Unsuitable (Unsuitable Recommendations)
Categories: Banking, Ethics/Morals
Putting little old ladies in extremely risky venture capital investments that likely don't get liquid for a decade. Putting the whole portfolio of 28-year-olds in U.S. Government treasury bills. Telling anyone to buy lottery tickets.
The law is pretty clear on this. If you're a broker or adviser, you have do what's best for your client, not what's best for you, your commission structure, or the Hawaii trip you win at the end of the year for whoever shafted the dumbest client. You work for the client, not against them. Even if the client has halitosis and is a close talker, you don't give them lousy recommendations. And if you do, the law will come down on you hard.
Example:
An unscrupulous investment adviser recommends 90 year-old Grandma Madge sink her life savings into a 30-year long bond. Unsuitable? You bet. Like, is she really gonna live 90 more years? Would you put her into venture capital? Uh, no. A fund typically lasts a decade, so that won't work either. Equities? Eh. Maybe very small, if it pays a fat dividend. So what is suitable for a 90-year-old grandma? Well, cash looks pretty good. You don't get big commissions selling people cash, but it's the suitable thing to do. Short-term paper, low yields, low risk.
The basic idea is that, if you are guiding a client as their investment adviser, you have to, uh...do right by them, so that you match their tolerance for risk, and hunger for reward, in investment packages that make sense. Old people, for the most part, just want to live their golden years in peace, so that they don't have to lean on their kids for financial support. Do they care whether they make 20 times their money on an investment in 10 years? No. At least...probably not. By the time the investments pay off, they’ll be doing the backstroke by then on a gentle, sloping hill with a view of a babbling brook. So they want their money...safe. Just to keep up with inflation. To manage low risk until…you know. The End.
Young people have kind of opposite concerns, i.e. not taking enough risk: being too safe and just owning safe U.S. Government paper likely has them losing buying power over time. After tax, 3% paper is something less than 2%, and if inflation is 3%, they’re losing a point a year in buying power. And with 20-somethings, they have likely 50 years before they have to really worry about drawing on their savings, so they can handle…ups. Downs. Sidewayses. But over long periods of time, the market goes up.
The bottom line is that the recommendations financial advisors give clients have to be suitable for the key elements of their life, like their age, their level of wealth, their tolerance for risk, and a whole bunch of other things.
Trust us: you don’t want to crap out. It feels, uh…crappy.
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Finance: What are Unsuitable Recommendat...0 Views
finance a la shmoop what are unsuitable recommendations I'm putting little old
ladies in extremely risky venture capital investments that likely don't [Old lady cartoon travels along ventural capital timeline]
get liquid for a decade yeah that's unsuitable putting the whole
portfolio of twenty-eight year olds in US government short term paper [28 year old portfolio opens]
unsuitable telling anyone to buy lottery tickets unsuitable the basic idea is
that if you are guiding a client as their investment advisor you have to you
know do right by them so that you match their tolerance for risk and reward
hunger for the reward there yet in investment packages that make sense [Risk and reward on a balance beam]
old people for the most part just want to live their golden years in peace so
that they don't have to lean on their kids for financial support do they care [Children sitting on sofa]
whether they make twenty times their money on an investment in ten years no
at least probably none is by the time the investments pay off they'll likely
be doing backstroke Six Feet Under you know on a gentle sloping hill with a [Man points to gravestone]
view of the babbling brook or be so old and well they won't know the difference
yeah so they want their money safe just to keep up with inflation maybe a little [Elderly man sitting in rocking chair]
bit better than that and they want it to be managed with low risk until you know
the end young people have kind of the opposite concern ie not taking enough [Young girl holding bonds]
risk being too safe and just owning safe US government paper well that has them
losing buying power over time after tax three percent government paper a tax
that ordinary income is something less than two percent and if inflation is now
three percent while they're losing a point a year in buying power and with
20-somethings they have something like fifty years before they really have to
worry about drawing on their savings so they can handle this ups downs sideways
but over long periods of time the market goes up like think about where it [Market price increases]
was 50 years ago relative to today and while they go via one path or another
from here to here and the bottom line is that the recommendations financial
advisers give their clients have to be suitable for the key elements of their
life their stage in life like your age their level of wealth their tolerance [List of considerations appear]
for risk and a whole bunch of other things that make the market a lot more
like this than like and trust us you don't want to crap out
it feels a you know crappy [Young girl playing craps at a casino]