Do Investor Suitability Standards Actually Protect Investors?

 CEO at DarcMatterCrowdfundBeat  Sr. contributing guest editor,

Investor suitability is a heavily discussed and regulated topic that falls within the realm of financial advisors and broker dealers. Investor suitability is the standard that brokers follow when searching and recommending specific investors to their clients. This is not the same thing as the ‘best’ possible investment for a specific investor or portfolio, which often ends with a conflict of interest.


The suitability standard can be loosely defined as a legal benchmark requiring whoever is handling your investments to put you in touch with products that are suitable for your objectives, means and even age. This falls way short of the fiduciary standard which requires that they put you in touch with only the very best products and to act with your interests in mind – not their own.

And the ability to fully exercise this fiduciary duty is further impeded when advisors for mainstream investment houses are heavily restricted to products and opportunities that are created internally and generate the most fees. Effectively, this creates a double-intermediation scenario in which money is redirected through fee-generating products into another fee-incurring opportunity such as a managed fund.

Investors should be demanding for more than a salesperson when looking for a financial advisor or wealth manager. In turn, advisors and other wealth management professionals should be increasingly leveraging new digital tools to enhance the experience for their clients as well as avoid the selection bias of internally generated products.

And so we have to start questioning whether investor suitability helps or protects investors. While this standard may have had well-intentions at the start, it may actually create more liability and limit investors to heavily biased recommendations. Because there is no fiduciary burden, the only incentive is to actually limit investors in their choices by quoting the suitability standard. Investors are not only trapped within a misaligned situation, but also further handicapped by the limited universe of products that are made available to them.

Investors: discuss with your advisors if they are making the best possible choices in asset allocation, portfolio diversification as well as selection of products. The future advisor should be armed with the best possible information and widest diversity of choices to better serve your investment needs.

Originally posted on DarcMatter’s Blog.

DarcMatter is a technology platform providing enhanced capital connectivity between issuers and investors in the alternative investment space. Visit to start raising capital or get transparent access to alternative investment opportunities.

Written by
Sang H. Lee

Sang H. Lee

DarcMatter is a technology platform providing enhanced capital connectivity between issuers and investors in the alternative investment space. to start raising capital or get transparent access to alternative investment opportunities.


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