SOUTHPORT, CT, Mar. 6, 2014 — Was it bad investment advice or a bad stock market that caused your investment losses? That’s the question many ask themselves. The answer could be the difference between you being able to recover those losses through a process called “securities arbitration” or having to accept the losses as just “the way things go”.
But how do you know if your losses are due to bad investment advice (which would justify a claim against the financial adviser), or the whims of the markets (which would not)? And when is it time go to securities arbitration over a loss? “Securities arbitration is a surprisingly underutilized process because of this confusion,” says Christopher Brown, a securities arbitration attorney in Southport. “It’s a tough call to make for those outside the industry. The first indicator is often found in your account statements which may contain red flags that tell you it may be time for further investigation.”
He points out three red flags:
Lack of Appropriate Diversification. Diversification is the acquisition of securities of diverse types in a variety of industries. The goal is to reduce the overall investment risk. “If your account statement shows too many, or too few, holdings that could be a sign of too much or too little diversification,” says Brown, who represents investors in these matters. “Why is this important? Stocks in one industry might be doing well at a given time while bonds in another industry are faring poorly. Tech stocks might be going gangbusters while bank stocks are getting clobbered. In six months it could be the reverse. As it was for Goldilocks, the trick with diversification is to have the amount that is ‘just right.’ Too much diversification can reduce the risk to the point where the account is unlikely to make any gains, which defeats the point of investing. Too little diversification can increase the risk to unacceptable levels, a strategy normally pursued by only the most aggressive of investors.”
While the “just right” amount of holdings will vary by the investor and size and type of account, Brown thinks a good rule of thumb is that more than twenty stocks may be too many and fewer than five may be too few. This issue often comes up when your employer compensates you with company stock and that ends up constituting most of your investment portfolio.
Excessive Concentration. Concentration is an aspect of diversification. Securities in the same investment sector often are affected by the same market forces, meaning that they can go up and down in price together. “Here, the concern is really overconcentration which can lead to horrendous losses,” points out Brown. “Think about the Tech Bubble in 2000. Investors who were over-concentrated in tech stocks lost their shirts.” An example of overconcentration might be an account consisting entirely of fifteen holdings in the technology sector. Fifteen different holdings might be “just right” for diversification – but not when they’re concentrated in the one sector.
Extreme Trading Activity. Too many purchases and sales in an account can be an indication of a variety of problems. “Brokers who are paid by commission need investors to buy and sell to make money. Sometimes that encourages brokers to recommend transactions that really benefit only the broker or at least benefit the broker more than the investor,” says Brown. “It’s hard to say what’s excessive, but if it seems like a lot to you, it’s worth conducting a more thorough review with securities arbitration professional.”
Esoteric Investments. In addition to selling recognized securities that trade on known exchanges, many financial advisors and the brokerage houses that employ them sell other investment products. These may range from options (puts and calls), to investments such as “reverse convertible notes”, “tenancies in common”, and “guaranteed deposits”. “It’s important to remember that these kinds of investments are not appropriate for every investor because of their risk profile,” points out Brown. “In addition, there is the potential that you may not be able to sell them when you want to because there is no exchange and the market will be very small. We think that your guiding principal here should be this: if you can’t explain what the investment is or why you acquired it, it’s probably time to consult a securities arbitration lawyer.”
Regardless of your relationship with your broker, it’s important that you believe their advice matches with your goals, is well communicated to you and feels like a fit for your risk profile. If not, it may be time to consult with a securities arbitration lawyer. He or she can give you an unbiased evaluation of the situation and whether it was bad advice or a bad market that resulted in an investment loss.
About Begos Brown & Green LLP
Begos Brown & Green LLP is a focused law firm with practices that involve investment disputes, mortgage foreclosure, business and employment law, family law, real estate law and insurance coverage disputes. The firm (previously known as Begos Horgan & Brown) was recognized by the Connecticut Law Tribune as one of the state’s “Dozen Who Made a Difference”, by Corporate Counsel as one of the nation’s “Go To” law firms and by the Commercial Record as one of the state’s best general law firms. The firm has offices in Southport, CT and Bronxville, NY. For more information see www.bbgllp or call (203) 254 -1900.