A rep wants to sell a 70-year-old a deferred variable annuity with a 7-year surrender period, but the client needs cash for medical bills next spring. Before any recommendation, the profile decides everything.
You must make reasonable efforts to obtain the customer's investment profile before recommending. The profile is not optional paperwork. It is the factual basis the recommendation must fit.
Financial factors include other security holdings, other assets and liabilities, annual income, net worth, and tax considerations. Other considerations include age, marital status, dependents, employment, home ownership and financing, employee stock options, insurance, and liquidity needs.
KEY: "Reasonable efforts to obtain" is the standard. You document what you collected; you do not need to verify every figure, but you cannot ignore a refusal that leaves you unable to assess suitability.
Four objectives sit on a risk ladder. Preservation of capital protects principal. Income seeks steady cash flow. Growth accepts volatility for appreciation. Speculation accepts high risk for high potential return. A retiree needing cash next year maps to preservation and income, not speculation.
Common mistakes
- Thinking suitability needs only one test. Rule 2111.05 requires all three: reasonable-basis, customer-specific, and quantitative.
- Ignoring hold recommendations. Advising a client to hold a concentrated position is covered by 2111.03.
- Confusing Reg BI with suitability. Reg BI is the best-interest standard for retail customers; it is higher than plain suitability.
Bottom line
- FINRA Rule 2111 requires reasonable diligence to obtain the customer's investment profile before recommending a security or strategy
- The profile covers age, other holdings, financial situation and needs, tax status, objectives, time horizon, liquidity needs, and risk tolerance
- Rule 2111.05 splits suitability into three obligations: reasonable-basis, customer-specific, and quantitative
- Rule 2111.03 extends suitability to recommended strategies, including an explicit recommendation to hold
Exam shortcut
Three care tests in order: reasonable-basis (the product), customer-specific (the person), quantitative (the pattern). Retail customer plus securities recommendation triggers Reg BI and Form CRS delivery; municipals trigger MSRB G-19. If the question says "hold" or "strategy," remember 2111.03 still makes it a recommendation.
The full lesson (about 1,223 words, 8 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- B5
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