Asset Allocation Fraud

Claims for Improper Asset Allocation or Overconcentration

Serving Clients Throughout Miami, Los Angeles, New York City and Nationwide

An investor who loses money through asset allocation fraud from a brokerage firm or stockbroker misconduct, may have a claim based on such mistakes as improper asset allocation among asset classes or lack of diversification within asset classes. If you believe that your broker recommended a poor mix of assets for your portfolio, or if you believe that an over concentration in a particular security exposed you to unnecessary risk and caused your investment losses, contact a securities arbitration attorney at Dimond Kaplan & Rothstein in Los Angeles, New York, Miami, or West Palm Beach.

Our attorneys represent investors in securities arbitration cases throughout the United States. Our firm’s experience and aggressive approach to brokerage firm and stockbroker liability claims can help you recover your losses wherever you live.

Improper asset allocation claims — Having the right mix of asset classes

Asset allocation refers to the distribution of investments among different types of assets — stocks, bonds, real estate, commodities and so forth. Studies have shown that more than 90 percent of an investor’s account performance is based on asset allocation, rather than on the selection of particular securities. The selection of asset classes and the distribution of assets among those asset classes should be based on investor’s age, risk tolerance, investment objectives and goals, and financial circumstances. An improper asset allocation can support an unsuitability claim against your brokerage firm or broker in a securities arbitration proceeding.

Diversification — Do not put all your eggs in one basket

Diversification refers to the sound practice of spreading your investments among different securities. For example, you generally do not want too much of your portfolio invested in a single stock or bond. You also generally should not invest too much of your money in any one industry or sector of the economy. Diversifying your investments not only among different corporations but also among different sectors — manufacturing, retail, banking, energy, technology, etc. — can protect you from losses if a particular company or economic sector turns sour.

A well-diversified portfolio will protect your savings. That is because when one sector of the economy suffers, another generally will thrive. Some examples of an improper lack of diversification would be if you had too much money invested in Enron or Worldcom stocks or bonds just before those stocks collapsed, or too much money in technology stocks in early 2000, or too much money invested in subprime mortgage backed securities in 2007.

An example of the risks of a lack of portfolio diversification concerns the recent, unprecedented turmoil in the financial markets, which has resulted in the demise of a number of long-standing banks, investment banks, and brokerage firms. This includes bankruptcies, conservatorships, or takeovers of the following companies:

  • Lehman Brothers
  • Fannie Mae
  • Freddie Mac
  • Bear Stearns
  • Merrill Lynch
  • Countrywide
  • Washington Mutual
  • Fifth Third
  • Wachovia

These events have resulted in sharp declines in the values of these companies’ stocks and bonds. Other financial-sector companies, including AIG, also have seen their stock values drop significantly. This all has resulted in the decimation of many investors’ life savings in the form of stock losses, preferred stock losses, and bond losses.

Many of these investment losses could have been prevented, however, through the proper diversification of investment portfolios. Indeed, given the upheaval that the financial sector has undergone since early 2007, the recommendation and sale of concentrated positions in Lehman Brothers, Fannie Mae, Freddie Mac, Bear Stearns, Merrill Lynch, Countrywide, Washington Mutual, Fifth Third, Wachovia, and other banking and financial-sector securities likely was unsuitable. Brokers who ignored the fundamental concept of investment diversification subjected their clients to catastrophic losses.

Sometimes concentrated stock holdings cannot be diversified because the stock is subject to a lock-up agreement, is restricted stock under Rule 144, or because of tax considerations. Even under those circumstances, however, brokers can use risk management strategies to protect investors from devastating losses. These strategies include, but are not limited to, the following:

  • Zero-Cost Option Collars
  • Variable Prepaid Forward Contracts
  • Exchange Funds

Unless there is documented proof that the stockbroker recommended and the investor rejected such strategies, investors may be able to recover their investment losses under various legal theories, including negligence and negligent supervision or failure to supervise.

At Dimond Kaplan & Rothstein, our securities arbitration lawyers know how to investigate, develop and present improper asset allocation and over-concentration (lack of diversification) claims against negligent or incompetent brokerage firms and brokers. For nationwide client service to help you recover your investment losses, contact us in Miami, New York, Los Angeles, or West Palm Beach for a free consultation about your case.  Call us today at 888-578-6255.