Every investment adviser understands their fiduciary duty to act in a client’s best interest. Despite this, many SEC enforcement actions result not from intentional client harm, but rather from preventable failures: insufficient understanding of a client and/or the client’s needs, failure to document the basis for recommendations, or failure to stay current of client developments. In other words, many enforcement actions stem from a lack of suitability, or the inability to establish and document that recommendations were appropriate based on the client’s individual needs and objectives .
A poignant illustration of this comes from a 2025 enforcement action. One recent enforcement action illustrates this point well.
In 2025, the SEC sanctioned One Oak Capital Management and one of its investment adviser representatives for recommending that clients convert commission-based brokerage accounts into fee-based advisory accounts without meaningfully reviewing the clients’ investment profiles or evaluating whether advisory accounts were in the clients’ best interests . The firm also failed to adequately document suitability determinations, leaving insufficient information to independently evaluate the recommendations. Ultimately, the SEC concluded that many of the converted accounts were not suitable and issued a nine-month suspension of the adviser and a $150,000 civil penalty against the firm.
Notably, the SEC’s findings were not centered on market performance or investment losses. Rather, they focused on the firm’s inability to demonstrate that it had gathered sufficient client information, evaluated whether the advisory accounts were appropriate, and documented the basis for its recommendations. The firm’s suitability process, not the outcome of the investments was the focus of the enforcement action.
This enforcement action reminds us that suitability is more than just an onboarding exercise: it is an ongoing fiduciary obligation that requires advisers to understand their clients, the investments recommended, to document their reasoning, and to continually reassess the appropriateness of recommendations over the course of the relationship.
While every firm’s process will differ, effective suitability programs generally share the same foundational principles. One helpful way to think about those principles is through four interconnected pillars. In this month’s Risk Management Update, we will look at pillars one and two, exploring the remaining pillars in next month’s article.
Pillar One – Know Your Client
Every suitability determination begins with one fundamental question: Do you truly understand your client?
While that question may seem straightforward, obtaining a meaningful understanding of a client requires much more than collecting information to complete a new account package. Suitability begins with a thorough inquiry into the client’s financial circumstances, investment objectives, and overall investment profile, forming the foundation upon which every recommendation should be made.
A comprehensive client inquiry should consider, among other things:
- Financial situation and cash flow
- Assets and liabilities
- Investment experience
- Tax considerations
- Liquidity needs
- Investment objectives
- Time horizon
- Retirement plans
- Risk tolerance
- Marital status
- Age
- Anticipated life events
Gathering information is just one part of the process. Advisers should also evaluate whether the information makes sense aggregately. A client’s investment profile should tell a consistent story. If certain responses appear inconsistent, for example, a client identifies as having an aggressive risk tolerance while simultaneously planning to retire within the next year or relying on portfolio withdrawals to meet living expenses, those inconsistencies should prompt additional discussion rather than simply being recorded.
For this reason, firms should avoid relying exclusively on questionnaires to establish suitability. Although investor questionnaires provide valuable consistency and help standardize the information collected across clients, they should supplement—not replace—a meaningful conversation. Sitting down with a client allows advisers to ask follow-up questions, clarify ambiguous responses, and identify considerations the client may not have initially recognized.
These conversations also provide an opportunity to conduct what many refer to as “behavioral interviewing.” Rather than asking a client to simply select “Conservative,” “Moderate,” or “Aggressive,” advisers should ask follow-up questions such as:
- How did you react during the 2022 market decline?
- How would you feel if your portfolio declined by 20%?
- When do you realistically expect to begin withdrawing assets?
Questions like these often reveal far more about a client’s true comfort with risk than a standardized questionnaire alone.
Advisers should also recognize the value they bring to these discussions. Many Clients are not investment professionals and may not appreciate how certain life circumstances affect their investment objectives or risk tolerance. Through thoughtful conversations and follow-up questions, advisers can help clients identify considerations they may not have connected on their own, resulting in recommendations that are more closely aligned with the client’s overall financial picture.
Ultimately, a meaningful suitability process begins by understanding not only what a client says, but also why they say it. The stronger the client discovery process, the stronger the foundation for every recommendation that follows.
Pillar 2 – Know Your Investment
Understanding the client is only half of the suitability equation. Advisers also have an obligation to sufficiently understand the investments they recommend.
An adviser cannot reasonably conclude that an investment is in a client’s best interest without first conducting sufficient due diligence to understand how the investment works, the risks it presents, and the role it is intended to play within the client’s overall portfolio. Simply relying on marketing materials, historical performance, or third-party recommendations is rarely enough to satisfy an adviser’s fiduciary duty.
Investment due diligence should extend well beyond reviewing returns. Advisers should develop a reasonable understanding of, among other things:
- The investment objective and strategy
- Fees and expenses
- Liquidity restrictions or lock-up periods
- Complexity and structural risks
- Tax implications
- Manager experience
- Historical risk and volatility
- Manager qualifications and investment philosophy
- Concentration risks
- Potential conflicts of interest
- Reasonably available alternatives
Importantly, the level of due diligence should be proportionate to the complexity of the recommendation. For example, recommending a broadly diversified exchange-traded fund may not require the same level of analysis as recommending a private fund, structured product, or other complex investment. As the complexity and risks associated with an investment increase, so too should the adviser’s level of inquiry and understanding.
Investment due diligence should also be viewed as an ongoing process rather than a one-time event. Markets evolve, investment managers change, fees are updated, products mature, and new risks emerge. Firms should establish procedures to periodically review the investments they recommend to help ensure those products continue to align with clients’ objectives and remain appropriate for use.
Ultimately, advisers should be able to clearly articulate why a particular investment was selected. If an adviser cannot explain how an investment works, identify its key risks, discuss its costs, or compare it against other reasonably available alternatives, it becomes increasingly difficult to demonstrate that the recommendation was made in the client’s best interest.
Some firms document investment due diligence through formal investment committee meetings, while others rely on portfolio managers or individual advisers to conduct and document their reviews. Regardless of the approach, firms should establish a consistent process for evaluating investments before recommending them to clients.
Conclusion
A strong suitability process begins with knowing your client and fully understanding the investments you recommend. These foundational elements provide the framework for fiduciary decision-making, but they are only part of the equation. In next month’s Part 2, we’ll explore the remaining pillars of an effective suitability program: matching the recommendation to each client and maintaining documentation that demonstrates the basis for every recommendation.
Author: Alexandria Hutchinson, Sr. Compliance Associate; Editor: Matthew Rothchild, Sr. Compliance Consultant, Core Compliance & Legal Services (“Core Compliance”). Core Compliance works extensively with investment advisers, broker-dealers, investment companies, and private fund managers on regulatory compliance issues.
This article is for information purposes and does not contain or convey legal or tax advice. The information herein should not be relied upon regarding any particular facts or circumstances without first consulting with a lawyer and/or tax professional.
