Oil Industry Investors May Recover Damages Against Their Stockbroker Due to Overconcentration of Risk


Some investors may be reasonably upset and disheartened by the fact that, although the broader stock market has performed well, their portfolio has been devastated over the past few months.   It may be that their stockbroker violated industry rules by investing all or a significant portion of their funds in oil industry stocks, or other industries, that have been hammered over the past several months.  If so, some investors may be able to recover damages.

For some investors being overly concentrated in a single industry, such as the oil industry, could be considered unsuitable and if their stockbroker recommended such a strategy their firm could be on the hook to pay back losses.  In such a circumstances the broker may be in violation of FINRA’s suitability rule.  FINRA Rule 2111 “Suitability” reads in relevant part,

(a) A member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile. A customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.

While some investors understand that concentration on certain industry sectors may involve substantial risk, and likely more risk than investing in the broader market, many investors either do not understand the risk or were unaware that they were heavily concentrated in a single industry.

Indeed, many investors see a list of companies or mutual funds in their account but understandably do not know that the companies underlying business is highly exposed to a single industry.   While they appear diversified, they are not.

The recent trends in the oil industry in particular may put some investors in a much higher risk position, even if they think they are diversified.  For example, Barclays Bank PLC iPath Exchange Traded Notes Linked to Goldman Sachs Crude Oil (symbol “OIL”) is down over 50% since June of last year, whereas the SPDR S&P 500 ETF Trust (symbol “SPY”) representing the broader S&P 500 index is up more than 5% during that same time period.  The difference is that OIL is concentrated in the oil industry and SPY is designed to reflect the broader S&P 500 index.  Concentration in one industry substantially increases the risk and volatility in an investors portfolio.

Vincent D. Slavens, partner at Krause, Kalfayan, Benink & Slavens, LLP., handles customer disputes with their investment advisers.  He can be reached at vslavens@kkbs-law.com or by phone at (619) 232-0331 Ext. 11.