Often, you’ll hear that an advisor will make a blanket recommendation to buy or sell an asset. But what precisely is a blanket recommendation? Basically, it is advice to buy or sell an asset, typically an equity, but it could be some other asset like currencies or gold, that’s distributed in a broad manner to all the advisors clients. The advice covers the advisors’ client base like a blanket, and everyone receives the same advice regardless of whether or not it is appropriate or even matches with their investment goals or risk tolerance.
There are times when sending a blanket recommendation is the appropriate thing to so, such as a statement telling all clients that they need to diversify their portfolios to include alternative investments and asset classes such as real estate or commodities. In other cases, the blanket recommendation can be extremely inappropriate, such as a recommendation to purchase shares in a highly speculative and risky new IPO.
- A blanket recommendation is an advice sent out by an expert advisor to all of their clients, regardless of whether that advice is applicable to everyone.
- Blanket recommendations are often prohibited by regulators in light of the fact that investors have wildly different risk profiles and investing goals. In every case it is ill-advised for a blanket recommendation to be issued, however there are cases when their general type of information might be broadly useful, such as a recommendation to diversify your portfolio.
- When a blanket statement is issued for an individual equity the goal is usually to inform clients that the stock is expected to make a large move in the coming days.
Blanket Recommendations Explained
Most blanket recommendations are sent to make a recommendation to purchase or sell a specific stock, sector, or asset. The goal of such communication can vary, but it is often meant to alert clients that the research done by the advisor or the institutions research staff indicates that the stock, sector, or asset being recommended is likely to make a large move in one direction or another in the near future. If the blanket recommendation is an expectation of a move higher than the clients may want to open a long position in the stock or other asset. However, if the predicted move is to the downside then clients can sell any shares they currently hold, or they might consider implementing a short selling strategy to take advantage of the projected move lower in the asset.
The major downside to these types of blanket recommendations is that they do not take into account the risk profile, investment goals, or time horizon of any of the individual clients.
Using a blanket recommendation in communications with clients is typically ill-advised because of the different investing profiles held by the advisor’s clients. As an example, one client might be a retiree who needs investments that are safe, and that generate income.
This type of client can’t afford to take a risk where they could potentially lose a good deal of money. Another client might be a young, single professional with a much longer time horizon and a far greater tolerance for risk.
A blanket recommendation to purchase an upcoming speculative IPO is certainly appropriate for the second client, who is able to tolerate the risks involved in purchasing shares in an IPO, but it is extremely inappropriate for the first client who needs to maintain their capital and avoid potentially large losses.
Financial advisors are regulated by the Financial Industry Regulatory Authority in the U.S. and they have prohibited their advisors from issuing blanket recommendations for individual company shares.
Blanket Recommendations and Suitability
Under the current regulations, financial advisors and broker-dealers are bound to fulfil a suitability obligation. This means they are only permitted to make recommendations to their clients which can be considered suitable and consistent with the best interests of the client.
Both financial advisors and broker-dealers fall under the regulatory aegis of the Financial Industry Regulatory Authority (FINRA) in the U.S. and both are bound to make only those recommendations which are suitable for their clients.
The specific FINRA rule dealing with suitability is FINRA Rule 2111. This rule requires broker-dealers, financial advisors, and other associated persons to “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 diligence of the [firm] or associated person to ascertain the customer’s investment profile.”
In other words, investment advisors who fall under the FINRA rules and regulations are required to consider the risk profile, time horizon, and investment goals of their clients when sending any recommendations pertaining to securities.
Blanket recommendations don’t take any of these client characteristics into account, and that’s why blanket recommendations are prohibited by FINRA in the U.S. As a matter of fact, any blanket recommendation is likely to provide advice that is directly in conflict with the goals of certain clients, and could be considered as particularly unsuited to those clients.
If you are ever the recipient of a blanket statement from any financial institution or advisor, no matter how well respected they might be otherwise, you should first of all carefully consider if the advice given in the statement is applicable and appropriate to your own situation. Consider whether it matches your tolerance for risk, and whether it is aligned with your own investment goals. Conduct your own research into the recommendation before taking any action.
Always remember that blanket advice is given without consideration for the individual’s situation or taking their best interests into account. There may be cases where the advice being given is more general in nature, and if this is the case it could be a good idea to follow it. These broad-based recommendations might be ways to diversify your portfolio or how much money you should keep in liquid cash reserves. As long as the advice is general like this it is worth considering.
However, as the blanket recommendation becomes increasingly specific individuals will need to become more cautious and pay more attention to the details of the recommendation. These specific recommendations might still be appropriate for your situation, but they could just as easily be inappropriate and the advice given should be avoided.
In some cases, blanket recommendations are more segmented, which will help to keep them more appropriate. For example, a financial advisor might send out a blanket recommendation that discusses retirement savings and appropriate vehicles for such, but they might send it only to their clients aged 25-45. Or they could send a blanket recommendation regarding social security or bond income to their clients that are near or past retirement age.
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