Overconcentration & Asset Allocation Attorneys — Bakhtiari & Harrison
What is overconcentration?
Overconcentration occurs when a broker fails to maintain adequate diversification in an investor’s portfolio — placing an excessive proportion of the investor’s assets in a single security, a single sector, or a single product type. The harm of overconcentration is not realized until the concentrated position declines — at which point losses that a properly diversified portfolio would have avoided or minimized are catastrophic and often irreversible.
Diversification is a fundamental principle of prudent investment management. A broker who fails to implement it — or who actively overconcentrates a portfolio in products generating high commissions — violates the suitability obligation under FINRA Rule 2111 and Regulation Best Interest, and may be liable for the full extent of the concentration-related losses.
Common overconcentration patterns
- Single security overconcentration: placing the majority of an investor’s portfolio in a single stock — particularly employer stock, which compounds the investor’s employment and investment risk in a single company.
- Sector overconcentration: overweighting a single industry sector — technology, energy, financial services, real estate — leaving the portfolio exposed to sector-wide downturns.
- Product type overconcentration: placing excessive allocations in a single product category — non-traded REITs, variable annuities, structured notes, alternative investments — often driven by the high commissions those products generate.
- Single manager overconcentration: concentrating assets with a single fund manager or investment program — creating excessive dependence on one manager’s performance and increasing exposure to manager-specific risk.
Overconcentration and employer stock
Employees who hold significant employer stock in retirement accounts are particularly vulnerable to overconcentration harm. A broker who fails to implement a diversification strategy for a client with concentrated employer stock — or who actively discourages diversification — may be liable for the losses that result when the employer’s stock declines. The concentration of both employment income and investment assets in a single company creates compounded risk that prudent portfolio management must address.
Proving overconcentration in FINRA arbitration
Proving overconcentration requires establishing: (1) the investor’s actual risk tolerance and investment objectives, (2) the concentration level in the account, (3) that the concentration level was inconsistent with the investor’s profile, and (4) quantifiable losses caused by the excessive concentration. Expert testimony on appropriate asset allocation standards and damages analysis is typically required. Bakhtiari & Harrison works with portfolio management and damages experts on every overconcentration case.
Frequently asked questions — overconcentration
What level of concentration is considered excessive?
There is no single threshold — the appropriate diversification level depends on the specific investor’s profile, risk tolerance, investment objectives, and time horizon. As a general principle, placing more than 10-15% of an investor’s portfolio in a single security is often considered potentially excessive, and placing more than 25-30% in a single sector is similarly concerning. The key question is whether the concentration level was consistent with the investor’s stated objectives — and whether the broker adequately disclosed the concentration risk.
My portfolio was concentrated in my employer’s stock — do I have a claim?
Possibly. The key questions are whether you directed the concentration yourself (in which case the broker’s liability is reduced) or whether the broker recommended or maintained the concentration without your specific instruction, and whether the broker adequately advised you of the risks of the concentration and recommended diversification. Bakhtiari & Harrison evaluates employer stock concentration claims at no charge.
Can I have an overconcentration claim even if the investment eventually recovered?
Possibly. If the investment declined significantly before recovering, causing you to sell at a loss or suffer anxiety and consequential harm during the decline period, you may have a claim for damages during the period of excessive concentration even if the ultimate outcome was positive. This is a fact-specific analysis that Bakhtiari & Harrison evaluates in the initial consultation.
For a full overview of the firm’s investor representation practice, visit the Advisor Misconduct page.
Contact a overconcentration attorney — free consultation
Contact Bakhtiari & Harrison for a free, confidential consultation. Our FINRA attorneys review every potential investor claim at no charge. Investor cases are handled on a contingency fee basis — no recovery, no fee.
Investor cases are handled on a contingency fee basis — no recovery, no fee.
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The Importance of Asset Allocation to Portfolio Performance
Recent market volatility has underscored the consequences of imprudent asset allocations, leading to substantial losses for numerous investors. When confronted with questions about declining account values, brokers frequently attribute these downturns to market fluctuations. However, seasoned securities attorneys would suggest that the real issue often lies with inappropriate asset allocations. Effective asset allocation, overseen by knowledgeable securities professionals, is essential in safeguarding investments and achieving long-term financial goals.
Research consistently has found the best way to maximize returns across every level of risk is to combine asset classes rather than individual securities (Markowitz, 1952; Sharpe, 1964; Brinson, Hood & Beebower, 1986; Brinson, Singer & Beebower, 1991; Ibbotson & Kaplan, 2000). Therefore the first is to identify a broad set of diversified asset classes to serve as the building blocks for a portfolio. Factors to consider are an asset class’s long-term historical behavior in different economic scenarios, risk-return relationship conceptualized in asset pricing theories, and expected behavior going forward based on long-term secular trends and the macroeconomic environment.
Other useful tools include evaluating asset classes on their potential for capital growth and income generation, volatility, correlation with the other asset classes (diversification), inflation protection, cost to implement via ETF and tax efficiency.
Different Types of Assets Provide Additional Diversification
Asset classes fall under three broad categories: stocks, bonds and inflation assets. Stocks, despite their higher volatility, give investors exposure to economic growth and offer the opportunity for long-term capital gains. Stocks provide effective long-run inflation protection and are relatively tax efficient due to the favorable tax treatment on long-term capital gains and stock dividends (relative to the way ordinary income is taxed). Bonds and bond-like securities are the most important income-producing asset classes for income-seeking investors.
Although bonds have lower return expectations, they provide a cushion for stock-heavy portfolios during economic turbulence due to their low volatility and low correlation with stocks. Most bonds are tax inefficient because bond interest income is taxed at ordinary income tax rates, except tax-exempt municipal bonds. Assets that protect investors from inflation in both moderate and high inflation environments include Treasury Inflation-Protected Securities (TIPS), Real Estate and Natural Resources. Their prices tend to be highly correlated with inflation.
Time horizon is another consideration in determining asset allocation. Time horizon refers to the expected number of months, years, or decades you will be investing to achieve a particular financial goal. An investor with a longer time horizon may feel more comfortable taking on a riskier, or more volatile, investment because he or she can wait out slow economic cycles and the inevitable ups and downs of our markets. By contrast, an investor saving up for a teenager’s college education would likely take on less risk because he or she has a shorter time horizon.
Asset Allocation and The Role of Risk Tolerance
Risk tolerance is the investor’s ability and willingness to lose some or all of your original investment in exchange for greater potential returns. An aggressive investor, or one with a high-risk tolerance, is more likely to risk losing money in order to get better results. A conservative investor, or one with a low-risk tolerance, tends to favor investments that will preserve his or her original investment.
Many investors use asset allocation as a way to diversify their investments among asset categories. By including asset categories with investment returns that move up and down under different market conditions within a portfolio, an investor can protect against significant losses. Historically, the returns of the three major asset categories have not moved up and down at the same time.
Market conditions that cause one asset category to do well often cause another asset category to have average or poor returns. By investing in more than one asset category, you’ll reduce the risk that you’ll lose money and your portfolio’s overall investment returns will have a smoother ride. If one asset category’s investment return falls, you’ll be in a position to counteract your losses in that asset category with better investment returns in another asset category.