Investment Suitability Checklist
This checklist should be used as a guide before making a specific investment recommendation or investment strategy recommendation.
|Note: This list should not be interpreted as a total list, and should be supplemented with your own specific questions tailored to what you know about your client. This list is only a guideline.|
|1.||Explain to clients the processes you use in developing portfolios and selecting specific securities. Tailor your explanation to their level of investment sophistication.|
|2.||Create and maintain a form which has basic information that you will ask of each client, such as: net worth, occupation, liquid capital, risk capital, investment experience, investment knowledge, age, dependents, tax rate, income, investment goal, and investment needs.|
|3.||Conduct a through interview of your client to obtain all relevant facts and circumstances, which might affect your recommendations.2|
|4.||Make sure that you are aware of all of your clients other investments so that you can properly evaluate whether your recommendation is appropriate in conjunction with his other investments.|
|5.||Make sure you are aware of your clients total financial needs and goals and that your recommendation is matched to these needs and goals.|
|6.||Make sure that you are aware of your clients risk tolerance, investment experience, and investment knowledge so that you can properly evaluate his ability to understand your recommendations. (See PPCs How to Measure Risk and Manage Client Expectations for risk tolerance and investment knowledge surveys.)|
|7.||Make sure your recommendations take into consideration the issues of diversification, liquidity, and the risks/reward relationship.|
|8.||Make sure you document any discussions with your client concerning his needs, any risks, and your investment game plan (as documented in the investment policy statement), and keep this information updated.|
|9.||Consider alternative investments or investment strategies and discuss with your client why you are recommending one over the other. Distinguish between facts and opinions when presenting recommendations to the client.|
|10.||Make sure you know the investment or strategy thoroughly so that you can fully understand the risks and potential rewards.|
|11.||Make sure that with each recommendation the clients interest and needs come first and that you are not influenced by a conflict of interest such as commissions or fees.|
|12.||Be aware of any tax ramifications of your recommendations and incorporate them into your decisions.|
|13.||Make sure that you fully disclose all the essential and key facts that relate to your recommendations.|
|14.||Make sure the client is fully aware and understands the risks and downsides of any recommendations that you make. Whenever the client is very naive, you should tend to keep the recommendations more conservative and take extra steps to keep the client informed.|
|15.||Evaluate your recommendations and the clients needs as client circumstances and the nature of the portfolio dictate, but at least annually. Document your conclusions and discussions with the client.|
|16.||Other suitability assessment steps taken:|
The Investment Advisers Act of 1940 codifies the fiduciary duty of investment advisers to act for the benefit of their clients. Additionally, the rules of the National Association of Securities Dealers (NASD) and the New York Stock Exchange (NYSE) require registered representatives of broker-dealers to make sure that all recommendations are suitable for the client. Some courts and arbitrators have ruled that even if you do not make the recommendation but place a trade, there is a duty to make sure a clients investment is suitable for the client.
This cannot be emphasized too strongly. It would be impossible to list all of the possible facts that might be relevant to an investor. For this reason you must conduct a very thorough investigation and dig deeper when possible areas of concern exist. Examples include tax liabilities, inheritance issues, and exposures through company debt obligations.