Concentration in a Single Stock or Sector During
Coronavirus (COVID-19) Pandemic
Securities industry standards of care dictate the need to avoid securities concentration in a single asset, asset class or investment product as a foundation for what is considered suitable for investors. The reason for this financial rule of thumb is investors are not compensated for taking this risk. Securities concentration exists to the extent that any portion of a portfolio’s holding exceeds 10% of the portfolio’s value in a single stock or sector.
Which Economic Sectors Have Suffered Disproportionate Losses During Coronavirus (COVID-19) Pandemic?
The Economic Sectors which have suffered disproportionate losses during the Coronavirus (COVID-19) Pandemic are those exposed to the risks of the transmission of the virus. The exposure to virus-related risks are no different to any risk a company faces that increase the costs of doing business or decreases the demand for its products or services. The widely-held theories of portfolio construction require the management of risks through diversification and other risk management strategies. The sectors/industries that have been adversely affected include:
- Travel & Leisure
- Aerospace & Aviation,
- Real Estate,
- Finance & Banking,
- High Yield Debt, and
- Non-Traded BDCs and REITs.
The failure of brokerage firms and its financial advisors to provide suitable investment recommendations which resulted in disproportionate investment losses in a single stock and/or sector may be held responsible to investors.
Why Would Investors have a Claim to Recover Investment Losses from Securities Concentration during Coronavirus (COVID-19) Pandemic?
According the Financial Industry Regulatory Authority (FINRA), brokerage firms and financial advisors are required to disclose the risks associated with a particular investment or investment strategy. A financial advisor should consider the total composition of securities held in an investment portfolio. Failure to recommend a strategy to manage the risks associated with securities concentration can be considered financial advisor negligence for providing unsuitable investment advice or the failure to recommend risk management strategies for a concentrated position. An investor might be unwilling or unable to establish a diversified portfolio which results in exposure to the risks of securities concentration. Investor portfolios may be concentrated as the result of one or more of the following reasons:
- Financial Advisor Recommended Securities Concentration;
- Inherited Legacy Stock;
- Employee Stock Ownership Plan Participant;
- Founding Member of Publicly Traded Company;
- Restricted Stock Rule 144 Stock;
- Corporate Lock-Up Agreement;
- Closely-held Stock Acquired through Merger or Acquisition; and
- Low Cost Basis with Substantial Capital Gains.
What Factors Are Considered in a Claim for Damages from Securities Concentration in a Single Stock or Sector to Recover Investment Losses sustained during the Coronavirus Pandemic?
Securities concentration in stocks might be caused by a financial advisor’s recommendation, an employer restriction on sale, tax avoidance, psychological and emotional attachment to the company stock. No matter what the reason for maintaining a concentrated stock position in a single stock or sector, a brokerage firm and its financial advisors must recommend suitable risk management strategies to protect the value of any concentrated stock position held in a financial brokerage account. Brokerage firms that do not recommend a fully diversified portfolio, that results in concentration in a single stock or sector may be able to recover investment losses through a securities arbitration award. In some instances, financial advisors might recommend risk management strategies such as complex hedging strategies to reduce the risk of a concentrated stock position. Unfortunately, the brokerage firm’s failure to supervise financial advisor’s who failed to implement the strategy properly, the brokerage firm may be held accountable for negligence.
Klayman Toskes Can Help Recover Investment Losses
Klayman Toskes has been dedicated to the protection of investor rights for decades, from the Tech Bubble in 2000 to the Mortgage Crisis in 2008, we can help you recover investment losses during the Coronavirus (COVID-19) pandemic. Klayman Toskes is investigating specific types of sales practice violations which resulted in investment losses suffered during the Coronavirus (COVID-19) pandemic that are related to the following types of misconduct:
- percentage concentration in stock or sector;
- ability to hedge concentrated position;
- investment objective and risk tolerance;
- tax ramifications; and
- client sophistication.