Unsuitable Investments

An unsuitable investment may comprise one, two, or all three characteristics, unsuitable investment lawyers note.

For instance, illiquid investments are typically unsuitable for elderly investors, who may need cash on short notice for medical expenses. Similarly, high-risk, volatile investments are typically unsuitable for investors with limited experience and low risk tolerance.

The typical suitability analysis that must be conducted by an investment professional involves three steps:

• First, the broker must evaluate the investment and conduct due diligence to be able to reasonably determine whether the investment is suitable for any investor; for instance, an investment that is fraudulent – such as a Ponzi scheme – would certainly not be suitable for any investor.
• Second, the broker must determine if the investment is suitable for the specific customer to whom the broker intends to recommend it. For instance, an investment that is appropriate for a young investor with a stated high-risk tolerance who clearly accept the risk of loss in exchange for the possibility of big returns may be unsuitable for an elderly pensioner who simply wishes to maintain their savings and who depends on steady income from their investment portfolio.
• Third, the broker must determine the quantity, or amount, that may be appropriate for the particular customer, to avoid over-concentration or “putting all the customer’s eggs in one basket.”