because both grow tax-deferred but the corporate bond earns more. This is one of the most common Series 7 trick questions.
6. Liquidity Needs
| Need | Time Frame | Suitable Products |
|---|---|---|
| High liquidity | Days to weeks | Money market, T-bills |
| Moderate liquidity | Months | Short-term bonds, liquid mutual funds |
| Low liquidity needed | Years | Long-term bonds, stocks, real estate |
Exam Tip: If a client needs money within 1 year for a specific goal (down payment, tuition, emergency fund), always choose the most conservative, liquid option. Never recommend equities for short-term needs.
7. Current Holdings & Diversification
Look for red flags in existing portfolios:
| Red Flag | Problem | Solution |
|---|---|---|
| 50%+ in one stock | Concentration risk | Diversify across sectors |
| 100% equities at age 70 | Too aggressive | Rebalance to fixed income |
| No equity at age 30 | Too conservative | Add growth exposure |
| Duplicate funds | Overlap/redundancy | Consolidate into fewer funds |
8. Tax-Loss Harvesting (Advanced)
If a client has realized capital gains, they may benefit from selling positions at a loss to offset gains. The exam may test the wash sale rule: you cannot claim a loss if you repurchase the same (or substantially identical) security within 30 days before or after the sale.
Product Matching: Quick Reference
Use this chart when answering suitability questions:
| Client Need | Best Product Match |
|---|---|
| Tax-exempt income + high bracket | Municipal bonds |
| Taxable income + low bracket | Corporate bonds, Treasuries |
| Long-term growth + young | Growth stock funds, equity index funds |
| Income + retired | Bond funds, dividend stocks, balanced funds |
| Short-term savings | Money market, T-bills |
| Inflation protection | TIPS, equity, real estate |
| Diversification (small portfolio) | Mutual funds, ETFs |
| Hedging a stock position | Options (protective puts, covered calls) |
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How to Answer Suitability Questions: A 4-Step Framework
Step 1: Identify the Customer Profile
Read the question carefully and note: age, income, tax bracket, risk tolerance, objectives, time horizon, current holdings, and any special circumstances.
Step 2: Eliminate Clearly Wrong Answers
Usually 1-2 answers are obviously unsuitable:
- Growth stocks for a conservative retiree needing income? Eliminate.
- Municipal bonds for a low-bracket investor? Eliminate.
- Money market for a 25-year-old seeking long-term growth? Eliminate.
Step 3: Compare Remaining Choices to the Profile
Match the remaining options against the customer's specific needs. The best answer is the one that most closely aligns with ALL stated profile factors.
Step 4: Choose the BEST Answer, Not a Good Answer
The exam often has two reasonable options. Choose the one that addresses the primary need first:
- If the question emphasizes income, prioritize income-generating investments
- If tax bracket is highlighted, consider tax implications first
- If age/timeline is prominent, weight time horizon heavily
Key Rule: Don't add information that isn't in the question. If the scenario doesn't mention tax bracket, don't assume one. Answer based solely on the facts given.
Common Suitability Scenarios on the Series 7
Scenario 1: The Young Professional
Profile: 28 years old, $85,000 income, aggressive risk tolerance, wants long-term growth for retirement Best recommendation: Diversified growth stock mutual fund or equity index fund Why: Long time horizon (35+ years), high risk tolerance, growth objective all point to equities
Scenario 2: The High-Bracket Retiree
Profile: 68 years old, $200,000 income, 35% bracket, wants income, moderate risk Best recommendation: Municipal bond fund Why: High tax bracket + income need = municipal bonds. Tax-exempt interest is worth more to high-bracket investors
Scenario 3: The Short-Term Saver
Profile: 40 years old, needs $30,000 for house down payment in 8 months, low risk Best recommendation: Money market fund Why: Short time horizon + specific capital need + low risk = capital preservation. Can't risk loss.
Scenario 4: The Concentrated Portfolio
Profile: 55 years old, $2M portfolio with 65% in employer stock, moderate risk Best recommendation: Diversify by selling some employer stock and investing across sectors/asset classes Why: 65% concentration = excessive unsystematic risk. Diversification reduces risk without necessarily reducing expected returns.
Scenario 5: The IRA Investor
Profile: 45 years old, 32% bracket, wants income in IRA Best recommendation: Corporate bond fund or balanced fund (NOT municipal bonds) Why: IRAs are already tax-deferred — municipal bond tax exemption is wasted. Use taxable bonds that offer higher yields.
Suitability Red Flags (Things That Are NEVER Suitable)
| Never Do This | Why |
|---|---|
| Recommend munis for retirement accounts | Tax benefit is wasted |
| Put elderly clients in long-term illiquid investments | They may need the money |
| Recommend speculative investments to conservative investors | Doesn't match risk tolerance |
| Concentrate a portfolio in one stock/sector | Excessive unsystematic risk |
| Recommend variable annuities to elderly clients with short time horizons | Surrender charges + complexity + fees |
| Trade excessively in a customer's account | Churning violates quantitative suitability |
| Recommend investments without knowing the customer's profile | Violates know-your-customer requirement |
Top Series 7 Suitability Mistakes
- Adding information that isn't there. Answer based ONLY on the facts in the scenario. Don't assume a tax bracket if one isn't given.
- Choosing a "good" answer instead of the "best" answer. Two answers may seem suitable — pick the one that best matches the PRIMARY stated need.
- Recommending munis for retirement accounts. This is tested multiple times. Tax-exempt income in a tax-deferred account = no benefit.
- Ignoring concentration risk. Any position over 50% of a portfolio is a red flag that needs to be addressed.
- Not matching time horizon to products. Short-term needs = capital preservation. Long-term needs = growth. Never reverse these.
Start Practicing Suitability Questions Now
Suitability questions test your ability to think like a financial professional, not just memorize facts. The best way to prepare is by working through realistic customer scenarios:
Our AI tutor analyzes each scenario and explains exactly why one recommendation is better than another — including the reasoning a registered representative would use in real life. Click "Ask AI" on any question you get wrong.