It certainly seems we are picking on Merrill Lynch these days for not properly supervising their brokers. This post is no exception. [Ed. Note – the author of this piece maintains a small IRA account at Merrill. Because of the sheer size of Merrill Lynch – it employs thousands of stockbrokers – there are always bound to be rogue brokers and advisers who make mistakes.]
In researching my earlier post, I found another arbitration case from this summer involving Merrill. A case in which Merrill Lynch and one of its brokers were found to be liable for clients who invested in the Merrill Lynch Phil Scott Team Income Portfolio. It’s not unusual for some of the “hotter” and bigger brokers to develop their own portfolio. The problem arises when that broker tries to sell all of his or her clients on the single investment. There are many egos in the brokerage industry and those egos can get in the way of sensible investment recommendations.
Take Merrill’s Phil Scott Team. Apparently all the clients of the team seemed to wind up with similar investments, you guessed it, an investment in the Phil Scott Team Income Portfolio. The portfolio was made up solely of equities. That might work for some people who don’t require diversification and and have a more aggressive risk tolerance. It didn’t make sense though for a 90 year old widow in failing health.
Diversification and Over Concentration Matter!
Any investment you make carries a certain amount of risk. And some investments are obviously more risky than others. Sophisticated investors with no immediate need for their money may be more willing to take riskier bets and to put all of their money into a single investment. That doesn’t work for people who need their money for retirement or who are more risk adverse.
To lesson risk, one simple strategy is to diversify. By investing in a variety of securities and bonds and in different sectors, a major loss on one investment is likely to in be offset by gains in others. Diversification is especially important for retirees and those nearing retirement. A sudden loss of savings can occur if one’s portfolio is concentrated in a single stock or asset class.
When a stockbroker or investment advisor makes an investment recommendation, he or she is obligated to do two things.
First, the broker has a legal duty to know his or her customer. That includes knowing their risk tolerance, age, and their need to access their cash. These rules are called KYC or Know Your Customer. Once the broker understands the needs of the customer, the broker has a legal obligation to recommend suitable investments (“suitability rules”).
Over concentration or lack of diversification can be a violation of suitability rules. And that means both the broker and the brokerage firm can be held responsible for any losses suffered by the customer. This is what got Merrill Lynch’s Phil Scott team in trouble. Phil may have been a brilliant broker but the folks who are depending on steady income for retirement shouldn’t have all their investments in a single, risky equities portfolio.
How can You Make Sure Your Investments are Diversified?
The easiest way to diversify a portfolio is by investing in a range of different companies, vehicles, and sectors. For example, in addition to individual company stocks, one can invest in real estate (either directly or through a REIT) and a variety of bond types. Mutual funds and exchange traded funds are also options.
In the Phil Scott case, an arbitration panel from the Financial Industry Regulatory Authority (FINRA) sided with investors and ordered Merrill Lynch to pay back almost $1 million in losses suffered by the clients.
Have You Lost Money Because of Over Concentration or Lack of Diversification?
The investment fraud lawyers at Mahany Law can help you determine whether an investment loss is the result of over concentration or a failure to diversify investments. If you suffered losses as the result of securities concentration or the poor diversification, we may be able to recover your losses through a FINRA arbitration claim.
If you have been defrauded or lost money to an investment adviser or stockbroker, give us a call. For a confidential consultation contact attorney Brian Mahany online, by email at or by phone 202.800.9791. Cases accepted nationwide. Cases accepted on a contingency fee basis meaning you pay nothing unless we win.
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