Charles W. Ranson
Expert Witness
Wealth Management and Trust & Estates

What is Investment Suitability?

The Nature of Suitability: what exactly is a suitable investment? The concept means that an investment is appropriate in terms of an investor’s willingness and ability (personal circumstances) to take on a certain level of risk. It is essential that both these criteria be met. If an investment is to be suitable, it is not enough to state that the investor has a high risk tolerance. The investor must also be in a financial position to take certain risk chances. It is also necessary to understand the nature of the risk and the possible consequences. Investors often do not understand what risk really entails, the possibility of losing all or part of a specific investment. Further complicating the matter is the fact that excessively low risk investments can be just as damaging to an investor’s portfolio as those that carry unsuitable levels of risk.

Investment advisors and broker-dealers that use a disciplined approach toward understanding the client’s investment objective, time horizon, risk tolerance, tax issues, and past investment experience and require the client to provide this information in detail and review it annually with the client are positioned to make suitable investment recommendations or execute discretionary investment management decisions. Documenting client financial information comprehensively to determine investment suitability is a critical risk management practice for investment advisors and broker-dealer representatives.