When you sign up for an account at Neighborly we ask you a lot of questions related to the types of investments or communities you are interested in, your financial situation and your investing experience. Your answers to these questions help us identify potential investments for you and allows us to keep you updated on new issuances you might find interesting.
You may be wondering, however, about the purpose of some of the more personal questions. What does your marital status have to do with investing in a local park?
The reason we ask these questions is that we are obligated by financial regulations to match you with investments that fit your investment goals and financial profile. This is called suitability, and requires that we have a comprehensive understanding of your financial situation so that we can evaluate how a specific investment might impact it.
How suitability works
For example, an investor who intends to pay for part of their child’s college education with an investment investing in municipal bonds should likely choose a bond that matures prior to the payments they are expecting to make. If it does not, that investor would need to sell their bond prior to maturity and would therefore be exposed to market risk – the risk that the market price of the bond at the time of sale is lower than the purchase price and therefore the investor loses money. Learn more about market risk.
Meanwhile, an investment that is suitable for an investor on a standalone basis may not be suitable when their entire portfolio is taken into account. Having 100% of your money in the same type of financial instrument or sector can expose you to the risk that a single negative event could impact a significant portion of your net worth.
For example, if the investor above purchased a California Affordable Housing bond that matured at the same time that their child graduated from high school, it would be suitable for that purpose. However, if all of the money they intended to spend was invested in California housing bonds, the investor might be exposed to an unacceptably large risk in the event that, for instance, a change in regulation caused the federal government to reduce its subsidies to affordable housing.
Suitability is one of the standards that all municipal broker-dealers must meet as part of the fundamental requirement for “fair dealing” with customers (MSRB Rule G-19).
What if I want to make up my own mind?
We’re sometimes asked by potential investors if Neighborly can let them make their own decisions about what investments are right for them. While we are not allowed to waive or disclaim any of our obligations around suitability, you may be able to provide additional information to clarify whether an investment is suitable for you. For example, you may have had a recent change in your financial situation or investment objectives and haven’t yet informed us of the change. If you believe this is the case or need clarification, please email firstname.lastname@example.org.
This article was updated on 10/10/17.