Suitability Analysis

An investment objective is a client's primary financial goal for their investment account, representing what they want their money to accomplish. Investment objectives are categorized into four primary classifications: Growth (capital appreciation), Income (current cash flow), Capital Preservation (safety of principal), and Speculation (aggressive returns with high risk). Clients may also seek Growth and Income, a balanced approach combining both appreciation and cash flow. This is a required element of Know Your Customer (KYC) procedures and directly drives customer-specific suitability analysis under FINRA Rule 2111.

Example: A 28-year-old software engineer with a stable income and 35 years until retirement states a 'Growth'...

The fundamental regulatory requirement for investment advisers and broker-dealers to gather and maintain essential information about each client to meet suitability obligations and Anti-Money Laundering (AML) requirements. Required information includes financial situation, investment objectives, tax status, risk tolerance, time horizon, liquidity needs, and investment experience. KYC is an ongoing obligation that begins at account opening and requires updates when client circumstances materially change.

Example: During account opening, an investment adviser gathers information showing a client is 45 years old, ...

The ability and willingness to withstand investment losses and volatility, comprising TWO components: (1) Risk CAPACITY - the financial ability to take risk based on time horizon, income needs, and net worth, and (2) Risk WILLINGNESS - the psychological comfort with volatility and potential losses. Suitability requires assessing BOTH, and the LOWER of capacity or willingness determines the appropriate risk level for investment recommendations.

Example: A 28-year-old software engineer earning $180,000 annually with 35+ years until retirement has HIGH r...

The obligation to recommend securities appropriate for a client's financial situation, investment objectives, risk tolerance, time horizon, liquidity needs, tax status, and investment experience. Includes three types: reasonable basis, customer-specific, and quantitative suitability.

Example: A broker recommending high-yield bonds to a 35-year-old aggressive investor with a long time horizon...

The length of time until a client needs to access invested funds. Longer time horizons (typically 10+ years) allow for more aggressive allocations with higher equity exposure because there is time to recover from market downturns. Shorter time horizons (under 3 years) require more conservative allocations to preserve capital and ensure funds are available when needed.

Example: A 28-year-old saving for retirement at age 65 has a 37-year time horizon, allowing for an aggressive...