Investment suitability is a concept which means that a particular investment or financial strategy that is recommended to a particular investor be appropriate for that particular investor. Suitability is very important for financial planners and securities broker-dealers, as it sets the outer parameters of what is a sound strategy for that investor, as opposed to betting the investor’s retirement on the next sporting event or pyramid scheme.
(a) A member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile. A customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.
As to particular investments, FINRA further elaborates that:
Brokers must have a firm understanding of both the product and the customer, according to Rule 2111. The lack of such an understanding itself violates the suitability rule. * * * Reasonable-basis suitability requires a broker to have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors. Reasonable diligence must provide the firm or associated person with an understanding of the potential risks and rewards of the recommended security or strategy.
This brings me back to cryptocurrencies in general, and Bitcoin in specific. As I, and many other commentators have previously noted, Bitcoin has no intrinsic value and thus is utterly incapable of rationally being valued at anything but zero, other than the naked current market price which is based on the purest speculation as to where the stock price may go in the future. And, no, Bitcoin is not like a $1 bill or any other governmental currency in this respect, since those can be used if for no other purpose to pay tax liability to the government, while Bitcoin can’t.
Thus, Bitcoin has become the ultimate speculative investment because there is nothing externally which drives its price, i.e., Bitcoin has no earnings, and thus no quarterly projections to hit or miss. It is the purest speculation; the bulls that are long in Bitcoin believe that it will go up in price, and the bears that are short in Bitcoin believe that it will go down in price, and at any given moment there is utterly nothing other than the rawest speculation that supports either belief.
In other words, Bitcoin is simply a huge worldwide Roulette table, where some bettors are placing their moneys on red, and some bettors are placing their money on black. Every time Bitcoin is traded either a red or black wins or loses. The price movement of Bitcoin is thus dictated by nothing other than the belief of two traders at that moment in time as to whether Bitcoin’s price will next go up or down.
To “invest” in Bitcoin is then simply to speculate, nothing more, nothing less. It is for that reason utterly impossible for an investment advisor or broker-dealer to create anything like a long-term plan for their customer to invest in Bitcoin, and thus equally impossible to fit a Bitcoin (or any other cryptocurrency) into anything like a reasonable financial plan for a client. An advisor might as well tell clients something to the effect of “just go to Vegas and put all that money on red or black at the roulette wheel, and let me know how it came out.”
Because of this, financial advisors and broker-dealers should never advise their clients to invest in Bitcoin or any other crypocurrency, for to do so would simply be negligent on their part. I can see all of this being played out in a FINRA arbitration:
Plaintiff’s Attorney: “Mr. Broker, you admittedly told your client to put 10% of his portfolio into cryptocurrencies. Can you please tell us the facts on which you relied to believe that they would increase in value over time?”
Mr. Broker: “Well, I saw somebody else speculating that it might go up.”
Good luck with that one. That compliance officers should take especial note of this risk goes without saying; push back on the urge to allow cryptocurrency bets simply because they are a current financial flavor-of-the-day.
Actually, this bring me around to another point, which is that there is a great deal of shilling that is going on with Bitcoin. Every day that I check the news on Bitcoin, I see somebody or other making some grandiose statement that Bitcoin will soon be going to $200,000 per coin, or whatever. These sort of statements aren’t worth anything, of course, since the folks who are shilling have utterly no idea where the price is going to go, but usually they themselves are invested in it and are simply trying to manipulate the price upwards.
Goodness knows that before the Bitcoin crash started on December 17, 2017, there were lots and lots of supposedly technical-based predictions as to where Bitcoin was going in price, to take the one found here just as one example: Bitcoin was going to reach $142,000 before it corrected in price (seven days later, the price of Bitcoin started to fall, finally reaching an artificial bottom in the 6,500 range by the spring of this year).
Those predictions were not based on any sound methodology, and neither are the current ones.
If you want to speculate, then go to Vegas and bet the amount you are willing to lose on black or red. If you win, you will instantly double your money and no waiting around for possibly years for another bubble to develop. If you lose, well then, hey, at least they will offer you a room and free buffet if your stake was big enough.
But don’t delude yourself into thinking that investing in cryptocurrency is a sound, much less suitable, investment strategy, because it is not.
Read more at: Forbes