Overconcentration Leading to Investment Losses
Quite often, a financial advisor will “fall in love” with a particular product and recommend it to all of their clients in large quantities. When this happens, the broker runs the risk of overconcentrating a customer’s account in too much of one investment. Overconcentration can prove problematic, creating unnecessary vulnerability to volatility and risk of loss for the investor.
Unfortunately, this type of stockbroker fraud continues to be a common reason for why investors lose money.
In 2018, the Financial Industry Regulatory Authority issued a year-end report in which it noted that not only were significant customer losses occurring because of overconcentration but also there were broker-dealers that had yet to establish or maintain supervisory procedures or systems to monitor for concentration issues.
At Shepherd Smith Edwards and Kantas (SSEK Law Firm at investorlawyers.com), our experienced securities fraud attorneys work with clients who have lost money because their broker invested their money in too much of one kind of security, stock, a single company, a specific market sector, or a certain industry and this caused them to lose money.
Overconcentration-related losses can be especially significant if the investor was heavily invested in a financial product that was unsuitable for their portfolio or risk tolerance level to begin with and that investment plunges in value or fails.
Contact SSEK Law Firm at (800) 259-9010 today so that we can help you determine whether you have reasons for pursuing an overconcentration claim against your financial adviser and their firm.What Are Ways in Which Overconcentration Can Happen?
This form of securities fraud can appear in an investor’s portfolio in a number of different ways. Below, we look at the most common types:
- Sometimes investment accounts become overconcentrated because a broker mismanaged their portfolio, made a mistake, or was negligent
- A financial advisor ignores the investor’s request that their money be placed in low or no risk investments and their portfolio be diversified
- Conflicts of interest including the lure of higher commissions and fees that a broker can earn from selling certain investments to their customers. This can cause the financial advisor to concentrate a client’s account with these products
- Failure to regularly review a customer’s account to make sure it has not become overconcentrated
- Broker misconduct or fraud
- Correlated investments
While it can look as if the stockbroker diversified a customer’s account, what the financial advisor actually may have done is heavily concentrate a portfolio in investments that are too similar to each other.
Although overconcentration can be a deliberate and suitable investment strategy for some investors especially those that high-net-worth or institutional investors, this is not an appropriate game plan for most inexperienced and retail investors, including retirees.Some Investments That Can Lead to Significant Losses If They Are Overconcentrated in a Customer’s Account
Below is a comprehensive list of some of the most notable investments that can cause investment losses when a customer’s portfolio is too concentrated in them.
- Oil and gas investments
- Real estate investment trusts (REITs)
- Non-traded REITs
- Master limited partnerships (MLPs)
- Private placements
- Junk bonds
- Alternative investments
- Mortgage-backed securities (MBS)
- Structured products
- Business development companies (BDCs)
Many of these investments can be risky, volatile, and illiquid. They often charge high commissions and other fees, which make them attractive to financial advisers and their firms.When Overconcentration Is Hard to Detect
Sometimes, overconcentration in a customer’s account may be difficult to identify. For example, your stockbroker may recommend a particular portfolio of mutual funds, which appear to be diversified. Instead, the portfolio contained funds from the same market sector. If that area were to tank, the investor could be susceptible to huge losses.
It is important to remember that the more diversified the portfolio, the more stable the investments are likely to be. Your broker should work with you to ensure that not only are your major asset classes diversified but also that your stocks are spread across various sectors or industries.
Our failure to diversify lawyers at SSEK Law Firm can help you identify whether overconcentration occurred in your account, as well as guide you through the steps you need to take to pursue your financial recovery in FINRA arbitration.Skilled Overconcentration Investment Law Firm
It can be devastating for an investor to discover that they’ve lost a significant amount of their savings or retirement money because their broker failed to diversify their account. Call us at (800) 259-9010 or contact us online for a free consultation.
At SSEK Law Firm, our knowledgeable overconcentration lawyers have been fighting for all kinds of investors for more than 30 years.