Over-Concentration

A broker's failure to diversify a customer's portfolio may result in an excessive amount of risk to the customer without the corresponding potential for gain, which is beyond the customer's appropriate tolerance for risk. This is also known as "concentrating" an account. Examples of concentration may be (1) very high % of invested assets in one or a few stocks, or in one or a few sectors or industries, or in one or a few classes of assets. Over-concentration of an account is rarely suitable for an investor due to the excessive risk without the corresponding opportunity for gain, unless such investor is specifically suited for such high risk, and fully aware of how a concentrated account may affect the overall gain or loss in the account. Examples include:

  • owning too much of one stock (employee stock options, company stock)
  • owning too many mutual funds in the same category (i.e., technology funds)
  • owning too many mutual funds in the same class (i.e. equity vs. fixed income)
  • owing too many mutual funds with the same objective (aggressive growth vs. Income)
  • owning too many mutual funds with the same core holdings
  • owning too many assets in the same asset class

The failure to diversify a concentrated portfolio, or the negligent recommendation of a concentrated portfolio may be fraud or misconduct from which an investor is due a recovery of losses.

Where your investments over-concentrated? Call us at 903-597-2221 or contact us online.