FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationOpening and Maintaining Customer Accounts and Investment RecommendationsHard
A 60-year-old client, retired and living solely on fixed income, requests to invest a substantial portion of their savings into a highly volatile emerging market equity fund. The client states, 'I want to make up for lost time and see significant gains.' What is the most appropriate action for the registered representative?
- AExecute the trade as requested, as the client has the right to make their own investment decisions.
- BAdvise against the investment, explain the unsuitability, and recommend a more conservative investment strategy.
- CExplain the risks associated with the fund and document the client's acknowledgment of these risks before executing the trade.
- DSuggest a smaller allocation to the emerging market fund and diversify the rest into other aggressive investments.
Show answer & explanationAnswer & explanation
Correct answer: B. Advise against the investment, explain the unsuitability, and recommend a more conservative investment strategy.
Given the client's age, retired status, fixed income, and desire to 'make up for lost time,' investing a substantial portion of savings into a highly volatile emerging market fund is clearly unsuitable. The representative has an obligation to protect the client from unsuitable recommendations.
Why the other options are wrong
- A. Executing an clearly unsuitable trade, even with client consent, can expose the representative and firm to liability.
- C. While explaining risks is necessary, simply documenting acknowledgment does not absolve the representative of suitability obligations for a clearly unsuitable recommendation.
- D. Even a smaller allocation to a highly aggressive fund might be unsuitable, and diversifying into other aggressive investments does not solve the core suitability issue.
Unsuitability
An investment recommendation is unsuitable if it does not align with the customer's investment profile, including their financial situation, investment objectives, and risk tolerance.
- RRs must have a reasonable basis to believe a recommendation is suitable.
- Unsuitable recommendations can lead to disciplinary action.
- Customer consent does not override unsuitability.
Memory trick: Fit the investment to the investor, like a glove, or you'll get burned.