Unsuitable investments

A stock broker may legally only make investment recommendations that are in the client's best interests, i.e. in line with investment objectives, needs and risk tolerance. Investments that meet any of the following criteria might be considered unsuitable and may make the stock broker liable.

1. Investments that ask the client to assume a greater financial risk than he or she can reasonably sustain.

2. Investments that are inconsistent with the clients financial needs.

3. Investments in which the client is not adequately made aware of the risks involved.

Some classic examples of unsuitable investments

1. Taking monies from dividends and putting them in high risk stocks such as option accounts or technology stocks when the client is older, unwell or in a situation in which he or she must have a steady income.

2. Putting tax free accounts into accounts that are already tax free. For example, putting municipal bonds into an IRA account.

3. Pressuring a client to make an investment that is not in his or her best interest but because the brokerage is under contract to sell the stock. Other examples of this can occur when a broker is trying to push a stock that his firm has underwritten or in order to artificially inflate the price of the stock as part of a fraud scheme. The financial damage incurred by investors lured into hyped stocks by defrauders has been astronomical.

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