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When Does Over-Concentration Constitute Fraud?

In today’s volatile financial environment of constant market fluctuation, it can be difficult to identify poor investment choices and know when over-concentration constitutes fraud. This is why market experts advise investors to maintain a diverse portfolio. 

In other words, you should avoid putting all your eggs in one basket. 

That’s an approach to which investment professionals should adhere in most cases. 

If you entrusted your portfolio to an advisor or broker and they failed to diversify your investments, you may be a victim of over-concentration.

The experienced attorneys at Colling Gilbert Wright have extensive experience in a range of cases involving investment fraud. We are committed to helping our clients recover their losses incurred by negligent brokers and advisors.

See our recent cases.

What Is Over-Concentration?

In the context of securities law, over-concentration describes having too many holdings in a particular market segment, investment class, or single investment in relation to your entire portfolio.

FINRA identifies five primary types of concentration:

  1. Intentional concentration. This occurs when investors intentionally invest in one type of asset as a personal preference.
  2. Concentration due to asset performance. This occurs when investors believe that an investment that performed well in the past will perform well in the future and invest heavily in that asset based on the belief. Past performance does not indicate future performance.
  3. Company stock concentration. This occurs when employees invest retirement funds in their company’s stock. Company loyalty should not detract from sound investment strategies. It is financially dangerous to hold too much company stock. 
  4. Concentration due to correlated assets. This occurs when investments are concentrated in a single industry or geographic location.
  5. Concentration in illiquid investments. This occurs with certain investments, such as unlisted Direct Participation Programs and non-traded Real Estate Investment Trusts (REITs) in which investors are expected to hold the investment for a prolonged period of time. Due to their potential high returns, these investments can be tempting. However, investors can pay exorbitant fees to cash out of their illiquid investments and may have to wait an extended period to access their funds.

When you diversify your portfolio, your risks are spread out across more of the market. If some investments lose value, others could increase, leaving you with a fairly balanced portfolio. A seasoned broker or financial advisor should know the risks of over-concentration and guide you toward a more diversified portfolio.

When Is Over-Concentration Considered Fraud?

It is important to understand that over-concentration is not always fraudulent. Perhaps one of your investments performed so well that it now represents a more significant percentage of your portfolio than it did previously, or you may have simply invested in a single type of security as a personal preference. 

On the other hand, your financial advisor or broker may be at fault for your over-concentration. 

Investment professionals have an obligation to ensure that their clients’ investments are diversified sufficiently based on individual goals, instructions, and circumstances. A broker should consider factors such as the client’s:

  • Investment strategy
  • Investment experience
  • Risk tolerance
  • Net worth
  • Liquidity needs
  • Age

Brokers violate FINRA rules when they give negligent investment advice that leads to an over-concentration in a particular security or class of securities –  and the elevated risk of loss is inconsistent with the investor’s investment profile.

For example, a retiree entrusts a broker with his or her nest egg and the broker invests only in oil and gas securities. That broker should know how risky that over-concentration will be – especially for someone who is retired and cannot risk their life savings on riding out the ups and downs of a particular industry. This failure to diversify investments could constitute fraud.

How Do You Prove Over-Concentration?

Over-concentration can be challenging to identify and hard to prove. Heavy concentration in some areas of your investment portfolio may be acceptable, especially if you are an experienced,  risk-tolerant investor. However, for many investors, over-concentration can have financially devastating consequences.

If you believe that you are a victim of negligent over-concentration, it is crucial to contact an experienced attorney at Colling Gilbert Wright as soon as possible. Our lawyers will listen to your story, assess the merits of your claim, and advise you on your rights and legal options. We have the knowledge, skill, and resources needed to handle these difficult cases and we will work diligently to help you recover your losses.

Contact Our Investment Fraud Attorneys For Free

Do not hesitate to contact our investment fraud attorneys today if you suspect that you are the victim of fraud. With substantial experience in a range of difficult cases, we can ensure that your rights and best interests are protected.
Do not face your financial losses alone. Call (800) 766-1000 today for a FREE consultation. Colling Gilbert Wright serves clients throughout Florida and Nationwide.