One of the riskiest and most speculative strategies on Wall Street involves the overconcentration of an investor’s account. If you requested safe and secure investments but your stockbroker invested a large percentage of your account into one security, one sector of the economy, or one type of investment, it is overconcentration.
The universally accepted doctrine of suitability prohibits stockbrokers from making recommendations and purchases that do not fit a customer’s risk profile. The inappropriate overconcentration of (or failure to diversify) a customer’s assets is a violation of this doctrine.
Consumers place immeasurable trust and confidence in their investment advisors to select appropriate investments and strategies that suit their needs. When a negligent or deceitful advisor ignores your needs and fails to diversify your investment accounts, the financial consequences can be nothing short of disastrous.
If you feel that your broker over-concentrated or failed to diversify your assets and you lost money because of it, there may be ways to recoup your losses and receive compensation for damages.
How Overconcentration Happens
Whether or not your account was over-concentrated depends on your investment objectives and needs. Some investors may be able to afford the extreme risk of having a heavily concentrated position. On the other hand, investors who require safety and security can’t risk putting all their eggs in one basket like this.
Overconcentration usually happens when a large percentage of your account is invested into:
- One or few stocks: If your account is invested into only one or just a few different stocks, you’re at risk of suffering grave investment losses should one of those stocks lower in value or go bankrupt.
- One sector of the economy: If your account is invested into only one sector of the economy, you’re at risk of losing a large percentage of your money should there be an economic downturn in that sector.
- One type of investment: If your account is heavily concentrated into one type of investment or ‘asset class’ it can be very risky. For example, a portfolio that’s over-concentrated in stocks, even if the stocks are from different sectors of the economy, is unsuitable for a conservative investor. That’s because when stock market forces change dramatically for the worse, as they often do, so too will the value of your account.
Why Overcentration is Often ‘Invisible’
Everyone knows it isn’t wise to put all your eggs in one basket, but the lack of diversification is rarely as simple as investing all your money in a single investment. In fact, overconcentration problems are usually hidden beneath the surface.
Many investors fall prey to overconcentration when a stockbroker recommends a portfolio of mutual funds to them. At face value, this strategy might sound diversified, and if the mutual funds are safely diversified, this could be a very good strategy for a conservative investor.
However, what if all the funds are 100% invested in stocks? What if they’re 100% invested in the real estate sector? If the stock market or the real estate market collapse, the funds will suffer a devastating loss.
Things get more complicated if you imagine a portfolio comprised of 85% mutual funds and 15% stocks. An investor could be misled to believe that the 15% stock market exposure is balanced by the 85% mutual funds. Still, if they are stock-based funds, this portfolio is again over-concentrated in the stock market.
Because overconcentration is often under the surface, many investors are misled into believing they have a safely allocated portfolio, when in fact, they do not.
If you lost money in your investment account in spite of your request for safely diversified investments, you might be the victim of overconcentration and it warrants an investigation.
Discover the Fraud
An investor can discover and avoid overconcentration by diligently reviewing monthly statements and asking a lot of questions. Whenever your stockbroker recommends a new investment, ask what sector of the economy it’s from. If it’s a mutual fund or contains other investments inside it, ask what the allocation is.
If you suspect that your portfolio is over-concentrated, double-checking your advisor’s recommendations and seeing how they fit into your overall investment strategy is easier than you think.
Here are some things you can check for yourself or get an accountant or stock fraud attorney to help you with:
- How is your portfolio divided? What percentage is invested in stocks? What percentage is in bonds, mutual funds, and other securities? Many brokerage statements give percentages like this in a summary on the first page.
- What sectors of the economy do your investments belong to? Make a note if your stocks, bonds, mutual funds and other investments are primarily from one or more sectors of the economy.
- What kind of investments is inside your mutual funds and other basket-like investment products? Look up these funds and investment products on the internet and see how they are allocated. You may notice that some of your mutual funds are 100% stock funds, 100% junk bond funds, or heavily invested in one sector of the economy. This in itself is not a necessary problem, but if the risk associated with an all stock fund isn’t balanced by the other investments in your account, your account is probably overconcentrated.
Sometimes the process of discovering overconcentration is like peeling the layers of an onion. To reveal an over-concentrated position, experienced stock fraud lawyers and accountants dig deep until they know exactly what your portfolio contains. If you are concerned about whether or not your account is properly balanced, seek the advice of an expert immediately.
Know Your Rights
The Financial Industry Regulatory Authority (FINRA) governs and regulates the actions of its members. Your stockbroker and his employing firm are members of FINRA and must abide by its laws. If your stockbroker breaks those laws, the firm that supervises his actions should compensate you for his negligence and/or fraud.
When an investor files a claim for overconcentration and failure to diversify against his investment advisor, the unsuitability of the investment advice and transactions is a major issue, therefore FINRA Rule 2111 and FINRA Rule 2090 will apply to most overconcentration claims. To learn more about the doctrine of suitability, and unsuitability claims, in general, you can read about this important legal issue here.
Try and Get Your Money Back
If you lost money because your stockbroker failed to diversify your accounts or because he over-concentrated your account in a way that doesn’t fit your needs, you deserve to be compensated for that loss. Overconcentration victims can make a claim for damages and may qualify for full or partial compensation in addition to other types of reimbursement.
The financial damages resulting from overconcentration can be crippling, but the realization that your stockbroker neglected your account or purposefully misled you can be emotionally disturbing. If you have fallen victim to this kind of fraud, it’s important to remember this is not your fault!
Pursuing a stock fraud claim will teach Wall Street brokerage firms that it is unacceptable to prey upon innocent consumers and completely disregard their best interests and needs. Your claim may even prevent others from suffering as you have by forcing Wall Street brokerage firms to conduct business with honesty and integrity.
You may be eligible to receive compensation regardless of whether you sold or continue to hold the securities at issue. Contact us today to set up a free consultation. We will listen to your story, answer any questions you may have and discuss your legal rights and options.