Over-concentration is a common type of financial fraud that costs investors in the United States millions of dollars every year. In an over-concentration scam, an investment advisor fails to adequately diversity an investor’s capital, increasing the risk of financial loss. In many cases, these scams involve the concentration of capital in a financial instrument that benefits a financial advisor.
In normal investing, a financial advisor is expected to diversify a client’s assets across many different types of investments. These can include dozens (or potentially hundreds) of different stocks, bonds, securities, futures, options, and more. In the event that a specific company fails, an investor will not have all his or her eggs in a single basket. A well-diversified portfolio can even protect investors from a potential financial recession or depression.
In the event an individual’s portfolio isn’t properly diversified, it may be subject to more significant fluctuations as markets go up and down. While a large portfolio of different stocks may be relatively stable, a portfolio made from a single stock might not be very stable.
In most cases, a financial advisor only commits over-concentration fraud if they have a vested interest in a specific company or organization. They may also attempt to direct investor funds to a company that they own themselves.
It can be very hard to detect over-concentration fraud as an investor. Since a financial advisor may falsify documents to make a portfolio appear diversified, there can be few signs that a portfolio has too much capital concentrated in a single company or organization. If you have any questions or concerns about over-concentration fraud, it’s a good idea to contact an attorney as soon as possible.
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