Corporate & Securities Law

Over-Concentration: A Growing Concern For Investors

By Keith Griffin

Over-concentration is the opposite of diversification. An over-concentrated portfolio means too much of your money is tied up in one security or asset class, such as a single stock, bond, mutual fund, or other investment vehicle. Over-concentration happens if you buy or sell too many shares of a stock in one company. It also occurs when you invest too much in one market sector (remember the dot.com era?).

A more recent example of over-concentration occurred last year over sales of reverse convertible notes. In February 2010, the Financial Industry Regulatory Authority (FINRA) fined H&R Block Financial Advisors, Inc. (n/k/a Ameriprise Advisor Services, Inc.) $200,000 for failing to establish adequate supervisory systems and procedures for sales of the notes to retail customers. FINRA also fined and suspended H&R Block broker Andrew MacGill for making unsuitable sales of the investments to a retired couple. The firm was ordered to pay $75,000 in restitution to the couple for losses they incurred.

If a substantial portion of your money is tied up in one investment, you are taking on a considerable amount of risk. When it comes to investing, the rule of thumb is never to put all of your eggs - i.e. your money - in one basket. Diversification is key, something that a good stockbroker or investment advisor should know.

A good investment advisor also will take into consideration your risk tolerance levels, as well as your overall investing objectives. If a broker recommends an investment that falls outside of either of these two areas, you may have reason for concern. Most important, you could be setting yourself up for financial disaster.

Over-concentration complaints by investors are on rise. If you believe you or a family member suffered substantial investment losses as a result of over-concentration, please contact us.

Full post as published by Representing Investors on March 09, 2011 (boomark / email).