Customer Investment Profiles and Suitability

The whole unit on one sheet: what goes in the profile, the obligations every recommendation must clear, and the lines the exam loves to test.

Build the Profile First

• Financial factors: security holdings, other assets, liabilities, annual income, net worth, tax considerations. Concentration risk shows up in holdings; tax bracket drives municipal suitability.
• Personal factors: age, marital status, dependents, employment, investment experience, home ownership, employee stock options, insurance, liquidity needs.
• The profile is not limited to these factors and is not static: a job loss, divorce, birth, inheritance, retirement, or disability can change what is suitable.
• The four investment objectives run on a spectrum from lowest to highest risk: preservation of capital, income, growth, speculation. Objectives are not mutually exclusive ("growth and income" is valid).

The Three Suitability Obligations

• Reasonable-basis: the product must be suitable for at least some investors. About the product, not the customer. A rep who does not understand a product violates this even if it happens to fit the customer.
• Customer-specific: the recommendation must fit this particular customer's profile (age, financial situation, tax status, objectives, experience, time horizon, liquidity needs, risk tolerance).
• Quantitative: a series of recommended transactions must not be excessive even if each trade is suitable alone. Guards against churning.
• Each obligation is independent: a recommendation can pass one and fail another.

The One-Liners That Win Points

• Reg BI governs retail customers; the FINRA suitability rule governs non-retail (institutional) customers. Reg BI does not replace suitability. A pension fund gets suitability, not Reg BI.
• A retail customer is a natural person using the recommendation primarily for personal, family, or household purposes.
• Best interest is a higher standard than suitable. Reg BI adds cost comparison among reasonably available alternatives and a no-firm-first rule.
• Reg BI's four obligations: Disclosure, Care, Conflict of Interest, Compliance. All four require written documentation.
• Churning requires intent (scienter); excessive trading does not. No control over the account is required for quantitative suitability.
• An explicit hold recommendation triggers full suitability, same as a buy or sell; implicit silence about holdings does not.
• Accreditation opens eligibility; it does not make a product suitable. Customer-specific analysis still applies in full.

Numbers to Lock In

Memory Aid: 1-2-3 (Accredited Investor)

• 1 = $1 million net worth (excluding primary residence)
• 2 = $200,000 individual income (each of the last 2 years)
• 3 = $300,000 joint income with spouse (each of the last 2 years)

Top Gotchas

• The joint income threshold is $300,000, not $400,000. It is not simply double the individual figure, and one high-income year is never enough (two consecutive years plus a reasonable current-year expectation).
• Primary residence is excluded only from the accredited-investor net worth test; new home-equity debt in the 60 days before the sale still counts against net worth.
• Naming specific securities kills the asset-allocation safe harbor. A generic 60/40 mix qualifies; the moment you name specific funds or tell a customer to hold specific positions, full suitability applies.
• "Best interest" is higher than "suitable": cost comparison is required under Reg BI but not under FINRA suitability, and security-specific sales contests, quotas, or bonuses must be eliminated, not merely mitigated.
• The retail customer cannot waive written disclosure; a verbal summary or a handed-over prospectus does not substitute, and a new material conflict triggers fresh written disclosure before the next affected recommendation.
• Municipal recommendations run under the MSRB suitability rule, not FINRA's, though the three obligations are substantively identical. Recommending munis to a tax-exempt entity (a pension fund) may violate customer-specific suitability because the tax exemption is worthless to them; a muni inside an IRA or 401(k) is a classic red flag.
• A wealthy but inexperienced investor may be accredited yet lack sophistication. Accreditation is a financial test; sophistication is a knowledge test. Reducing the position size of a mismatched product does not cure the mismatch.

One-Breath Recap

Gather the customer investment profile (financial factors plus one of the four objectives), then clear reasonable-basis, customer-specific, and quantitative suitability, with each obligation standing on its own. Reg BI raises the bar for retail customers through Disclosure, Care, Conflict of Interest, and Compliance, while institutional customers stay under the FINRA suitability rule. Remember that explicit hold recommendations count, munis follow the MSRB rule, and accreditation opens the door but never guarantees suitability.

Need more than the recap? This is a condensed summary. If it is not enough, read the full Customer Investment Profiles and Suitability unit for the complete lesson.