Unsuitable (Unsuitable Recommendations)
Putting little old ladies in extremely risky venture capital investments that likely don't get liquid for a decade. Putting the whole portfolio of 28-year-olds in U.S. Government treasury bills. Telling anyone to buy lottery tickets.
The law is pretty clear on this. If you're a broker or adviser, you have do what's best for your client, not what's best for you, your commission structure, or the Hawaii trip you win at the end of the year for whoever shafted the dumbest client. You work for the client, not against them. Even if the client has halitosis and is a close talker, you don't give them lousy recommendations. And if you do, the law will come down on you hard.
Example:
An unscrupulous investment adviser recommends 90 year-old Grandma Madge sink her life savings into a 30-year long bond. Unsuitable? You bet. Like, is she really gonna live 90 more years? Would you put her into venture capital? Uh, no. A fund typically lasts a decade, so that won't work either. Equities? Eh. Maybe very small, if it pays a fat dividend. So what is suitable for a 90-year-old grandma? Well, cash looks pretty good. You don't get big commissions selling people cash, but it's the suitable thing to do. Short-term paper, low yields, low risk.
The basic idea is that, if you are guiding a client as their investment adviser, you have to, uh...do right by them, so that you match their tolerance for risk, and hunger for reward, in investment packages that make sense. Old people, for the most part, just want to live their golden years in peace, so that they don't have to lean on their kids for financial support. Do they care whether they make 20 times their money on an investment in 10 years? No. At least...probably not. By the time the investments pay off, they’ll be doing the backstroke by then on a gentle, sloping hill with a view of a babbling brook. So they want their money...safe. Just to keep up with inflation. To manage low risk until…you know. The End.
Young people have kind of opposite concerns, i.e. not taking enough risk: being too safe and just owning safe U.S. Government paper likely has them losing buying power over time. After tax, 3% paper is something less than 2%, and if inflation is 3%, they’re losing a point a year in buying power. And with 20-somethings, they have likely 50 years before they have to really worry about drawing on their savings, so they can handle…ups. Downs. Sidewayses. But over long periods of time, the market goes up.
The bottom line is that the recommendations financial advisors give clients have to be suitable for the key elements of their life, like their age, their level of wealth, their tolerance for risk, and a whole bunch of other things.
Trust us: you don’t want to crap out. It feels, uh…crappy.