Is My Investment Advisor Required to Diversify My Portfolio?

When you work with an investment advisor, your advisor is required to manage your portfolio with your best interests in mind. Among other things, this means that your advisor must diversify your portfolio in accordance with your risk profile. If your advisor failed to adequately diversify your portfolio—and if you suffered losses as a result—an investment loss attorney may be able to pursue a claim for damages on your behalf.

Diversification is a fundamental tenet of investing for long-term growth. Diversifying helps investors protect against facing substantial losses due to isolated events; or, in the words of the U.S. Securities and Exchange Commission (SEC), “[d]iversification is about managing risk while preserving the potential for return.”

Because diversification is so important, investment advisors have a duty to diversify their clients’ portfolios. Investment advisors must make diversified investments that align with each client’s unique risk profile. If an investment advisor fails to adequately diversify a client’s portfolio, this can provide grounds for legal action if the client suffers losses that could (and should) have been avoided.

When Do Investment Advisors Have an Obligation to Diversify?

Investment advisors are required to adequately diversify their clients’ portfolios as part of their duty of care. This is a fiduciary duty that all investment advisors owe to their clients under federal law. Under the duty of care, investment advisors have a legal obligation to manage their clients’ portfolios in their clients’ best interests—including diversifying to the extent necessary to achieve their clients’ investment objectives.

The obligation to diversify exists regardless of the size of a client’s portfolio. As a client’s portfolio grows, the client’s risk grows as well. This makes it essential for investment advisors to proactively manage the diversification of their clients’ portfolios on an ongoing basis.

What Are the Risks of Inadequate Diversification?

The risks of inadequate diversification can be substantial. If an investor’s portfolio is not adequately diversified, the investor can suffer substantial losses due to isolated events that do not affect the market as a whole.

The opposite of diversification is overconcentration. Broadly, overconcentration can take two main forms:

• Overconcentration in Individual Investments – The most straightforward form of overconcentration involves investing too much of a client’s portfolio in one or more individual securities or investment products.
• Overconcentration in a Specific Industry (or Industries) – Overconcentration can also involve failing to invest outside of a particular industry (or industries). Even if an investor owns multiple companies’ stock, if all of these companies are in the same industry, this could still constitute a lack of diversification.

When Can (and Should) Investors Take Legal Action Against Their Investment Advisors?

Investors can take legal action against their investment advisors when they suffer losses due to lack of diversification. In this scenario, investors can seek to recover their investment losses through the FINRA arbitration process.

Even if it is theoretically possible for an investor’s portfolio to regain its value over time, FINRA arbitration may still be warranted. Investors who have questions about their legal rights should consult with an experienced investment loss attorney to ensure that they are making informed decisions.

FAQs: Dealing with Investment Losses Due to Lack of Diversification

How can I determine if my investment advisor has diversified my portfolio?

Determining whether your investment advisor has adequately diversified your portfolio requires knowledge of the market and the legal standards that apply. If you are facing investment losses that you suspect may be due to your investment advisor’s failure to adequately diversify your portfolio, it will be worth talking to an investment loss attorney about your legal rights.

How can I prove that my investment losses are due to lack of diversification?

Proving that your investment losses are due to lack of diversification is a multi-step process that requires several forms of documentation. To start the process, you should save copies of your recent account statements and your current risk profile (or your risk profile at the time the losses occurred). Once you have these available, you should schedule a free consultation with an attorney who has experience representing investors who have suffered losses due to overconcentration.

What is involved in filing for FINRA arbitration?

Filing for FINRA arbitration is also a multi-step process that requires several forms of documentation. Due to the complexity—and the importance—of the process, we strongly recommend working with an experienced attorney from the outset of your claim. This will help maximize your chances of success while also ensuring that the process is as smooth and efficient as possible.

How Zamansky LLC Can Help

Our attorneys have decades of experience representing investors in overconcentration claims against their investment advisors. We have a long track record of success in FINRA arbitration, and we have secured numerous settlements and arbitration awards for our clients. If you have questions about filing a claim against your investment advisor for inadequate diversification, our attorneys can:

• Determine if your investment advisor overconcentrated your portfolio;
• Calculate your investment losses resulting from your investment advisor’s failure to diversify;
• Gather all of the documentation needed to establish your claim for liability;  
• Prepare and file a FINRA arbitration complaint on your behalf;
• Target a favorable settlement on your behalf and pursue an arbitration award if necessary.

You can get started with a free and confidential consultation, and we handle most investment loss cases on a contingency-fee basis. If your case is eligible for contingency-fee representation, you will not have to pay anything out of pocket for our legal representation.

Speak with an Investment Loss Attorney at Zamansky LLC for Free

Do you need to know more about pursuing an overconcentration claim against your investment advisor? If you have questions about seeking to recover your investment losses, we invite you to get in touch. To speak with an experienced investment loss attorney at Zamansky LLC in confidence, call us at 212-742-1414 or request a free initial consultation online today.