Lack of Diversification Attorney
Diversification is a fundamental principle of investments. A well diversified portfolio should contain investments in multiple companies, industries (e.g., financial, healthcare, technology, etc.) and types of investment products. Overconcentration occurs when a stockbroker invests too much of a client’s money in one particular company, market sector or type of investment product. Investing a portfolio in a range of companies, industries and types of investment products reduces risk and may increase returns. Victims of overconcentration can make a claim for failure to diversify and for the unsuitability of investments under Financial Industry Regulatory Authority (FINRA) Rules 2111 and 2090. It may be possible for a lack of diversification attorney to recover full or partial compensation and other types of reimbursement for the irresponsible investment choices that were made by your broker or financial advisor.
Overconcentration in a Single Company
When an investment portfolio contains a disproportionate amount of a single company’s stock, investors can be at risk for excessive losses. The investment portfolio can drop sharply if the company has disappointing returns. A well diversified portfolio can help protect the investor because some stocks may decrease in value while others may remain stable or increase. Investing in multiple companies reduces risk since the stocks will not likely all lose value at the same time and at the same rate.
Overconcentration in an Industry
A properly diversified portfolio can protect individuals from experiencing extreme losses as a result of market fluctuations. Industry sectors move up and down at varying rates and at different times. When a portfolio is concentrated in a single industry, the value of the portfolio can drop dramatically with normal market fluctuations and investors can sustain devastating losses when a sector struggles. For example, when the “dot-com” bubble burst in 2001, investors who were overconcentrated in internet and other technology companies suffered shattering losses when many of these companies collapsed and stock prices plummeted.
Overconcentration in One Type of Investment Product
Over-concentration can also occur when investments are limited to just a few types of securities or asset classes. A well designed portfolio should include a mix of investment product types such as common stocks, preferred stocks and bonds. When a stock broker fails to adequately diversify the types of investment products within a portfolio, this overconcentration substantially increases the risk of investment losses to a client. Simply put, a stockbroker should never put too many of your investment “eggs” in one basket.
Overconcentration in an Illiquid Security
Illiquid securities are high-risk investments because they only offer limited opportunities for investors to sell their shares and mitigate their losses. Additionally, with some types of illiquid securities, investors will have to pay fees or premiums to get out early. Given the unique risks involved with illiquid securities, brokerage and investment advisory firms must avoid overconcentrating their customers’ portfolios in these assets. Examples include closed-end funds, REITs, private placements, and various types of structured investment products.
Has Your Broker or Advisor Overconcentrated Your Investment Portfolio?
How can you tell if your broker or advisor has overconcentrated your investment portfolio? Overconcentration is assessed on a case-by-case basis. There is no specific ratio or percentage of assets that necessarily qualifies a portfolio as overconcentrated. Instead, for purposes of investor claims in FINRA arbitration, overconcentration is assessed based on factors such as:
- Percentage of investments in a particular asset, industry or asset class
- How frequently (if ever) the broker or advisor has rebalanced the customer’s portfolio
- Overall value of the customer’s portfolio
- Comparison of the value of concentrated investments in comparison to overall portfolio value
- Suitability of the concentrated investments to the customer’s investment objectives and risk profile
While overconcentration will be obvious in some circumstances, this is not always the case. For example, while many mutual funds and exchange-traded funds (ETFs) are structured with diversification in mind, some funds use specific types of investment strategies or target highly-specific investments. Investing in multiple funds that use the same investment strategy can result in overconcentration, and so can investing in multiple funds (or investing exclusively in funds) that target specific investment products.
Overlap between fund assets and individual investment holdings can result in overconcentration as well. This is yet another factor that advisors and brokers need to keep in mind when making investment recommendations. If a mutual fund or ETF targets the same types of securities that an investor already has in his or her portfolio, then investing in the fund could result in overconcentration rather than serving the intended purpose of diversification.
This underscores a key aspect of broker and advisor fraud: Intentional misconduct is not necessary to establish a claim for damages. If a broker or advisor fails to consider factors that he or she should have considered before making an investment recommendation, this can be enough to support a claim in FINRA arbitration.
Given the risks associated with overconcentration, FINRA recommends that investors take steps to evaluate their portfolios for signs that they have received bad advice. Some of FINRA’s specific recommendations include:
- Examine your portfolio. If your portfolio does not include assets in multiple classes (i.e. stocks, bonds and mutual funds) or your assets are not spread across different market sectors, your portfolio may be overconcentrated.
- Ask about rebalancing. Ask your broker or advisor about rebalancing your portfolio. If your broker or advisor is evasive, or if you pick up on any other red flags, it may be time to speak with an attorney.
- Make sure you understand your investments. Are your investments illiquid? Do the funds in which you are investing offer adequate diversification. Understanding your investments will help you identify possible overconcentration.
A Lack of Diversification Attorney at Zamansky LLC Can Help You
Zamansky LLC has decades of experience representing investors who have suffered serious financial losses because their stockbrokers failed to diversify their investment portfolios. Each lack of diversification attorney is qualified to work with all types of investors across the United States and abroad, ranging from small individual investors to sophisticated high-net-worth clients and institutions.
When a stockbroker fails to properly diversify your portfolio, the broker or the brokerage firm may be liable if the investment declines in value. At Zamansky LLC our lack of diversification attorneys have the specialized legal skills and in-depth knowledge of the industry to successfully pursue your overconcentration claims. An experienced stock broker fraud attorney at our firm will personally investigate your case and examine your investment history to determine whether your portfolio may have suffered losses as a result of overconcentration.
At Zamansky LLC, our overconcentration lawyers know how to develop, present and prevail in claims against stockbrokers and brokerage firms. Each investment losses lawyer at our firm is committed to providing personalized legal service. Our attorneys are relentless and will fight aggressively to recover the money that you have lost.
If you believe that you have suffered an investment loss due to overconcentration, call our broker misconduct attorneys at 212-742-1414 or complete our contact form. We offer free, no-obligation initial consultations and respond to all inquiries within 24 hours.