Investors deserve a broker or brokerage firm that can help them build a portfolio that is specifically designed to suit their unique investment objectives. A properly structured portfolio will be well-diversified. Lack of diversification dramatically increases risks, and it can result in enormous investment losses.
At Sonn Law Group, our securities fraud lawyers have extensive experience handling overconcentration claims. If you suffered large investment losses because your broker failed to adequately diversify your portfolio, we are prepared to fight aggressively to help you recover fair compensation for your losses.
Why is Lack of Diversification a Problem?
The market is not perfectly predictable. Winning trades can quickly become major losers, and industries that are leading the way today could soon become the market’s biggest laggards. Many people are familiar with some of the most prominent examples of market crashes, such as the Dotcom Bubble, which crushed internet-based stocks in the late 1990s, and the Subprime Mortgage Crisis that shocked the economy in 2007-2008.
Though, these are just two in a countless list of examples. Just recently, in early 2018, Bitcoin lost more than half of its value in less than 30 days. The market can turn at any moment.
The entire market could drop, or certain sectors or certain companies could bear the brunt of the impact. While these downturns leave many investors with losses, those with properly diversified portfolios will survive in the long-term. Investors with overconcentrated assets are in serious trouble. They have taken on far more risk. When things start to go bad, losses will be multiplied.
It is Hard to Recover from Major Investment Losses
A skilled broker should help you set up a portfolio that minimizes risk to a level that is acceptable for your specific needs. Sustaining a major loss can be financially and emotionally devastating. This is especially true if you are a conservative leaning investor who is interested in saving for retirement, not in speculating in a risky market.
Consider this example: imagine that your broker put all of your money into a single exchange traded fund (ETF). Unfortunately, that ETF soon drops from 100 down to 30, losing 70 percent of its initial value.
At that point, your portfolio would have to increase by 333 percent just to get back to even. Recovering from large losses is very hard. Your broker should create a well-diversified portfolio that minimizes risks and helps you avoid devastating losses.
When Can Brokers Be Held Liable for Lack of Diversification?
FINRA Rule 2111 requires that registered brokers must have a reasonable basis for making investment recommendations. When recommending a portfolio strategy, investment opportunity, or specific transaction, brokers must ensure that the proposed trade is suitable for their client.
A strategy or transaction that results in the investor taking on too much risk is, by definition, not suitable. For a broker to meet FINRA’s suitability requirements, they must give guidance that results in a well-diversified portfolio.
If your investment advisor recommended an unsuitable strategy or unsuitable trades, and you ended up with overconcentrated investment holdings, you should consult with an attorney. You may be able to hold your broker legally liable for your investment losses.
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At Sonn Law Group, we have decades of experience fiercely advocating for the rights of investors nationwide. If you lost a substantial amount of money because your broker or brokerage firm failed to properly diversify your portfolio, our legal team can help.