Maintaining a diverse portfolio is one of the most basic principles of prudent investing. Unfortunately, when the oil and gas sectors were booming in recent years, many unscrupulous advisers encouraged an overconcentration of investments in this one area. Eventually, those sectors went into decline, and investors experienced out-sized losses exactly because of this overconcentration in the oil and gas sector. This was not only frustrating and embarrassing for the out-of-luck investors. It was an example of illegal behavior on the part of the advisers. Here’s why:
Overconcentration in the Oil and Gas Sector is Unlawful
As fiduciaries, investment advisers are required to puts their client’s financial best interests first and foremost. That means avoiding unnecessary risks and advocating for a diversified portfolio. Overconcentration, whether in energy and gas or any other sector, is a fundamentally risky investment strategy. It is also a breach of the responsibilities legally required of a fiduciary.
Rules Explicitly Prohibit Overconcentration
Overconcentration is not a legal gray area. In fact, there are specific financial regulations prohibiting this kind of high-risk investment strategy. For example, FINRA Rule 2111 states that a registered adviser must recommend investments that are suitable to an investor’s goals and means. Overconcentration is a direct violation of that mandate. Similarly, FINRA Rule 2090 prevents advisers from trying to justify risky investments by claiming not to know their client’s priorities. In almost every case, an investment strategy based around overconcentration is a violation of the law.
High-Risk Investments are Always Irresponsible
Some advisers will try to justify their reliance on overconcentration by pointing to the stratospheric gains in the oil and gas sectors. But even if there was money to be made, a strategy based around overconcentration is inherently unbalanced. No investor’s interests are served by putting all their eggs in one basket. That means not only investing in multiple companies, but also in multiple sectors.
If you have been a victim of overconcentration in the oil and gas sector, or in any other sector, the law is on your side. You have the power to hold the adviser responsible and pursue the justice that you deserve. To begin exploring your options, contact attorney Howard M. Rosenfield by calling 860-777-1237 today.