Over Concentration Investment

Over Concentration Investment


The term over-concentration comes from the old adage of “not wanting to keep all your eggs in one basket.” Instead of making multiple investments, your broker may have placed your money in a single asset or a grouping of the same type of investment. A more straightforward way to define over-concentration is the failure to diversify. When a broker over-concentrates an account, they expose the portfolio to higher risk.  

What Is Over-Concentration?

Over-concentration is one of the lesser-known financial investment offenses. However, the act can result in significant financial losses for a client. If a client doesn’t diversify, the portfolio is considered very high-risk. Without a multitude of investments, you could lose a lot of money quickly if the sector takes a downturn.

If your advisor didn’t diversify your portfolio, your financial team might have committed fraud. Furthermore, you may take legal action to recoup your losses from the broker. The Schwartz Law Firm can look at your case and evaluate whether you have a claim against a financial advisor.

Risks This Portfolio Type Poses

Over-concentration poses more risks than benefits. Unless an investor asks explicitly for a high-risk portfolio, the broker is responsible for diversifying investments. Many clients may not even realize that they have an over-concentrated portfolio. On the surface, the portfolio may appear to have a lot of different assets. However, once examined closely, the portfolio may have too much money in a single sector.

The following are a few examples of over-concentration:

  • Owning only a single stock or a minimal number of stocks
  • Investing only in the same sector, such as gas, technology or precious metals
  • Having too much money in one asset class, such as only stocks or only mutual funds
  • Owning too many mutual funds in the same class or category
  • Owning too many stocks and mutual funds with the same objective, like aggressive growth versus income-building

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We take cases on a contingency fee basis, which means we do not collect a fee unless we recover for you. Please contact our office to discuss your case.

Is Over-Concentration Always Investment Fraud?

Not all scenarios of over-concentration are considered fraud. For instance, if you expressed a preference to have a large portion of your money in a single type of investment, then the broker only acted at your behest. Also, a specific investment may have performed exceptionally well and, as a result, represents a large portion of your current portfolio.

Diversification strategies depend on the client’s investment experience, current age, and net worth. For instance, if a broker invests a retiree’s savings only in gold and precious metals, the act could constitute fraud due to the person’s age and the riskiness of the investment.  

Brokers may believe high-risk investments would pay off for their clients, but they shouldn’t invest without considering if the portfolio could handle the risks and discussing them. The broker may also have chosen not to diversify because the advisor is looking out for their financial interests and wishes to earn higher broker commissions.

Protection Against Over-Concentration

In 2017, FINRA announced it would take a more aggressive stance against over-concentration. FINRA has monitoring guidelines that help alert investors against brokerage firms that are not diversifying. FINRA guidelines state that, in most cases, investors should not have more than 10 to 20 percent of assets in a single stock.

Brokerage firms have a legal responsibility before dispensing any investment advice. A regulation known as the suitability rule demands that brokers must investigate investments before giving any guidance. The advisor must evaluate the risks, benefits, and tax requirements before recommending any investments. Over-concentration has numerous risks and, therefore, would not likely be considered suitable.

Get Help with a Law Firm

The Schwartz Law Firm can assist those who suspect they have been a victim of investment fraud. Over-concentration is simply one form of financial misconduct that the law firm handles. Clients trust their financial advisors to guide them in making solid financial decisions. When an advisor acts misleadingly or fraudulently, then you can experience major monetary losses. Financial advisors who don’t invest with their client’s best interests in mind may also violate securities laws.

Along with protecting you against over-concentration, the Schwartz Law Firm can proactively work with you to avoid poor investments. Instead of placing reliance entirely on a single person, you can have the Schwartz Law Firm give a second opinion on an investment portfolio. The legal team doesn’t provide financial advice as an objective third party. Instead, the firm confirms your current financial advisor has created a plan that helps you reach your investment goals while minimizing risk.

Contact the Schwartz Law Firm today by phone or email to discuss any questions about over-concentration or any other financial investment concerns you have with your current advisor.