Suitability
While some ethical standards for securities professionals are simple black and white, do this or don’t do that, kinds of rules, others are a lot grayer. Suitability is one of those concepts that require professionals to make an ongoing effort to ensure that they are looking out for their clients’ best interests and walking the ethical line.
Suitability is the concept that not all investments are right for all clients, due to a wide variety of factors. One set of factors includes an investment’s cost, level of risk, expected return, and growth or income features. Another set includes the investor’s risk tolerance, liquidity needs, investment experience, current portfolio composition, investment objectives, time horizon, tax situation, and amount of funds to invest.
In other words, a top-ranked mutual fund that has posted great growth for ten straight years in a row may be inappropriate for someone who never, ever wants to see his investments have a negative performance year. Likewise, someone who hopes to grow her investments at a rate that exceeds inflation should not have the bulk of her money parked in low-yield savings accounts for any extended period of time. Suitability involves making sure clients are taking enough risk to meet their goals, just as it can be about making sure clients are not taking too much risk to keep them from reaching them.
Determining suitability is a mix between an art and a science that requires two very important actions—listening and talking. First, professionals have to listen carefully to what their clients express as their short- and long-term goals, their ability to tolerate risky investments, and their need for immediate income from their investments or their ability to hang on for long-term growth potential. Further, when clients don’t know how to express these things or do it l