General
Suitability
Suitability is the requirement that investment recommendations must be appropriate for a client's financial situation, risk tolerance, and investment objectives.
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Exam Tip
Suitability has 3 parts: reasonable basis, customer-specific, quantitative. Know all three!
What is Suitability?
Suitability requires that broker-dealers only recommend investments that are appropriate for a specific customer based on their individual circumstances.
Suitability Obligations (FINRA Rule 2111)
| Component | Requirement |
|---|---|
| Reasonable Basis | Understand the product/strategy |
| Customer-Specific | Match to customer's profile |
| Quantitative | Not excessive trading |
Customer Profile Factors
To determine suitability, firms must know the customer's:
- Age and life stage
- Income and net worth
- Investment objectives
- Risk tolerance
- Time horizon
- Tax status
- Liquidity needs
- Existing investments
Suitability vs. Fiduciary
| Factor | Suitability | Fiduciary |
|---|---|---|
| Standard | Suitable for customer | Best for customer |
| Conflicts | Must disclose | Must avoid or mitigate |
| Applies to | Broker-dealers | Investment advisers |
Regulation Best Interest (Reg BI)
Since 2020, broker-dealers must also comply with Reg BI, which raises the standard above suitability but below full fiduciary duty.