Your stockbroker needs to make certain that the investments owned in your account are suitable for your situation.
A registered investment advisor is required to make certain the investments you hold are prudent.
There is a huge a difference!
For example:
It may not be suitable for a client who is seeking safety, income and principal preservation from their investment account to have a large percentage of their money invested in the growth mutual funds and individual stocks.
Also consider:
A client seeking income and growth from their portfolio may find investing 100% in treasury bills and treasury notes not very suitable, since these investments do not provide growth. However, if these investments are part of a well-diversified account, this could be considered suitable.
Every single client is different, and every single client-broker relationship may define risk differently. Good (ongoing) communication remains essential between clients and their investment advisers. Remember, what IS suitable for one client might NOT be suitable for another. And situations (and the tolerance for risk) can change over time, too.
The investment advisor must make sure the recommendations are prudent for his or her client. But stockbrokers are only obligated to make certain that the recommendations they make for clients are suitable.
So let us "turn back the clock" to display the difference between "suitable" and "prudent." A suitable investment for a growth-oriented investor in 2007 may have been Google. In 2007, the price of Google traded over $500 per share (and the stock traded over $700/share at several points throughout 2007). The company (and Wall Street firms), forecast enormous growth rates for Google. The stock appeared suitable for investors seeking growth.
However, as the stock market fell in 2008, so did Google. The price of the stock was down 50% from the high reached just the year before, in 2007.
But amazingly, Google could be a "suitable" investment for someone seeking growth as their investment goal.
But was Google really prudent?
A prudent suggestion needs something more than suitability: it needs an "exit plan." An advisor should have a strategy planned in advance - what to do if a stock achieves the upper target? And what is the plan if it drops too far, to the price where you need to get out?
You and your investment adviser need to prepare for both outcomes.
So many investors do not use a game plan. Not having a game plan allows impulses to take over the decisions to buy or sell. Emotions need to be removed from the equation.
Many investment firms maintain "buy," "strong buy" or "accumulate" opinions on stocks, even while prices fall. Reminding a client to "hang in there" is usually not very helpful. This is also not a plan.
What is your advisor's obligation to you?
Is your advisor a stockbroker or a registered investment advisor?
You need to know.
