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Failure To Diversify

Failure to Diversify

One of the most effective ways to manage risk in an investment strategy is by diversifying a portfolio. As the old saying goes, “don’t put all your eggs in one basket.” While this is perhaps one of the most fundamental rules of investing, it is also one that is often ignored.

Stock brokers and financial advisors have a fundamental obligation to diversity their customer’s holdings across different sectors and asset classes. The failure to diversify can often lead to significant losses.

The Fifth Circuit Court of Appeals, in Metzler v. Graham, explained that it is difficult to establish a fixed percentage in evaluating failure to diversify cases, explaining, “the degree of investment concentration that would violate this requirement to diversify cannot be stated as a fixed percentage, because a fiduciary must consider the facts and circumstances of each case.”

Metzler v. Graham, 112 F.3d 207 (5th Cir. 1997). The Financial Industry Regulatory Authority, or FINRA, offers a similar note of warning, “there is no simple or single answer that is right for everyone. Whether your stock portfolio includes six securities, 20 securities or more is a decision you have to make in consultation with your investment professional or based on your own research and judgment.”

While it is correct that courts and arbitration panels evaluate failure to diversify cases on a case-by-case basis, there are a number of court cases that provide examples of impermissible conduct. We have summarized cases from several jurisdictions below.

GIW Industries, Inc. v. Trevor, Stewart, Burton & Jacobsen, Inc., was an Eleventh Circuit Court of Appeals decision concerning the failure to diversify a bond portfolio. The case originated from a district court decision in Georgia. The Court found that a concentration of 70% in government bonds with a single maturity date created an unreasonable risk. see GIW Industries, Inc. v. Trevor, Stewart, Burton & Jacobsen, Inc., 895 F.2d 729 (11th Cir. 1990).

In Culbertson v. J.J.B Hillard and W.L. Lyons, a FINRA arbitration panel in Ohio awarded $129,000 in compensatory damages as well as $45,150 in attorneys’ fees. FINRA Case 11-03226. The case concerned the brokers, failure to diversify a client’s account. According to the FINRA award, the Claimant alleged that her assets were over-concentrated almost exclusively in low-growth cash and fixed income investments.

If you or someone you know suffered investment losses due to a non-diversified portfolio, you may be able to recover your losses. Contact Miller Stern lawyers, LLC today for a free and confidential consultations.

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