Asset Allocation Negligence: Did Your Financial Advisor Put All Your Eggs in One Basket

Financial advisors who concentrate their investors’ portfolios in a small number of positions may be liable for negligence. If you or someone you know lost money due to an overly concentrated position, call us at 800-767-8040 for a free and confidential consultation.


What Is Portfolio Diversification?

asset allocation negligence

Portfolio diversification is the practice of allocating assets so that your exposure to any single type of investment product or industry is limited. Diversification can greatly mitigate the volatility and risk in a portfolio, helping it to meet its goals of growth and/or income with a minimum of ups and downs. Most stockbrokers and financial advisors recommend having both stocks and fixed income investments, such as bonds, as the first layer of diversification. The stock portion of a portfolio should have a healthy mix of stocks from different sectors such as tech, energy, finance, and healthcare, but it’s not necessary to have exposure to every single sector. It’s important that the stocks within a sector are diversified so that a scandal at one particular company doesn’t result in as much of a hit. That’s why experienced financial advisors often recommend sector mutual funds or exchange traded funds (ETF’s) for smaller portfolios and niche sectors such as cannabis or solar energy, rather than trying to pick winners with emerging companies. It’s also prudent to include CD’s, gold, or real estate in a large portfolio for further diversification and safety. Courts have consistently supported claims by investors against brokers that fail to diversify portfolios, especially if they are heavily weighted towards speculative investments, including non-traded REITs.

Your Broker Must Align Your Portfolio With Your Investment Goals

If you’re young, growth and value stocks are riskier, but can offer more opportunity for long term gains. Younger people are usually willing to roll the dice on riskier investments because they’ll have time to make back losses. That said, a financial advisor has a duty to ask every client about their risk preference, never assuming it due to their age. Most brokers recommend that if you’re approaching retirement, your investments should be less risky and more focused on producing income. This is especially true if you have a relatively small amount of assets that you will need to live on throughout your retirement. Older people with high net worth may want to hold growth stocks hoping to generate more capital for their children and grandchildren – not necessarily generate income. If you’ve lost money because your broker invested your money in risky investments without ascertaining your goals and tolerance for risk, you may be entitled to money damages.

Why is this Investment so Complex?

If your broker is promising a higher return, it’s a red flag that he’s planning to invest your money in something risky. Unscrupulous stockbrokers and financial advisors tend to prey on people with little knowledge or understanding of financial matters to invest in high risk financial products that produce extremely large commissions for them. These unsuitable investments are often one or more of the following types:

  • Non-traded Real Estate Investment Trusts (REITs);
  • Variable Annuities;
  • Equipment Leasing Investments;
  • Oil and Gas Partnerships;
  • Non-traded business development corporations.

Real estate investment trusts (REITs) are investments in companies that own or finance income producing real estate. REITs that are publicly traded on major stock exchanges are safe investments that are registered with the Securities and Exchange Commission (SEC) that are designed to allow smaller investors access to the real estate sector. Private non-traded REITs, on the other hand, are exempt from SEC registration so there is little to no way to thoroughly scrutinize the financial health of the REIT, making them very risky investments. Fixed rate annuities are safe investments that produce steady income, but variable rate annuities fluctuate based on the funds they are invested in, making them risky and more suitable to experienced investors. If you’ve lost money on risky investments recommended by your broker, call MDF Law PLLC for a free consultation to find out if you’re entitled to money damages from an asset allocation negligence claim.

The Importance of Liquidity

One of the things that can make any investment especially risky is not being able to sell it easily when it’s value heads south. For example, Apple stock is highly liquid, meaning that if the price of the stock goes down due to a downturn in the tech sector or a poor quarterly report for the company, you can usually sell the stock within seconds. On the other hand, a non-traded REIT cannot easily be sold so there’s nothing you can do but hope for the best if the value begins to plummet. This could lead to a major loss, or even the loss of your entire investment.

Asset Allocation Negligence Claims

Stockbrokers and financial advisors have a duty to understand their clients’ investment goals and to provide guidance for choosing prudent investments that are in line with their age, net worth, and investment goals. When they fail to choose appropriate investments for their clients and/or misrepresent the nature, liquidity, and safety of investments, they can be found liable for asset allocation negligence. Call MDF Law PLLC for a free consultation

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