Investment Objective, Risk and Suitability: Why are They Important?

An investment objective is, in reality, nothing more than a client’s financial objective, which assists a stock broker in determining what type of investments would constitute a “suitable” recommendation for a client.  It is one of the fundamental factors that any attorney looks at in attempting to determine whether the investments purchased, held or sold, in a client’s account, were appropriate (suitable) for that client.

For example, if an investor is seeking income, assuming that the account executive tells the truth about the investment or knows how to properly analyze the same, the client might opt-out of purchasing an investment that does not pay any type of income (for example dividends) to its shareholders as the investment would not be suitable to satisfy an income objective.  Conversely, if an investor is seeking growth of capital, he or she should consider investments that have a higher potential for capital appreciation then an investment whose primary function is to pay income to its holder.  Another popular type of investment objective is total return.  Obviously, this type of investment objective combines elements of the income and growth objective, attempting to maximize return.

However, it is important to bear in mind that all investment objectives must be combined with the risk tolerance of an investor, which helps the investor ( or the stockbroker) narrow their search to an investment vehicle designed for the client’s needs at a particular time.

If you feel that unsuitable or inappropriate investments have been recommended to you by your account executive, you should seek a second opinion either from another brokerage firm or from a qualified attorney.

Please keep in mind that this post is being provided for educational purposes only.  Thus, it is not designed to be complete in all material respects.  It should not be relied upon as providing legal or investment advice.  If the reader has any questions, you should consult with a qualified expert.

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