West Palm Beach Overconcentration Attorney
Broker’s Failure to Diversify Investments
One of the best known risks of investing is that “putting all the eggs (money) in one basket” leaves the investor vulnerable to drastic losses. Investors fare better when their portfolio is diversified enough that a major downturn in one stock or one market segment won’t wipe them out. Brokers and advisors who fail to diversify – known in the investment industry as “over-concentration” – to a reasonable degree can end up liable to the investor.
Investors and their investment advisors share a common interest in that both benefit from profitable investments. When the investment goes bad, producing losses instead of gains, no investor is happy. But the simple fact that an investment loses money doesn’t mean that the broker did anything wrong; investments are inherently risky. The nature of the relationship, though, is that the broker is expected to know more about investments, and to take steps to see that the investor is protected from unnecessary risks; that’s why the broker gets paid, after all.
The Broker’s Duty and Claimed Breaches
It is always the duty of the broker to make sure that the investor is aware of the various risks involved in making each specific investment, as well as in the overall investment strategy that the portfolio represents. Failure to recommend a strategy to manage the risks associated with securities concentration can leave a broker exposed to several different dangers, especially:
- Claims for damages by the investor, based on the broker’s negligence in having caused the investment loss.
- Regulatory discipline for failing to provide suitable advice and follow prescribed sales practices.
Excuse for Not Diversifying
Assuming that the broker actually does inform the investor of the risks involved in a strategy, both the degree of diversification required for a given investor, and the degree of diversification possible for a given investor, largely depend on:
- Restrictions on the securities that the investor holds; sale of some securities is simply restricted by the issuer (often encountered with stock option plans, closely held corporate stock, and the like).
- What the investor’s goals and needs are, as they have been communicated to the broker.
There are numerous reasons that an investor may choose to overload a portfolio with certain securities, ranging from sentimental value to capital gains concerns. The key, again, is that the decision be the investor’s, and that it be based on a full explanation of the risks.
Evidence of What the Broker and Investor Discussed
It’s crucial to establish exactly what the investor told the broker about the needs and goals of the portfolio. It’s just as important to establish what the broker told the investor about the reasons for using the specific investment strategy that was employed, and the risks that it entailed.
Among the major pieces of evidence are:
- The contract between the broker and the investor.
- The contents of any informational questionnaires compiled about the investor’s needs and goals.
- The contents of any update to that questionnaire.
- If updates weren’t obtained, the reasons why.
In almost all cases, the broker and investor have had several other discussions of the account and investment strategies and opportunities. These ordinarily are evidenced by:
- Notes of phone calls.
- Copies of e-mails, text messages and other correspondence.
- Notes of information that may have been submitted via online contact forms.
- Notes of in-person meetings.
Get Legal Help when Your Brokerage Account Has Been Mismanaged
Failure to diversify cases raise many factual and legal issues. Handling them effectively calls for broad knowledge and experience of the investment field. Todd A. Zuckerbrod has spent his nearly 30-year career in the securities industry, seeing it from the perspective of a regulator at the New York Stock Exchange, as in-house counsel with Merrill Lynch, as outside counsel with the law firm of Greenberg Traurig, and as the general counsel of a brokerage firm.
Depending on the facts, your failure to diversify case may involve negligence concepts, firm policies, various regulations (especially those of the Financial Regulatory Authority, or FINRA), the practicalities of broker-investor relationships, and the ins-and-outs of arbitration proceedings.
Whether you are an investor who thinks that your broker’s failure to adequately diversify the investments in your portfolio has cost you money, or a broker who is being accused of a failure to diversify, Todd A. Zuckerbrod can help. Tell Todd the story behind the claim and he can advise you on the best way to proceed. Things to consider include:
- Is arbitration mandatory?
- Is it optional?
- Would you likely benefit from going that route?
- If not, is there a basis for avoiding it?
There’s no fee for our initial discussion, so call Todd A. Zuckerbrod today.