An investment portfolio that’s too heavily invested in one asset type, class, or sector is inherently risky and could lead to catastrophic losses in the event of a downturn.
If a financial adviser or brokerage firm does not sufficiently diversify an investor’s assets and the investor suffers losses as a result, he or she may have a claim for misconduct.
“Overconcentration” is an investment term which expresses the old adage, “don’t put all your eggs in one basket.”
Examples of overconcentration include an account that is invested only in:
- One stock or a few different stocks
- A single sector of the economy (i.e. investing only in gold or precious metals)
- One investment asset class (such as purchasing just stocks, rather than stocks and mutual funds)
Without a portfolio spread across multiple investment avenues, the investor could faces dire economic consequences. For example, if an investor puts all her money in a single startup company, and the company goes out of business, the investor loses 100% of her account.
Overconcentration Could Be the Result of Broker Misconduct
Many investors trust a financial adviser, who is expected to get to know the investor and make suitable investment recommendations based on the investor’s profile (so-called “suitability”).
A crucial aspect of an investor’s profile is their willingness to make risky investments. While some investors can afford the risk of a heavily concentrated portfolio, others cannot. Financial advisers should take into account an investor’s stance on risk when devising an investment strategy.
Unfortunately, an investor may not know that their investment portfolio is overconcentrated. A portfolio might look diversified on the surface, but at a deeper level it could be heavily concentrated in a single sector or among undiversified stocks.
An overconcentrated position is often only revealed after heavy investment losses. If you believe your losses are the result of overconcentration, a lawyer can help you discover whether your adviser made unsuitable investments. In the event of broker misconduct, lost money is recoverable through a legal claim.