A client has an investment objective of aggressive growth with a very high risk tolerance and a long-term time horizon. The registered representative recommends investing 100% of the client's portfolio in a single, highly concentrated sector fund focused on biotechnology startups. What type of suitability concern does this recommendation primarily raise?
- AProduct-specific suitability.
- BCustomer-specific suitability.
- CReasonable-basis suitability.
- DQuantitative suitability.
Show answer & explanationAnswer & explanation
Correct answer: B. Customer-specific suitability.
While the client's stated objectives and risk tolerance are aggressive, investing 100% of a portfolio in a single, highly concentrated and volatile sector fund, even for an aggressive investor, raises concerns about customer-specific suitability. This is because a competent RR should still recommend diversification to manage unsystematic risk, even for aggressive clients, unless there's a compelling, documented reason. It might be suitable for *some* aggressive investors to have *some* allocation, but 100% in one sector fund is highly questionable.
Why the other options are wrong
- A. Product-specific suitability is similar to reasonable-basis, focusing on the inherent nature of the product. The fund itself isn't inherently unsuitable, but the 100% allocation to it is.
- C. Reasonable-basis suitability concerns whether the product is suitable for *any* investor. A biotechnology startup fund itself can be suitable for *some* aggressive investors, so this is less likely the primary concern.
- D. Quantitative suitability relates to a series of transactions, not a single recommendation for a portfolio allocation.
Customer-Specific Suitability
Ensures that a recommended transaction or investment strategy is appropriate for a particular customer based on their unique investment profile.
- Considers age, financial situation, risk tolerance, objectives.
- Even a suitable product can be unsuitable in the wrong quantity or context.
- Requires reasonable belief that the recommendation is in the customer's best interest.
Memory trick: Product is fine, but for THIS client, is it divine?