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 investors lose money and may need an investment lawyer in the future.

In 2018, the Financial Industry Regulatory Authority (FINRA) issued a year-end report noting that overconcentration contributed to significant customer losses. It also identified a lack of established supervisory procedures and monitoring systems as a reason for widespread overconcentration.

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 substantial if the investor heavily invested in a financial product that was unsuitable for their portfolio or risk tolerance level. The losses can also be significant if that investment plunges in value or fails.

Contact SSEK Law Firm at (800) 259-9010 or contact us online to speak with an investment lawyer. They can help you determine whether you have reasons for pursuing an overconcentration against your financial adviser and their firm.

This form of securities fraud can appear in an investor’s portfolio in several 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

A customer’s account may seem well diversified, but the financial advisor may have actually concentrated a portfolio on investments that are too similar to each other.

In some cases, overconcentration can be a suitable investment strategy for investors, especially those with high net-worth or institutional investors. However, it isn’t an appropriate game plan for most inexperienced and retail investors, including retirees.

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 on 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.

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 your major asset classes are diversified, and your stocks are spread across various sectors or industries.

An investment lawyer here at SSEK Law Firm can help you identify whether overconcentration occurred in your account. They can also guide you through the steps needed to pursue financial recovery in FINRA arbitration.

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 investment lawyer team has experience and knowledge in fighting overconcentration and other investor-related fraud for over 30 years.