Failure to Diversify

This is When You Can File a Failure to Diversify Lawsuit

Financial advisors, brokers and trustees are expected to act as prudent investors. They should administer your investments carefully and avoid the unreasonable risk of “putting all your eggs in one basket”. If they over-concentrate investment on only one market sector or business, they may be liable to a failure to diversify lawsuit.

The rule is that administrators of an account should try to mitigate risk. They should help make investors’ holdings safer and increase return on investments. Through investment types such as bonds, stocks and treasury bills, they should diversify.

But if your financial advisor or trustee has over-concentrated your investment in only one business, causing you loss, you may be able to sue. The law protects your right to be compensated for that loss. This may be through a failure to diversify lawsuit or FINRA arbitration.

Weltz Law has a strong track record of handling securities cases that allege over-concentration. We have helped countless clients succesfully in FINRA artbitration and in state and federal court. If you believe that your investment portfolio has been harmed due to a failure to diversify, you should seek help immediately.

The Duty to Diversify

It is generally accepted that investment is risky business. After all, no one can always tell with absolute certainty how the market will behave. Investors are expected to understand this risk before their foray into the securities and exchange market.

Yes, the general risk of investing is acceptable. But what is unacceptable is holding an investor’s entire portfolio in just one business. The simple reason is that when you put all your eggs in one basket, you’re more likely to lose them all.

This is why it is a fundamental tenet of investment strategy that investment portfolios should always be diversified. Granted, investment is risky. But investing in a broad range of businesses through a variety of investment types helps to reduce the risk of investors.

This fundamental tenet of diversification is recognized under laws applicable in New York. The Uniform Prudent Investor Act imposes a duty to diversify on investment professionals. This duty arises because financial advisors owe a fiduciary duty to investor clients.

Under the Securities Exchange Commission Act, financial advisors must act in the best interests of their clients. Even under some specific state law’s, brokers owe their investors an ongoing fiduciary duty of good faith and fair dealing.

Based on this duty, they are expected to act prudently. They should never expose your portfolio or assets within your portfolio to unreasonable risk. Investment decision should be taken carefully. This should be in accordance with the need to increase returns and also protect the value of the investments. A good broker should review all relevant facts and recommend a diversified portfolio. This should be one that best suits the investor’s goals and risk tolerance.

If your financial advisor has failed to live up to this duty, causing you loss, you may be entitled to pursue compensation. The law allows you to do this through a FINRA arbitration or a lawsuit if the other party refuses to settle.

When can a Financial Advisor be Liable for a Failure to diversify?

While the law imposes a clear duty on investment professionals to diversify investor portfolios. Although, there is no standard formula for diversification. There is no automatic rule for determining what the appropriate level of diversification should be. Neither is there any rule to determine whether over-concentration has occurred.

Due to this, the question of whether over-concentration has occurred is usually treated as a fact that must be proved. It would depend on the unique circumstances of your case. As well as how your financial advisor has behaved. Despite this, over-concentration can generally be said to have occurred in any of these three instances:

  • Sole investment in just one company: The stocks of a single company can be quite volatile. This means that an investor is more likely to register huge losses on their portfolio when all or a large part of their investments are in one company.
  • Industry over-concentration: Just as individual company stocks can be volatile, industries can also have their ups and downs. Many things can cause the sector to suffer. These include typical market fluctuations, foreign competition and even fears about the economy.
  • Investment in only one product types: A good portfolio should also consider investment in diverse product types. These should include investment in equities, bonds and cash. This will reduce volatility and allow for better returns over time.

On the whole, financial advisors should carefully review what investments are best for their clients. They must also take into consideration the duty to diversify. A diversified portfolio should meet the expectation of the client. It should also consider the risks and rewards that different investment types and industry sectors can offer.

Determining when over-concentration has occurred is not always easy though. If you are uncertain about whether you have a claim for over-concentration, it is best to contact a competent securities law attorney. They would be able to explain to you if the loss you have suffered was due to a failure to diversify. They will also be able to explain what options are available to you.

Special Circumstances That Allow Non-Diversification

You should note that it is not in all cases that a financial advisor or trustee would have a duty to diversify. The law provides some special circumstances where they may fail to diversify an investment portfolio.

One of these is where the portfolio was created by a trust. In this situation, the trustee may be able to avoid the duty to diversify if the trust limits this duty. For instance, the trust instrument may state that the trustee should keep the portfolio in a particular type of business. In this instance, the trustee may have limited liability for failure to diversify.

Even for portfolios not created by trust, a financial advisor or broker may have limited liability for failure to diversify. For instance, your broker may conclude that the benefits of diversifying your portfolio are outweighed by the tax implications that will follow.

This is subject to proof though. Regardless of what circumstances your trustee or financial advisor claims to limit their liability. There may be facts that point to inappropriate behavior. They must be able to show that they acted prudently in all circumstances, with the object of securing your best interest.

Your securities lawyer will be able to help you determine how the law applies to the facts of your case and what rights you can assert.

Contact a Seasoned Securities Arbitration and Litigation Attorney

Investors often face substantial losses due to a failure to diversify by the broker or brokerage firm. If you suffered financial harm due to a portfolio that had not been diversified properly, it is vital to confer with a securities attorney regarding whether you may be able to recover compensation. New York based attorney Irwin Weltz at Weltz Law has represented parties in securities litigation and arbitration hearings for more than two decades. Attorney Weltz will work tirelessly to help you pursue compensation for your losses. You can contact us at 877-935-8952 or through our online form to set up a conference to discuss your case.

Client Reviews
"Irwin has been my go-to lawyer for arbitration and regulatory matters for years. He’s smart, cost-efficient and gets results. I highly recommend him." B.D.
"Over the last few years, we have employed Irwin Weltz for a variety of functions. No matter what the issue may be Mr. Weltz responds in a timely and proactive fashion. His ability to think out of the box is second to none and has literally saved us millions of dollars. Irwin also sincerely cares about his clients. I cannot say enough good things about this man, he is simply the best!" T.A.
"Irwin Weltz was referred to me by a former colleague who worked as the Deputy General Counsel for a large, multi-national broker-dealer located in the New York metropolitan area. I had requested a referral for an attorney to handle a complicated arbitration that my firm was involved in." G.C.
"After a very negative experience with another law firm, Irwin was truly terrific in every way. He cared, he was responsive, and he guided me through a difficult time with compassion and expertise. In the end, he was successful as well in settling the lawsuit favorably and allowing me to restore focus and energy back to my family and business. I am truly grateful to Irwin and highly recommend his services." F.S.
"Irwin is the best. He successfully represented me in a number of matters, including an employment dispute. He was attentive to every aspect of my matters, always available to speak with me, gave me great advice and fought hard for me every step of the way. You want Irwin on your side!" I.S.