Menu Call

Failure to Diversify & Securities Concentration Lawyers

diversified portfolio

Diversifying your portfolio by spreading investments across different asset classes is an elemental investing concept. Failure to diversify can lead to outsized and disproportionate losses from a single investment.

Financial professionals have a duty to ensure that their clients’ portfolios are protected from concentration risk. If an investor loses money due to lack of diversification, they may be able to recover their losses in a FINRA arbitration claim.

The Importance of Diversification

Market fluctuations do not affect every type of investment equally. Some assets and market segments can—and usually do—outperform others during different periods. The goal of portfolio diversification is to manage risk. By investing in numerous companies, industries, and investment products and classes, investors are better-positioned for long-term success.

Diversification is Not One-Size-Fits-All

FINRA explains that a diversified portfolio is harder to achieve than simply not putting all of your eggs in one basket. To manage concentration risk, you should not only diversify across and within major asset classes, but also regularly rebalance your portfolio, know the individual holdings in your mutual funds and ETFs, and understand an investment’s liquidity. Many investors trust a financial professional to help them manage concentration risk, since it can be difficult for the average retail investor to tell whether their portfolio is sufficiently diversified.

In addition, FINRA notes there is no simple or single answer to the question of how much diversification is enough. No two investors have identical financial situations, investment experience, risk tolerance, investment objectives, time horizons, or liquidity needs. Diversification is also not a one-time exercise. Portfolios should be regularly reviewed and rebalanced as investor needs and market conditions dictate.

A 2018 report of FINRA examinations focused on over-concentration in the context of product suitability. FINRA found that some firms concentrated customer accounts in “sector-specific investments” and “illiquid securities” (such as REITs) that “were unsuitable for customers and resulted in significant customer losses.” The report also noted that in some cases, firms did not have procedures or systems in place to identify and supervise concentration levels in customer accounts.

Find Out If You Have a Claim for Misconduct

On the surface, a portfolio may appear diversified, especially if it contains complex products and/or sophisticated strategies. Investors often learn that their investment portfolio is over-concentrated only after they suffer disproportionate losses in just a few positions.

If you suffered disproportionate losses because of an over-concentrated position, you may have a legal claim to recover the losses. During a free consultation, the Business Trial Group can review your case and assess possible misconduct. Our contingency-fee securities attorneys help to balance the power between investors and investment firms, and we charge only for results, not hours. To get started with your free case evaluation, contact us.