What is Overconcentration and Failure to Diversify?

Most investors are aware about the risk of relying too much on a single investment, also known as concentration risk. Although all investments carry some degree of risk, investors can manage their exposure to a certain extent by diversifying their investments.

Diversification can be summarized as not putting all your investment eggs in one basket.

Making investments on the bedrock principle of diversification among different asset classes help manage an investor’s risk of loss if market conditions sour. On the other hand, holding a concentration in a particular security, product or industry can add significant risk to an investment portfolio.

Overconcentration occurs when a broker makes a high concentration of investments in one security, or in one industry sector exposing the investment portfolio to an inappropriate degree of risk which can lead to devastating losses.

An investment portfolio may also be exposed to liquidity risk and product specific risks if it has a high concentration of illiquid investments. Overconcentration of investor funds in illiquid assets or in any one product presents significantly higher potential risks.

Overconcentration and Failure to Diversify Claims

Brokers are required to consider an investor’s strategy, risk tolerance and liquidity needs, and have a firm understanding of the investment before recommending it to an investor. Brokers violate FINRA sales practice rules when they provide unsuitable investment advice that results in an undue concentration in a particular security or category of securities and the increased risk of loss is inconsistent with the investor's investment profile.

Brokers also violate FINRA rules when mismanaging an investor’s account resulting in a high concentration of investments in speculative securities that are not suitable for investors with limited income, means, and investment experience. Excessive concentration of investor funds in illiquid securities put investors at greater risk of losing all of their money when considering the liquidity risks and the product specific risks.

You may have a claim against your broker if you have an overconcentration in certain illiquid investment products that resulted in losses, such as:

• Alternative Investments

• Business Development Companies (BDCs)

• Mortgage-Backed Securities (MBS)

• Non-traded Real Estate Investment Trusts (REITS) 

• Oil and Gas Investments

• Private Placements

• Real Estate Investment Trusts (REITS) 

• Structured Products

Contact Us if Your Investment Losses are Due to Overconcentration 

Riera Law’s securities experience and understanding of overconcentration claims allows us to help you to determine whether you are a victim of overconcentration or failure to diversify. You may be able to recover your investment losses if your broker mismanaged your account resulting in a high concentration of investments. Contact us or call us today at 305-204-9779 for a free case evaluation.