Over-Concentration

A brokerage firm has the duty to recommend that an investor’s account be diversified among different investment classes such as cash, stocks and bonds, and across wide industry sectors (e.g., technology, energy, industrials, consumer staples, healthcare, banking/financial) within classes. A properly diversified account is the best way possible to minimize risk and avoid excessive losses. Simply stated, diversification means following the old adage of not putting all your investment eggs in one basket.

Over-concentration occurs when the investments in an investor’s portfolio are disproportionately weighted in one asset class, such as stocks, or when holdings in an asset class are concentrated in a particular sector or even the stock of a single company. If, for example, most of an investor’s assets consist of stock holdings in an automotive company or a worldwide beverage producer, or the stocks of only a few companies, or even the investor’s own long-time employer, the account is not diversified. Similarly, if an investor’s account includes stocks, bonds, and equity mutual funds that are primarily in the technology or energy industries, for example, the account is not diversified. A brokerage firm may be held liable for failure to diversify a customer’s account.

If a brokerage firm represents, for example, that companies in the oil and gas industry are poised to achieve record earnings and that an investor can realize a greater rate of return by focusing investments in this sector or by investing in one or two particular stocks or equity mutual funds, the firm is breaking the cardinal rule of investing. The risk of losses — which can occur rapidly — increases dramatically in an over-concentrated account. Diversification is an essential element of any successful investment strategy and a brokerage firm has the duty to help an investor achieve this goal.

If you have found yourself a victim of unfair brokerage activities relating to over concentration, call the lawyers of Page Perry for experienced representation at (877) 673-0047.