
Putting all your eggs in one basket can be a great decision if you are transporting eggs, but the analogy is not favorable when it comes to investment.
Sometimes, fiduciaries and brokers, out of over-excitement about the potential of an investment, recommend it to all their clients. When this happens, they may end up over-concentrating your portfolio in the investment.
This might not be a problem if the stock is performing well, but it is risky because any loss from the investment can result in a total loss of your portfolio.
For example, if an investor’s portfolio is over-concentrated in fossil energy, their portfolio could rapidly lose money if something like climate policies mandates using renewable energy. Or investing too much in one company, an industry such as automobile, or even a country. Some failures to diversify include investing in only one type of security, such as common stocks, against mixing stocks and bonds.
Overconcentration does not necessarily equate to fraud, provided your fiduciary or broker informed you of the risk, but you instead went ahead with the investment.
To effectively manage concentration risk, FINRA explains five ways it might occur:
Fiduciaries are required to always prioritize your interest before their own. The FINRA Rule 2111 requires that a firm or associated person have a reasonable basis to believe a recommended transaction or investment strategy involving a security or securities suits the customer.
This means the firm must do due diligence on every and any stock before recommending it to its clients. The recommendation should consider the client’s age, net worth, and personal financial goals.
Most of the time, experts will advise against overconcentration, especially for clients that are close to retirement age. Losing their money at such an age could disrupt their retirement plan, and they would have been too old to start working for another savings.
Since overconcentration is not an outright fraud, it is an allegation that can be difficult to prove.
If you believe you or someone close to you has suffered financial loss due to overconcentration, consult an experienced stock fraud attorney today.
S.A. Law Group’s team of securities lawyers can help you decide if you have a case and what steps you should take to prepare for FINRA arbitration. Get in touch today for a free consultation or call us at (202)444-4222.
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