A broker has a duty to know his client and only recommend investments and trading strategies that are suitable for that client. An investment may be unsuitable if a customer does not have the financial ability to incur the risk associated with a particular investment, if the investment was not in line with the investor’s financial needs or if the customer did not know or understand risks associated with certain investments.
A broker has a duty to gather essential information in order to understand the risk tolerance of an investor, the tax considerations for the client, the client’s prior experiences and appetite for risk, and the level of return desired. It is the duty of a broker to make recommendations that are appropriate and suitable given his client’s circumstances. If a broker breaches those duties and makes unsuitable recommendations for a client, the broker may be liable to that client.
The issue is not whether a broker picked the right stock, anyone can make a mistake, but whether the broker pick the right type of investment. Example: bonds and lower risk stocks for a retirement account rather than high risk stocks only.
A broker must also have a “reasonable basis for the recommendation”. The broker’s basis for the recommendation can be the firm’s research, in which case the firm must have a reasonable basis for its own recommendation.
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