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Suitability Standard

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Definition:

According to the suitability standard, clients will receive recommendations that are suitable, or appropriate, to their circumstances. This is less stringent than the fiduciary standard.

Under the suitability standard, financial firms and professionals are not required to put the client's interests first. They also are not obligated to disclose conflicts of interest.

Securities sales people such as financial advisors and insurance agents typically have been subject to the suitability standard, according to guidelines set in federal legislation dating back to 1940. This allows them to push products that maximize their own compensation, as long as such products are appropriate, or suitable, for their clients, though not objectively the best for their circumstances.

The suitability standard also allows financial firms to design and market securities that primarily serve the interests of issuers, rather than those of buyers, most notably retail clients.

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