Subscribe to our mailing list

* indicates required







We seek to provide information, insights and direction that may enable the Financial Community to effectively and efficiently operate in a regulatory risk-free environment by curating content from all over the web.


Stay Informed with the latest fanancialish news.




Investments - Unsuitable

The Gambler and Undue Concentrations

December 18, 2019

[Photo: The Gambler, a 1974 film by Karel Reisz, Czech-born British Filmmaker]



by Howard Haykin



Imagine you enter a casino, head straight for the Roulette table, and place a $10,000 bet on a single number, “20”. This concentrated bet will pay $350,000 or nothing (35:1 payout, though true odds are 37:1).  Feeling lucky?



Now imagine you’re a brokerage customer with Oppenheimer & Co., and the broker recommends a concentrated bet that would invest most (70%) of your portfolio in high yield bonds issued by oil and gas companies (“O&G”). A high risk bet that can pay off big – or bite you in your ass!


Never mind that you’re over 65, partially retired, have a liquid net worth of only $200,000, never invested in anything but equity mutual funds and a real estate investment trust, and really can’t afford any significant losses to your principal.


The bonds fluctuate wildly over the next 3 years but they pay a high interest rate. However, in late 2014, O&G bonds fall dramatically and, by late 2015 and early 2016, many of the O&G issuers that your broker recommended declared bankruptcy. Your high risk bets just bit you in the ass!



RISK TOLERANCE AND INVESTMENT OBJECTIVES MATTER.    Concentrated bets may work for brokerage customers with aggressive investing or trading styles and who seek quick, outsized profits. For everyone else, the suitability standard calls for a diversified portfolio that’s based on 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."


A recommendation may be unsuitable if it results in an undue concentration ... in a particular security, category of securities, or industry sector, and the correspondent increased risk of loss is inconsistent with the customer's investment profile.



[For further details on this case, click on ...  FINRA Case #2016049840101.]

[For further details on Suitability, click on ... FINRA Rule 2111, and FINRA Guidance.]