Registered representatives must understand their customers well enough to make suitable recommendations. New account forms ask detailed questions to build a complete picture of a client’s financial situation, including:
This suitability information can be grouped into two categories: financial and non-financial considerations.
When a suitability attribute relates directly to money, it’s a financial consideration. These are the financial considerations you’ll want to understand.
Annual income is the amount of money an investor receives from employment, investment income, or other sources. It affects both:
In general, higher income means more money available to invest and save for goals (a child’s education, retirement, etc.). With more cash flow, an investor may be able to:
Annual income also connects to liquidity. Investors with substantial ongoing income may be more comfortable investing in less liquid securities (such as municipal bonds and limited partnerships), because they’re less likely to need to sell investments quickly to cover expenses.
Lower-income investors typically have less room for error. If a major market decline occurs, losses could interfere with essential goals. Investors with lower income levels should also be cautious about securities with high liquidity risk if they may need to sell investments to pay for living expenses.
In the common stock chapter, we learned about income statements for corporations. Individuals can also create personal income statements to track monthly cash inflows and outflows. For example:
| Event | Amount (monthly) |
|---|---|
| Retirement benefits | $2,000 |
| Investment income | $1,500 |
| Social security | $1,000 |
| Rent payment | -$3,000 |
| Utilities | -$300 |
| Various bills | -$500 |
| Total | +$700 |
When reviewing an investor’s income statement, watch for potential red flags. In this example, rent is a large expense and the investor is only saving $700 per month. That’s a reason to ask follow-up questions about expenses and whether costs could be reduced.
Keep in mind that an income statement is only part of the picture. The investor might also have substantial assets in a bank account or in investments that don’t generate current income, and those wouldn’t appear here.
In the common stock chapter, we learned about corporate balance sheets, which help determine a company’s net worth. Individuals can do something similar by listing assets and liabilities to calculate personal net worth. For example:
| Assets | Liabilities | Net worth |
|---|---|---|
| $250k home | $200k mortgage | |
| $20k car | $10k car loan | |
| $100k IRA | $10k credit card | |
| $25k cash | ||
| $5k jewelry | ||
| $400k | $220k | $180k |
Net worth often influences how much investment risk is suitable.
A higher net worth generally means an investor can tolerate more risk. For example, a $1,000,000 portfolio yielding 4% could provide $40,000 per year in income without touching principal. Investors with substantial assets may have capital they can expose to higher-risk investments in pursuit of higher returns.
A lower net worth generally points toward lower-risk investing. It may reflect low annual income, high debt, or significant family obligations. In these situations, investors may have limited ability to save and less capacity to absorb losses.
An investor’s tax status can provide useful context about their financial situation. In the U.S., income taxes are based on a marginal tax system: as income rises, the marginal tax bracket increases. As of tax year 2025, these are the income tax brackets for individuals and those filing jointly:
| Rate | Individuals | Married filing jointly |
|---|---|---|
| 10% | $0 | $0 |
| 12% | $11,926 | $23,851 |
| 22% | $48,476 | $96,951 |
| 24% | $103,351 | $206,701 |
| 32% | $197,301 | $394,601 |
| 35% | $250,526 | $501,051 |
| 37% | $626,351 | $751,601 |
Do not memorize these tax brackets; this chart is only for context.
The higher the income, the higher the marginal tax bracket. When a suitability question includes an investor’s tax bracket, it gives you a quick clue about income level and which investments may be appropriate. For example, if an investor is in the 37% bracket, you can assume they earn more than half a million dollars annually. Investors with incomes at this level may be able to save significant amounts and invest aggressively with disposable income.
Tax brackets also affect after-tax returns:
Interest income from debt securities is generally taxed at the investor’s marginal tax rate.
Short-term capital gains are taxed at the investor’s marginal tax rate, which can encourage high-bracket investors to prefer long-term gains.
Liquidity is how easily an investment or asset can be converted to cash. Liquidity needs depend on an investor’s financial situation and stage in life.
For example, older investors living on fixed incomes typically should avoid investments with high liquidity risk. If an unexpected expense occurs (such as medical bills), they may need to sell investments quickly to raise cash. Securities that can be difficult to sell include:
Liquidity concerns aren’t limited to older investors. Younger investors living on disability, unemployed investors with children, and investors planning a major purchase soon (such as a home) may also need ready access to cash.
In general, these securities are more suitable for investors who need short-term liquidity:
An investor with high annual income or high net worth is often less concerned with liquidity, and may be able to invest in securities with higher liquidity risk.
When a suitability attribute isn’t directly about money, it’s a non-financial consideration. These attributes focus on preferences, goals, and personal characteristics. Here are the non-financial considerations to understand.
People move through stages of life such as childhood, adolescence, adulthood, middle age, and senior years. Stage in life often affects time horizon, income sources, and risk capacity.
Younger investors are often employed, tend to invest more aggressively, and may allocate more to stocks. Because employment income covers living costs, younger investors typically don’t need investment income right away. They also often have long time horizons, which gives them more time to recover from market declines.
Older investors are often retired, tend to be more conservative (risk averse), and may allocate more to fixed-income securities. Without employment income, they may rely on retirement benefits (defined benefit plans, defined contribution plans, IRAs, and annuities), social security, and income from investments (such as bonds, preferred stock, and mutual funds that invest in these securities). Shorter time horizons usually mean taking less risk and avoiding riskier growth-oriented investments.
Earlier in this unit, we discussed specific investment objectives. Registered representatives help clients determine an appropriate objective based on the client’s suitability information.
Risk tolerance describes how much investment risk an investor is willing and able to accept. It ranges from low-to-no risk tolerance (conservative investors who want to avoid risk) to high risk tolerance (aggressive investors seeking risk for higher return potential).
Risk discussions are essential because higher potential returns typically require taking more risk. Investors who want to pursue large returns need to understand that significant losses are possible if the market moves against them.
Investment experience isn’t always the most critical suitability characteristic, but it can affect how complex a recommendation should be. Some investments are difficult to understand and can behave in unexpected ways, including hedge funds and leveraged and inverse ETFs.
Before recommending complex securities, registered representatives should confirm that the client understands how the investment works. Investors with a stronger grasp of market dynamics and basic finance principles are typically the only ones suitable for these products.
Goals often change across a person’s life, and most goals require funding. That’s why goals are a key part of a client’s suitability profile: they strongly influence which products and securities are appropriate.
Examples include:
Time horizon matters. In general, the longer the time horizon, the more risk an investor may be able to take in exchange for return potential. For example, a 25-year-old saving for retirement or parents saving for a young child’s college education may have 10-20+ years to invest. Over long periods, markets may experience short-term declines but generally rise over time. For example, the 1-year S&P 500 return from April 2019 to April 2020 was approximately -3%, while the 30-year annualized return from April 1990 to April 2020 was roughly 9.5% (including dividend reinvestments).
Shorter time frames usually require a more conservative approach. Significant losses can occur over short periods, and there may not be time to recover.
For example, assume an investor has $50,000 for a down payment on a first home purchase in the next 3 months. If the $50,000 was invested in an S&P 500 ETF in January 2020, the investor would’ve lost almost $15,000 (the S&P 500 was down nearly 30% from early January 2020 to end of March 2020). That would leave $35,000 for the down payment, and the investor might lose the opportunity to buy the house if $50,000 was required. This is why it’s so important to avoid risk for short-term goals. In this example, the investor should’ve considered a short term debt security like a Treasury bill or a money market fund.
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