What Your Broker Should Be Doing to Prevent Overconcentration

A stockbroker fraud lawyer explains more about how brokers guard against overconcentration and what to do if you suspect stockbroker misconduct.

You trust your stockbroker to manage your portfolio well and take your financial needs and goals into consideration. Unfortunately, some unscrupulous brokers have been known to fail to diversify their clients’ portfolios, leaving them with an overconcentration of assets in investments that are too similar. Having too much invested in a particular security, financial sector, or industry puts you at a greater risk for losses, and this is generally considered poor portfolio management.

How Do Brokers Guard Against Overconcentration?

Your broker has a duty to avoid exposing you to the unnecessary risks inherent in overconcentration. Here are the two main tactics they generally use:

• Diversification. Diversification is simply making sure that your investments are spread out so that they are not too dependent on the performance of a particular security or industry. In general, your broker should seek a variety of investment types to help protect your assets if something goes wrong within a certain sector.
• Asset Allocation. Asset allocation is essentially balancing your financial needs and tolerance for risk with the risks or rewards of the investments chosen. For example, an investor with a higher risk tolerance may be fine with big investments in stocks or equities that would be inappropriate for an investor with a lower risk tolerance. Your broker should be sensitive to your needs and goals and allocate assets appropriately.

If you believe you have a claim against your broker or brokerage firm for overconcentration of your portfolio that led to losses, you are likely facing FINRA arbitration to resolve your dispute. A stockbroker fraud lawyer with Meyer Wilson would be happy to meet with you in a completely free legal consultation to discuss your situation and next steps toward recovery. Give our investment fraud lawyers a call today for more information.