Registered representatives must know their customers well enough to make suitable recommendations. New account forms ask detailed questions to build a clear 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 directly affects how much the investor can contribute to investments, how much risk they can reasonably take, and how important liquidity is.
Lower annual income generally means less money is available to invest and save. In that situation:
In the common stock chapter, we learned about income statements for corporations. Individuals can also create personal income statements to track cash flow. Here’s an 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 saving only $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 cash in a bank account or 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 determine a company’s net worth. Individuals can create a similar snapshot by listing assets and liabilities to calculate personal net worth. Here’s an 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 helps you gauge how much financial cushion an investor has.
Lower net worth generally points toward lower-risk investing. It may reflect low annual income, high debt levels, or significant family obligations. In these situations, the investor may not be able to save large amounts and typically can’t afford large losses.
An investor’s tax status can provide useful context about their financial situation and about which investments may be more appropriate after taxes.
In the US, we operate under a marginal income tax system: as income increases, the marginal tax bracket increases. As of the 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.
When a suitability question includes an investor’s tax bracket, it often signals annual income level and can hint at which investments may be more suitable. For example, if an investor is in the 37% bracket, you can assume they make more than half a million dollars in earned income annually. Investors with incomes at this level can often save significant sums and invest more aggressively with disposable income.
Tax brackets also affect after-tax returns:
Interest income (from debt securities) is taxable at the investor’s tax bracket.
Short-term capital gains are taxable at the investor’s tax bracket. This creates an incentive for investors in high brackets to pursue long-term capital gains.
Liquidity is the ability to turn an investment or asset into cash easily. An investor’s financial situation and stage in life help determine how important liquidity is.
For example, older investors living on fixed incomes typically should avoid securities with liquidity risk. If an unexpected liability arises (such as medical bills), they may need to sell investments quickly to cover costs.
Investors with these concerns should avoid difficult-to-sell securities, which include:
Liquidity concerns aren’t limited to older investors. Younger investors living on disability, unemployed investors with children, and investors planning a large purchase soon (such as a home purchase) are also examples of investors who may need to avoid securities with liquidity risk.
In general, these securities are suitable for investors concerned with short-term liquidity:
An investor with high annual income or high net worth is often less concerned with liquidity, and may be able to tolerate investments 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 several life stages: childhood, adolescence, adulthood, middle age, and senior years. Stage in life often affects time horizon, income sources, and the role investments play.
Younger investors tend to be employed, invest more aggressively, and invest larger amounts in stocks. Because employment income covers living costs, they typically don’t need investment income right away. They also often have longer time horizons, which gives them more time to recover from market declines.
Older investors tend to be retired, more conservative (risk averse), and invest larger amounts in fixed-income securities. Without employment income, they often 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 chapter, we discussed specific investment objectives. Registered representatives help clients determine an investment objective based on 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 higher risk. Investors who want to pursue large returns should also understand that significant losses are possible if the market moves against them.
Investment experience isn’t the most critical suitability characteristic, but it can affect how complex a recommendation should be. We’ve covered many complicated investments, including hedge funds, leveraged and inverse ETFs, advanced option strategies (like straddles and spreads), and CDOs.
Before recommending complex securities, registered representatives should confirm that the client understands how the investments work. Investment experience ties directly to this: investors who understand market dynamics and general finance principles are typically the only ones suitable for these products.
At different stages of life, different goals become priorities. In most cases, goals require funding, and investing can be one way to build that funding. Setting goals is an important part of building a suitability profile, because recommendations are often shaped by what the investor is trying to accomplish.
Examples include:
Time horizon strongly affects how much risk may be appropriate.
Shorter time frames usually require safer investing. Significant losses can occur over short periods, and those losses can derail a near-term goal.
For example, assume an investor has $50,000 for a down payment on a first home purchase that will occur 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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