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Simply put, a recommendation is unsuitable if it is inappropriate for an investor. In an over-simplistic example, recommending a penny stock to an elderly retired widow would be deemed unsuitable. However, unsuitability determinations are always more nuanced, and apply to all ages, risk tolerances, financial abilities and experiences. Unsuitability can also apply to the wealthy. In a recent matter involving a wealthy physician, the broker utilized margin to purchase securities, which increases risk, and also recommended leveraged mutual funds that were aggressive in nature. The portfolio was simply not sustainable. It would have been unsuitable for anyone. As was to be expected, a minor downturn in the market caused the entire portfolio to implode.

Unsuitability can be about a specific transaction, but generally the concept is applied to a portfolio’s composition and/or strategy. Unsuitability can also be applied to a product. Examples involve concentration, margin/credit line usage and excessive transactions and/or mark-ups. In one particular instance, a broker recommended a portfolio which consisted of close to 50% exposure to financial stocks. Such a recommendation was extremely unsuitable regardless of risk tolerances and financial wherewithal of the client. When financial stocks plummeted, the portfolio was decimated. In another situation, a financial advisor failed to perform proper due diligence on a mutual fund and recommended the fund based on his beliefs about the fund’s safety and lack of fluctuation. By neglecting due diligence efforts, the advisor misrepresented the product which equated to an unsuitable recommendation

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