Forms of Suitability Obligations a Compliance Consulting Firm Confirms for Securities

 In securities, suitability refers to an enforceable, ethical standard to which an investment is held when working with clients. Before the workers in a brokerage firm recommend an investment, they should have taken steps to ensure the product is suitable and matches an investor’s risk tolerance, goal, and needs. While this might be challenging, a compliance consulting expert can recommend the suitability types below when evaluating investment products.

Reasonable-basis suitability

This requires brokers to have a rational basis to believe that a product is suitable for an investor. This belief should be based on reasonable diligence that gives your firm and associated persons an understanding of the rewards and risks of investing in a specific security. A compliance consulting expert should be on hand to guide you on how to conduct the diligence needed to ascertain an investment’s suitability.

Customer-specific suitability

This requires that brokers have a reasonable basis to believe that specific investments will suit particular customer profiles. To make an informed decision, a broker will consider several customer-specific factors, including age, liquidity needs, investment time horizon, and risk tolerance. For instance, a long-term investment product would be unsuitable for an old client and one who wants to liquefy a product quickly.

Quantitative suitability

This dictates that a broker with defacto or actual control over a client’s account has a reasonable basis to believe that recommended transactions are suitable for a client’s investment portfolio. In quantitative suitability, the investment product should be suitable and not excessive, even when viewed in isolation. The suitability is designed to prevent the excessive portfolio turnover meant to generate commission fees for brokers.

Sometimes, brokerage firms without compliance consulting experts confuse the above suitability forms for fiduciaries. This is understandable since both protect investors from excessive risk and foreseeable harm. However, investment fiduciaries have legal responsibilities to manage other people’s money, while broker-dealers only fulfill a suitability obligation.