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Do You Have a Claim Against Your Broker or Investment Advisor for Overconcentrating Your Portfolio in Financial Stocks?

March 10, 2023 Blog

As we recently discussed, our firm is actively investigating potential claims for investment fraud related to the overconcentration of investors’ portfolios in bank and financial stocks. With the collapse of Silicon Valley Bank, several other bank and financial stocks were hit hard as well, and our preliminary investigations have revealed that many retail investors’ portfolios were heavily concentrated in this sector at just the wrong time. If your broker or investment advisor overconcentrated your portfolio and you suffered significant losses as a result, you may have a claim for investment fraud.

How (and Why) Brokers and Investment Advisors Overconcentrate their Clients’ Portfolios

“Overconcentration” refers to the practice of failing to adequately diversify an investor’s portfolio. Diversification is essential to effective risk management, as it helps ensure that isolated events (like the run on Silicon Valley Bank) do not wipe out investors’ entire life savings.

Brokers and investment advisors have a duty to avoid overconcentrating their clients’ portfolios. This obligation exists under federal law and under the rules enforced by the Financial Industry Regulatory Authority (FINRA). For example, FINRA Rule 2111 states, in part:

“A [broker or investment advisor] 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 . . . to ascertain the customer’s investment profile. A customer’s investment profile includes, but is not limited to, the customer’s . . . other investments, financial situation and needs.”

When a broker or investment advisor recommends an investment or makes an investment that does not adequately reflect a client’s investment profile, the broker or advisor can be held liable for investment fraud. This includes recommending or making an investment that results in overconcentration.

How (and why) do brokers and investment advisors overconcentrate their clients’ portfolios? While there are several possible explanations, one of the most straightforward (and most common) is negligence. Simply put, too often, brokers and investment advisors do not take the time necessary to examine their clients’ existing portfolios before recommending or executing trades.

In the present circumstance, the fact that bank and financial stocks have largely been considered among the safer and more reliable investments in recent years likely played a role as well. Despite the obligation to thoroughly research and carefully consider all recommendations and trades, it is likely that many brokers and investment advisors got complacent. Rather than giving due consideration to the risks of overconcentration, in many cases, brokers and investment advisors may have simply assumed that investing in bank and financial stocks was a safe bet.

But it wasn’t.

Are the bank and financial stocks that lost value in the wake of the Silicon Valley Bank collapse going to come back? Maybe. But, at this point, it is too early to tell. Additionally, as things went south, many brokers and investment advisors may have advised their clients to get out. While this may have helped to mitigate their losses in some circumstances, it also effectively locked in the losses that many investors had already suffered.

Pursuing a Claim for Overconcentration in FINRA Arbitration

How do you know if you have a claim for overconcentration—and if so, what should you do? To determine if you have an overconcentration claim against your broker or investment advisor, you will need to discuss your portfolio with a lawyer who handles these types of investment fraud claims. Not all investment losses resulting from the Silicon Valley Bank collapse will warrant claims for fraud. A lawyer who has experience representing investors will be able to determine if your losses are fraudulent, and, if they are, your lawyer can advise you regarding your next steps.

For many investors, these next steps will involve filing a claim in FINRA arbitration.

Along with establishing rules that govern the brokerage industry, FINRA also provides a forum for defrauded investors to recover their losses. This forum is FINRA arbitration. As a condition of registration, all registered investment professionals and firms agree to arbitrate investor claims. Arbitration is both less costly and less time-consuming than litigation, and FINRA’s arbitrators are well-versed in the laws, rules and regulations that are in place to protect investors against losses from overconcentration and other forms of investment fraud.

When evaluating overconcentration claims, FINRA arbitrators examine several key factors. These are the same factors that an experienced lawyer will consider when deciding whether it makes sense for you to pursue a claim. Some examples of these factors include:

  • The overall value of your portfolio
  • Your stated investment objectives and risk tolerance
  • The degree to which your portfolio was concentrated in bank and financial stocks
  • The degree to which you participated in determining the makeup of your portfolio
  • Whether (and to what extent) your broker or advisor informed you of the concentration of your portfolio and the risks related to overconcentration—particularly with regard to bank and financial stocks

Importantly, while your investment fraud claim may ultimately go to a FINRA arbitration panel for a final decision, many investment fraud claims settle prior to being scheduled for an arbitration hearing. If it is clear that your broker or investment advisor overconcentrated your portfolio—whether intentionally or unintentionally—your lawyer may be able to negotiate a favorable pre-hearing settlement. If your brokerage or investment advisory firm makes a settlement offer at any stage during the arbitration process, your lawyer can evaluate the offer for you and help you make an informed decision about whether to accept or continue fighting for a larger financial recovery.

Discuss Your Potential Overconcentration Claim with a Lawyer at Zamansky LLC

Did you suffer investment losses following the Silicon Bank Valley collapse? Were you working with a broker or investment advisor at the time? If so, we strongly encourage you to contact us for more information. To arrange a free, no-obligation consultation as soon as possible, call 212-742-1414 or tell us how we can reach you online now.

Client Reviews

“Jake Zamasky and his colleagues represented me in a FINRA arbitration case against a large multinational bank and succeeded in obtaining an award for the full amount of my investment losses. I would highly recommend the Zamansky firm for their experience in securities litigation, their level of detailed research and case preparation, and their ability to effectively fight for what’s right.”

Richard R.

“Throughout my entire case, Jake Zamansky was incredibly responsive and spent time walking me through each step of the process. He is professional and worked with my challenging schedule, even meeting with me nights and on weekends. He knew exactly which turn to take when it came to my case and yet was respectful of any decisions I wanted to make resulting in a positive outcome.”

Donald A.

“Jake Zamansky and his firm represented me in a FINRA arbitration case to recover investment losses. Jake and his team were very professional and worked very hard preparing for trial and then reaching a substantial settlement of our case. I would highly recommend them.”

William E.

“Jake Zamansky represented me in a FINRA arbitration case which allowed me to recover a substantial portion of investment losses. He is truly an expert in this space and I would highly recommend him to those investors who may have been been a victim of investment fraud.”

Chris K.

“Jake and his team did a great job communicating with me throughout the process of my lawsuit. I would recommend him to anyone looking to sue UBS for unethical practices.”

Mike A.
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